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ECB asks banks to halt dividends over Covid-19 crisis

The European Central Bank has asked euro zone banks to freeze dividend payments “until at least October 2020” to preserve liquidity that can be used to help households and companies through the coronavirus crisis.

The Frankfurt institution also asked banks not to buy back shares, another tool to reward shareholders, at a time when policymakers everywhere are taking unprecedented steps to support the global economy.

“The ECB expects banks’ shareholders to join this collective effort,” it said in a surprise statement. 

The measures would “boost banks’ capacity to absorb losses and support lending to households, small businesses and corporates during the coronavirus pandemic”, it added.  

The ECB’s proposal, which would affect dividends for the financial years 2019 and 2020, echoes that of the Brussels-based European Banking Federation.

The EBF said last week that “listed banks should not accrue dividends or undertake share buybacks so as to maintain maximum capital preservation” during the crisis. 

The ECB’s suggestion is likely to be welcomed by euro zone citizens, many of whom vividly remember the taxpayer bailouts of global banks during the 2008-2009 financial crisis. 

“The coronavirus outbreak is threatening the lives of many people around the globe and is pushing the economies of many countries into recession,” ECB supervisory board chair Andrea Enria said in a separate blog post.

“Unlike in the 2008 financial crisis, banks are not the source of the problem this time. But we need to ensure that they can be part of the solution,” Andrea Enria said. 

He estimated that compliance with the ECB’s proposal would keep an extra €30 billion of capital in the financial system. 

While many euro zone banks may be able to hold off on their 2020 dividend payments, some have already paid out those for 2019 or have committed to doing so. 

The ECB said it was not asking for those payouts to be scrapped, but lenders whose shareholders are set to vote on dividend proposals in upcoming annual meetings “will be expected to amend such proposals in line with the updated recommendation”. 

After initially facing criticism for not taking as much action as other central banks in the coronavirus fightback, the ECB has in recent weeks unleashed a flurry of measures to shore up the 19-nation euro area.

That includes a “big bazooka” scheme to buy an additional €750 billion in government and corporate bonds this year to keep cash flowing through the financial system. 

The ECB has also launched a fresh round of ultra-cheap loans to banks and eased rules on capital buffers to encourage banks to offer loans to households and businesses. 

It further sought to calm markets by promising there would be “no limits” to its commitment to protecting the euro. 

The ECB warned earlier this month that it expected banks “to use the positive effects coming from these measures to support the economy” and not to increase dividends or bonus payouts. 

Authorities in the Nordic countries of Finland, Norway and Sweden have likewise been urging banks to forgo paying out dividends. 

Thousands of companies worldwide have been forced to close their doors to slow the spread of the virus, while large swathes of employees have seen their working hours cut or are facing unemployment.

Several major firms have already said they would scrap their 2019 dividends, among them German airline giant Lufthansa and European plane maker Airbus. 

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European rout pauses as ECB stimulus measures calms recession panic

European shares edged higher from near-seven year lows today as another set of dramatic stimulus measures by the European Central Bank injected a ray of hope around its preparedness to tackle a major health crisis gripping the world.

The pan-European STOXX 600 index was up 0.5% in opening trade. 

The European Central Bank joined peers in Japan, Australia and the US in launching a fresh wave of emergency stimulus to help businesses battered by a near halt in economic activity from the coronavirus pandemic. 

Although banking and oil and gas stocks rose in early trading, travel and leisure firms fell another 3% on growing concerns of a complete collapse of the sector. 

Germany’s Lufthansa said the airline industry may not survive without state aid if the virus outbreak lasted for a long time.

Shares in Milan jumped 4.3% in opening trade this morning, while the Madrid stock exchange gained 3.1%.

The Paris CAC was up 2.3% in early trade, while shares in London and Frankfurt reversed their opening losses to stand 0.04% and 0.3% higher respectively. 

Dublin’s ISEQ index was also lower again this morning, falling by 0.67% in opening trade.

Earlier in Asian trade, Tokyo’s Nikkei index closed 1% lower while the Hang Seng index in Hong Kong was down 2.6%.

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ECB to launch review that will redefine its mission and tools

European Central Bank President Christine Lagarde is set to launch a broad review of the bank’s policy today that is likely to see her redefine the ECB’s main goal and how to achieve it. 

