ECB Hawks Go Hunting, Say Draghi May Have Made ‘A Mistake’ With New Easing
Dissenters to Mario Draghi's latest stimulus push are making their voices heard as questions about the desirability of more broad-based monetary easing swirl.
Not surprisingly, Klaas Knot is leading the charge.
"This broad package of measures, in particular restarting the asset purchase program, is disproportionate to the present economic conditions, and there are sound reasons to doubt its effectiveness", he said, adding that "there are increasing signs of scarcity of low-risk assets, distort
What in the hell does this actually mean, in terms of bank liquidity?
====> The Governing Council of the European Central Bank (ECB) today decided to introduce a two-tier system for reserve remuneration, which exempts part of credit institutions’ excess liquidity holdings (i.e. reserve holdings in excess of minimum reserve requirements) from negative remuneration at the rate applicable on the deposit facility.
The two-tier system will apply to excess liquidity held in current accounts with the Eurosystem but will not apply to holdings at the ECB’s deposit facility
The exempt tier of excess liquidity holdings will be remunerated at an annual rate of 0%. The non-exempt tier of excess liquidity holdings will continue to be remunerated at zero percent or the deposit facility rate, whichever is lower.
A QE clue?
Quantitative Easing and the Hot Potato Effect:
Evidence from Euro Area Banks
Ellen Ryan & Karl Whelan
Vol. 2019, No. 1
For these reasons, the academic research on the impact of QE has tended to ignore the role played by large increases in the supply of reserves. Instead, as summarised by Christensen and Krogstrup (2016b), the literature has focused on two main channels through which QE could influence the econ-
omy by affecting long-term interest rates. The first channel is a portfolio rebalancing effect driven by reduced availability of assets purchased by the central bank. This increases their price and reduces their yields via a lowering of term premia. The second channel is a signalling channel: If the portfolio balance channel is effective, then communication about the quantities of future bond purchases can provide a signal about when the central bank intends to normalise monetary policy and increase interest rates. Studies such as Gagnon et al. (2011), D’Amico and King (2013), Joyce et al. (2011) and Christensen and Rudebusch (2012) found that QE purchases had statistically significant but economically modest effects in reducing long-term interest rates, with the effects being a mix of these two channels. A typical conclusion was that the QE programmes depressed long-term bond yields by about 100 basis points.