Post by account_disabled on Feb 27, 2024 18:51:37 GMT -10
In the coming weeks, the European Central Bank will probably write a letter to Rome. In that letter – formally, a legal opinion – he will almost certainly criticize the Italian government's plans to tax a substantial portion of its banks' net interest income. Upon receiving the letter, Giorgia Meloni, Prime Minister of Italy, should not feel unfairly singled out. The ECB has also taken aim at Madrid over its taxes on bank windfall profits, warning that they could weaken lenders' capital positions. However, the central bank's own actions may ultimately have set in motion the chain of events that led to governments' decisions to tax their lenders. Two of the eurozone's largest economies have revealed windfall taxes, as has Lithuania. We'd bet others could follow suit. In an environment where lawmakers (and voters) are struggling to make ends meet, taxing bank profits inflated by central bank interest payments is an option too politically attractive and too fiscally lucrative for people. like Meloni ignore her.
Especially when lenders across the region, to varying degrees, fail to pass on higher interest rates from central banks to savers. However, there is simply less reason for them to do so in an environment where the Job Function Email Database side effects of the ECB's decision to buy trillions of euros worth of debt (as well as offering cheap long-term loans) are still being felt. Let's back up a little. Throughout history, looser monetary policy has not only meant lower rates, but also larger supplies of cheap central bank cash. However, the scale of aggressive central bank easing over the last cycle has created a scenario in which important elements of looser monetary policy cannot be easily undone. Let's take a look at the Eurosystem's balance sheet. Eurozone central banks still hold around €5 trillion in bonds, mostly government bonds. Several of its long-term refinancing operations (TLTROs), which offered abundant supplies of very cheap liquidity, have not yet expired. And so the balance sheet, deep into the current tightening cycle, still sits above €7 trillion, compared to less than €2 trillion when rate setters raised borrowing costs by last time in.
Why does this matter? In the past, when central banks wanted to increase borrowing costs, they did so by absorbing excess reserves through their open market operations. That process guided market rates upward, as the need for lenders to refinance central bank financing (“reserve shortages” in the jargon) allowed officials to easily control the price of reserves by controlling the quantity supplied. However, even though rates have returned to historic levels, 15 years of aggressive monetary easing have meant that, deep into the current cycle, banks still have all the liquidity they need. Lenders generally do not need to participate in central banks' open market operations to access cash, and have much less need to compete with rivals for deposits, as years of QE and TLTRO have left them bankrupt. Central banks therefore appear to have much less control over the interest rates that lenders offer on deposits than in previous cycles.
Especially when lenders across the region, to varying degrees, fail to pass on higher interest rates from central banks to savers. However, there is simply less reason for them to do so in an environment where the Job Function Email Database side effects of the ECB's decision to buy trillions of euros worth of debt (as well as offering cheap long-term loans) are still being felt. Let's back up a little. Throughout history, looser monetary policy has not only meant lower rates, but also larger supplies of cheap central bank cash. However, the scale of aggressive central bank easing over the last cycle has created a scenario in which important elements of looser monetary policy cannot be easily undone. Let's take a look at the Eurosystem's balance sheet. Eurozone central banks still hold around €5 trillion in bonds, mostly government bonds. Several of its long-term refinancing operations (TLTROs), which offered abundant supplies of very cheap liquidity, have not yet expired. And so the balance sheet, deep into the current tightening cycle, still sits above €7 trillion, compared to less than €2 trillion when rate setters raised borrowing costs by last time in.
Why does this matter? In the past, when central banks wanted to increase borrowing costs, they did so by absorbing excess reserves through their open market operations. That process guided market rates upward, as the need for lenders to refinance central bank financing (“reserve shortages” in the jargon) allowed officials to easily control the price of reserves by controlling the quantity supplied. However, even though rates have returned to historic levels, 15 years of aggressive monetary easing have meant that, deep into the current cycle, banks still have all the liquidity they need. Lenders generally do not need to participate in central banks' open market operations to access cash, and have much less need to compete with rivals for deposits, as years of QE and TLTRO have left them bankrupt. Central banks therefore appear to have much less control over the interest rates that lenders offer on deposits than in previous cycles.