The ECB has fallen short of its inflation target of just under 2% for years despite increasingly aggressive stimulus measures under her predecessor, Mario Draghi. 

ECB rate-setters are not expected to make any policy change this week but simply stand by their pledge to keep buying bonds and, if needed, cut interest rates until price growth in the euro zone heads back to their goal. 

Ms Lagarde will, however, announce the start and scope of the ECB’s first strategic review since 2003.

The review will last for most of the year and will span topics from the inflation target to digital money and the fight against climate change.

Investors will be looking for clues to whether the review will see Lagarde cement her predecessor’s legacy of monetary largesse, or if she will use it to acknowledge worries that years of easy credit have fuelled financial bubbles. 

Changing the ECB’s formulation of price stability – currently defined as an annual inflation rate below, but close to, 2% over the medium term – will be the focal point of the review. 

The ECB could signal its commitment to boosting inflation by raising the goal to 2% and spelling out that it will take any undershooting just as seriously as an overshoot. 

“Our inflation target must be symmetric. If the central target is seen as a ceiling, we have less a chance of meeting it,” ECB policymaker Francois Villeroy de Galhau said recently. 

But policy hawks on the Governing Council, who have long called for the ECB’s money taps to be shut off, will not go down without a fight. 

Some of them favour creating a tolerance band around 2%, which would lower pressure on the ECB to act, while others would leave the target unchanged or even cut it. 

Rate-setters will also debate the pros and cons of their tools, such as sub-zero rates and massive bond purchases, which have been credited with staving off the threat of deflation but at the cost of an unprecedented rise in house and bond prices. 

The ECB regularly lauds those instruments, recently estimating that without them, the euro zone economy would have been 2.7 percentage points smaller at the end of 2018. 

But minutes of the December meeting show growing discomfort about their side effects. 

That led to calls by some policymakers to give housing costs greater weight in inflation calculations and take into account households’ perceptions of price growth, which is generally higher than official figures. 

While these matters are addressed, the ECB is expected to leave its monetary policy on hold. 

That would leave it buying €20 billion worth of bonds every month and charging banks 0.5% on their idle cash for most of the year. 

“While the ECB reviews its strategy, we see no change in policy settings,” economists at Morgan Stanley wrote in a note. 

Euro zone data has improved recently, leading economists to believe the export-focused economy has weathered the storms of the global trade war. 

Furthermore, a trade deal between the US and China, and the prospect of an orderly Brexit are lessening the two main risks the ECB had said were clouding the horizon. 

But the outlook for euro zone growth and inflation remains lukewarm, meaning the ECB is likely to strike a cautious tone by reaffirming its warning about “downside risks” to the economy.

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ECB has not reached limits of monetary policy – Lane

The European Central Bank has not reached the limit of what it can do on monetary policy, its chief economist Philip Lane has said.

Despite unprecedented monetary easing, Professor Lane said the ECB still had further tools in its toolbox if needed, but added that they would depend on particular circumstances. 

“Let me emphasise that we don’t think we’re at a limit as of yet,” chief economist Philip Lane, the former Central Bank Governor, told a Fortune conference in Paris.

“We do think that the bigger focus should be rather on what other policies can contribute to make this limits question less relevant, less interesting because the economy would be growing more quickly,” he added.

ECB announces measures to kick start euro zone economy

ECB announces measures to kick start euro zone economy

The European Central Bank today promised an indefinite supply of fresh asset purchases and cut interest rates deeper into negative territory, an effort to prop up the ailing euro zone economy.

The moves come in the final weeks of ECB President Mario Draghi’s mandate.

They will increase pressure on the US Federal Reserve and Bank of Japan to ease next week to support a world economy increasingly characterised by low growth and protectionist threats to free trade.

Yet there were immediate doubts as to whether the ECB measures would be enough to boost a euro zone recovery in the face of a US-China trade war and possible disruption from Brexit.

The ECB cut its deposit rate – the rate it charges banks to hold money – by 10 basis points to a record low of -0.5% from -0.4%.

ECB deposit interest rate cut – a Draghi on savers

It also promised that rates would stay low for longer and said it would restart bond purchases at a rate of €20 billion a month from November 1.

“The Governing Council expects (bond purchases) to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates,” it said in a statement.

