Trump’s tweets stoke up tensions and keep interest rates low

Cliff Taylor: The days of ‘money for nothing’ might not be over

With Irish mortgage rates still well above the EU average, there is simply no excuse for borrowers not to benefit from the latest extraordinary developments in interest rates markets.

With Irish mortgage rates still well above the EU average, there is simply no excuse for borrowers not to benefit from the latest extraordinary developments in interest rates markets.

 

Another day, another row. US president Donald Trump’s repose to the latest comments by ECB president Mario Draghi underline one of the key issues facing the world economy – a lack of any internationally agreed way forward. And in turn this is stoking fears of trade wars which are depressing business confidence and making things worse.

On Tuesday, the State and mortgage borrowers got a boost as European Central Bank president Mario Draghi suggests that the the ECB may have to provide “ additional stimulus” to the euro zone economy to combat low inflation.

It is unclear what form that stimulus might take, but Mr Draghi – speaking on Tuesday at a key ECB conference in Portugal – was keeping all options open, including further cuts in some interest rates. With the ECB’s key refinancing rate at zero and its deposit rate in negative territory at minus 0.4 per cent, talk of further cuts is remarkable – and will not be easily achieved.

Stimulus

The ECB’s rethink – it had previously signalled that it wanted to start slowly unwinding the stimulus now offered by monetary policy – is part of a global picture. Partly due to global trade tensions, international growth has slowed and confidence is shaky. The US Federal Reserve Board – its central bank – is to meet this week, under pressure from the markets to signal a willingness to reduce interest rates, reversing earlier expectations that they would continue upwards.

But despite the price these global tensions are having, the US president persists with this own particular brand of economics, arguing that one country’s gain is another’s loss. And so he criticised Draghi, whose comments lead to a weakening of the euro, giving a short-term boost to EU companies exporting to the US and making life a bit more difficult for US exporters. “ They have been getting away with this for years,” Trump complained, along with China and others..” he later complained that a rise in the Dax index of German shares showed how this was “ unfair to US.

It is ironic that it is the very fears which Trump is stoking which are increasing fears in business of a full-scale trade war and hitting investment. Interest rate expectations worldwide have reversed in recent moths as worries increase about the growth outlook. A Bank of America/Merrill Lynch survey out on Tuesday showed investment managers at their most bearish since the crisis, with money being moved out of equities and into bonds and other safe havens..This is reflected in Government bond markets, which are based on expectations for future interest rates.

German 10-year bond interest rates fell to a record low of minus 0.3 per cent on Tuesday morning, while Irish 10-year interest rates are now just 0.23 per cent. So it is a case of “money for nothing” for many governments now raising cash, while in the case of Germany investors are paying for the privilege of lending it money. Ireland is borrowing one year funds later this week and is likely to do so at an interest rate approaching minus 0.5 per cent.

Inflation

With euro zone inflation falling back in May to 1.2 per cent – well below the ECB’s target of close to 2 per cent – and worrying growth signals, Mr Draghi suggested that the ECB would consider new measures in the coming weeks. The ECB could tweak the deposit rate paid to banks who leave money their overnight even more deeply into negative territory ( there is much discussion in the markets on the technicalities of this ).

Mr Draghi also signalled that the programme of buying Government bonds, which was to be wound down, could be revived and the rules limiting ECB buying could be eased to allow this to happen.

Programmes to provide cheap finance to banks could also be stepped up, on the understanding that the resulting cash it loaned out into the economy. It had echoes of his 2012 speech, when he said the ECB would do “ whatever it takes” to save the euro.

Rate

It is too early to say exactly what this means for Irish borrowers, but it is obviously good news – as well, of course, as being negative for returns on offer to savers.

The ECB is probably unlikely to cut its main refinancing rate – the one tracker mortgages are priced off. But there will be no increase in this rate for the foreseeable future and any talk of rates edging up heading into 2020 looks to be off the table. And a general environment of lower rates – and cheaper finance for banks – should feed through to more competition and possibly better offers for standard variable rates and for fixed rate products.

With Irish mortgage rates still well above the EU average, there is simply no excuse for borrowers not to benefit from the latest extraordinary developments in interest rates markets.

Mr Draghi’s move led to a fall in the value of the euro against the US dollar and other currencies, leading to a tweet from US president Donald Trump saying this would make it “ unfairly easier” for EU companies to compete against those from the US. “ They have been getting away with this for years, along with China and other” he added, in a move which will ratchet up trade tensions between the EU and US. It is precisely these fears which were one of the reasons for the growth slowdown which prompted Mr Draghi to promise more stimulus.

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