European Central Bank, CC BY-NC-ND
Mario Draghi - ECB
It is not without good reason that the ECB’s policy is often accused of dispossessing German savers. The criticism aimed at the ECB is actually somewhat hypocritical, because there is so little in the way of support or encouragement for systematic alternative investment strategies within Germany.
The year 2018 was marked by low base rates and very little movement in long-term interest rates. Both rates could rise in 2019 – but only slowly and gradually. The ECB remains the dominant factor when it comes to interest rates.
2018 in review
Over the course of 2018, short-term interest rates remained almost static. The room for manoeuvre provided by the European Central Bank (ECB) through its base rate is severely limited. Monetary policy instruments can be used with a high degree of precision to directly affect short-term rates – but this is not the case where long-term interest rates are concerned. In this regard, the ECB sent a strong market signal through its bond-buying activities, but did not influence rates directly. This means that market influences can have a stronger effect, and indeed the long-term rates in 2018 moved slightly more than the short-term rates, though the fluctuations remained limited.
The ECB has been carrying out a bond-buying programme of over EUR 60 billion per month since March 2015, with the purchasing volume increasing to EUR 80 billion from April 2016 onwards. Long-term interest rates subsequently reached a historic low in October 2016. In 2017 and 2018, the monthly purchasing volume was lowered to EUR 30 billion and then to EUR 15 billion in October 2018. At the end of the year,the bond-buying programme was discontinued for the time being. However, long-term interest rates during this period have only risen slightly, showing mild fluctuation. Various crises such as the trade conflicts initiated by the US government, the UK’s impending withdrawal from the EU, or Italy’s banking and budget crises also failed to have a significant impact on the long-term rate’s development. Since the beginning of October 2018, the conditions for ten-year swap rates have actually fallen again, coming in below 0.8% in January 2019. This means that long-term interest rates are also still at a historic low, despite increases in the interim. On balance, the ECB remains the key influence on long-term interest rates.
Outlook
The ECB will continue to be the domi-nant bond-buyer on the market in 2019 due to the continuous replacement of maturing bonds. This process will result in the ECB purchasing a further EUR 15 billion in bonds each month. It is there- fore expected that long-term interestrates will continue to rise slowly over the course of 2019. However, sudden increases are unlikely.
Where short-term rates are concerned, the ECB has repeatedly stressed that it will not change the base rates beforesummer 2019. The imminent departure of Mario Draghi as president will not lead to any changes in that regard either. The key decisions will be taken by the Governing Council of the ECB, in which the president only has one vote. The ECB has indicated several times that all of the decisions announced depend on the continued positive development of the inflation rate. In light of the weakening economy, this is far from a certainty. In December, inflation fell back to 1.7%.
Despite a slight increase in interest rates, property prices have not yet fallen. The development of the German property market is thereby following the American pattern: In the US, both interest rates and property prices have been rising steadily in recent years. The link between interest rates and property prices is less direct than is often assumed. That is why there is no reason to assume that the moderate interest rate increases expected for 2019 will have significant effects on property price trends.