Given that markets do not expect rates to rise for nearly a decade, such a formulation suggests that purchases could go on for years – an eventuality Mario Draghi did not challenge.

“We have a relevant headroom to go on for quite a long time at this rhythm without the need to raise the discussion about limits,” he told a regular news conference after the meeting.

The news triggered a rally in euro zone bonds that would cut the cost of borrowing in the 19-country currency bloc, and pushed the euro below $1.10, prompting expectations that inflation could rise.

US President Donald Trump, who this week called on the US Federal Reserve to follow other central banks in adopting negative interest rates, accused the ECB of seeking a trade gain by deliberately depreciating the euro against the dollar.

“And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!” he tweeted.

The rate cut will however increase the cost to commercial banks of parking their more than €1 trillion worth of excess reserves at the central bank.

The ECB said it would compensate lenders for part of this charge to ensure they continued to lend to the real economy.

The ECB also eased the terms of its long-term loan facility to banks and said it would introduce a multi-tier deposit rate facility to help them.

Mario Draghi, whose pledge in 2012 that the ECB would do “whatever it takes” to save the euro is credited with helping restore stability at the peak of the bloc’s debt crisis, stressed the currency zone needed more support.

“Incoming information since the last Governing Council meeting indicates a more protracted weakness of the euro area economy, the persistence of prominent downside risks, and muted inflationary pressures,” he said.

Indeed the ECB’s initial, unprecedented €2.6 trillion bond purchase scheme since the financial crisis has had only limited success in stimulating activity.

Data earlier showed euro zone industrial production fell for a second month in July, while Germany’s Ifo institute predicted a recession in Europe’s economic powerhouse in the third quarter.

Although markets had priced in a revival of asset purchases, over half a dozen conservative policymakers spoke out in public against such a scheme, leaving markets in doubt about how bold the ECB’s measures would be.

The decision suggests that many of these sceptics eventually agreed, giving Draghi a comfortable enough majority in what is likely to be his last major policy move before handing over to Christine Lagarde later this year.

The ECB has undershot its inflation target of almost 2% since 2013 so stimulus was essential to maintain credibility.

But policy easing by central banks around the globe, including the US Federal Reserve, also put the ECB in a bind.

Not easing in sync with the Fed also risked pushing the euro higher, which would then dampen inflation and put the bank even further away from its targets.

Draghi’s critics argue that the euro zone’s biggest troubles – a global trade war, Brexit and China’s slowdown – are outside the ECB’s control, so any stimulus would have a limited impact.

They also say the bloc is experiencing a slowdown, not a recession, and that bond purchases, the ECB’s most powerful tool, should be reserved for real crises, especially since the bank has used up much of its firepower in past stimulus rounds.

With Lagarde taking over on November 1, some also argued that the ECB should refrain from making long-term commitments that would tie the hands of the bank’s next president.

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ECB won’t raise rates until at least mid-2020

ECB won’t raise rates until at least mid-2020

The European Central Bank yesterday signalled that it would not raise interest rates until the first half of 2020.

That compares to a previous guidance that pointed to a rate rise towards the end of this year – something that, in itself, was a delay on its previous plans.

The decision comes as the euro zone’s lacklustre economic recovery faces new headwinds – including China’s slowdown and transatlantic trade tensions.

“Over the last three to four weeks we’re beginning to see central banks across the world decide that they need to support the global economy more,” said Niall Dineen, chief investment officer with Appian Asset Management.

“We’re see rate cuts out of Australia and New Zealand and we’re seeing the Federal Reserve in the US talk about cutting rates as well. So I don’t think it’ll be a huge surprise that we’ve seen the ECB getting on board with everybody else,” Mr Dineen said.

This is a marked turn around from 12 months ago, when most central banks were moving rates upwards and the ECB was poised to follow suit.

According to Mr Dineen a number of factors, but particularly those around global trade, are weighing on economic performance.

“I think the reality is that the trade war rhetoric that we’ve been listening to over the past twelve months has had a real impact on the global economy,” he said.

“There is also weakness in China. There’s a real risk that parts of the Chinese economy could be in a recession and a lot of this is dragging down economic growth numbers across the globe,” he added.

That is prompting central banks to look again at offering supports to economies – rather than trying to take the heat out of markets with rate rises.

