Peter Garnham, Editor at FX-MM
Six years on from the start of the financial crisis and the world’s largest central banks are still racing each other to the bottom.
This month has seen the European Central Bank (ECB) cut its main refinancing rate to just 0.15%, impose negative deposit rates and commit to further liquidity injections in a bid to stave off deflationary pressure in the eurozone and boost the economy. Investors and market makers looking for a return of muchneeded currency volatility following the ECB’s decision may be in for disappointment, however. Initial sharp losses in the euro were quickly reversed.
Of course part of that reflects the fact that the move was widely expected, but also the fact that the ECB shied away from following the US, UK and Japan down the road of asset purchases and quantitative easing. Admittedly, Mario Draghi, ECB president, opened the door for more action should the outlook deteriorate further, saying the central bank “has not finished yet”. It looks, however, like the central bank is hoping for the best: that its current measures will move the dial on eurozone inflation and thus enable it to avoid resorting to the policy bazooka that is quantitative easing.
Most of the conversations I have had in the wake of the ECB’s decision imply that economists do not believe the central bank has yet hit on the right formula to boost the eurozone economy. Consider negative deposit rates: the effects on credit growth are, as one analyst put it, unclear at best and negative at worst. A negative deposit rate means increased costs for financial institutions, with banks unlikely to pass the cut on to customers. Excess reserves thus become a hot potato that no bank wants to get stuck with at the end of the day.
That means banks with excess reserves are likely to accelerate early LTRO repayments – unless they find new lending opportunities – and that to compensate for the fall in their profit margins, banks might increase lending rates.
The prospect, in other words, that the ECB is forced to finally engage in quantitative easing in the future is real. That might be the point at which the lacklustre currency market livens up and gives investors and market makers the trends and volatility that have been calling out for.
The effects could be far reaching, and, as we point out in our timely profile of Sweden on page 34, could prompt dramatic reactions from other central banks, while on page 8 there is a cautionary tale for the ECB as we chart Japan’s attempts to revive its economy. Elsewhere in this issue, we take a look at the electronification of the FX market, and how it is levelling the playing field for investors. Talking of which, I had the pleasure of interviewing Bank of New York Mellon’s Art Certosimo this month. On page 16, you can find out how the bank has revamped its FX trading operations. We also take a look at how firms are adapting to new collateral requirements for derivatives trading on page 11 and see how technology can optimise a firm’s use of working capital on page 37.
Meanwhile, on page 28, we see how working with the world’s development agencies makes good business sense for banks. As ever, we hope you enjoy this month’s issue, and please, let us know what you think.