The problem for the ECB is that its interest rate remains at zero – while it already has trillions of euro of bonds on its balance sheet from the recently-completed round of quantitative easing. That leaves it with limited scope for further stimulus measures should the euro zone economy require it.

“Central banks will argue that they can always do more on the rate side in terms of forcing banks to lend, or they can do more quantitative easing,” Mr Dineen said.

“But maybe the reality is that the next part of support for the economy has to come from governments and has to come from fiscal spending – maybe that’s the thing that’s been lacking in this cycle. We have to get away from this idea that it’s always going to be central banks that provide this support,” he stated.

The support Europe’s central bank may be willing to offer could also hinge on the person at the helm, as Mario Draghi is due to step down at the end of October. His successor could set a different tone for the authority following what has been a prolonged period of accommodation.

“We have to recognise how positive Draghi has been for Europe,” Mr Dineen said. “He has put the ECB front and centre of keeping the euro zone together as it went through its own crisis and keeping the stimulus measures in place.

“Is there a risk that if we get, maybe, a German head of the central bank that the underlying philosophy will change? I think it’s a small risk – I don’t think it’s a huge risk,” he stated.

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ECB still has ammunition left to fight recession – Lane

ECB still has ammunition left to fight recession – Lane

The European Central Bank’s policy arsenal has not been depleted and fiscal policy could help stimulate investment, the ECB’s incoming executive Board member Philip Lane has said.

Investors fear the ECB’s window to potentially raise interest rates has closed, meaning it has little in its toolkit to face the next recession.

But in some of his first public remarks since securing the job of replacing current ECB chief economist Peter Praet, Central Bank Governor Philip Lane said the ECB still had options.

“The idea that the ECB lacks potency is very far from where we are,” he told academics and diplomats at Ireland’s embassy in London.

Professor Lane added that fiscal policy could also help reduce policy uncertainty, and encourage the private sector to resume investing.

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Safe-haven Euro zone bonds dented by Brexit but buffered by ECB

Safe-haven Euro zone bonds dented by Brexit but buffered by ECB

Germany’s 10-year bond yield edged up on Thursday as a no-deal Brexit was avoided for now but held firmly below zero percent thanks to a signal from the European Central Bank that it will do all it can to fight low economic growth and inflation.

European Union leaders early on Thursday gave Britain six more months to leave the bloc, meaning it will not crash out on Friday without a treaty to smooth its passage.

The news bought some relief to markets but the selloff in safe-haven assets such as German government bonds was limited as investors focused on the dovish message being sent from major central banks.

ECB President Mario Draghi on Wednesday raised the prospect of more support for the struggling euro zone economy if its slowdown persisted, saying the ECB had “plenty of instruments” with which to react.

And minutes from the Federal Reserve’s March meeting released on Wednesday showed the Fed is likely to leave interest rates unchanged this year given risks to the US economy.

Germany’s 10-year bond yield was up around a basis point at minus 0.023pc, off Wednesday’s one-week low.

Still, having spent much of the past week skirting around the zero percent level, German Bund yields are back within sight of 2-1/2 year lows hit last month after Draghi flagged the ECB is looking at ways to offset the impact of negative interest rates.

“The April ECB meeting had a dovish ring to it which, put in the context of the March dovish surprise and stabilisation of economic indicators, caught rates markets off guard,” said Antoine Bouvet, a rates strategist at Mizuho in London.

“What really stood out was his (Draghi’s) willingness to signal the ECB is studying whether NIRP (negative interest rate policy) side-effects need mitigating.”

Across the euro area, benchmark 10-year bond yields were around a basis point higher on the day .

Renewed talk about further ECB policy measures to lift economic growth, especially the notion of tiered interest rates, means speculation about euro zone rates is starting to build.

Eonia money market futures dated to the ECB’s December meeting price in 1.5 basis points worth of rate cuts, which analysts say equates to roughly a 15 percent chance of a 10 basis point rate cut.

“Since there is no new evidence that issuer limits could be raised, for QE (quantitative easing) to be restarted, the logical conclusion would be that rate cuts may have to be reconsidered in the future under an adverse scenario,” said Pictet Wealth Management Frederik Ducrozet, referring to the ECB’s rules for asset purchases.

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