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CAPinsideBörse3 MIN READING TIME2018-11-07

Central banks influence stock markets

For the first time in about ten years, the sums in the balance sheets of central banks in Western countries are no longer increasing. Analysts even consider a reduction of the values ​​in the coming year for possible. That means for the national economies that the current support policy is about to end. In the past, those responsible for the banks took measures that helped stimulate the economy. The banking crisis was responsible for slowing economic growth. Bond purchases were necessary from the point of view of the Landesbanker, so that the dangers of a recession remained minimal. In addition, a stable rate of inflation was ensured along this path.

The US monetary authorities have decided to change their strategy sooner than their European counterparts. Raising the key interest rate was the logical consequence. It has been completed in seven steps and is now in the United States at a value that varies between 2.00 percent and 2.25. Although Donald Trump criticized this approach in his capacity as American President, his tirades, which he disseminated via Twitter and gave in interviews, did not change the opinion of those responsible. A further rise in the key rate next year is possible, if one believes the statements of the Fed chiefs. The only question is how many levels the further increase covers, as there are risks that affect the decisions. Uncertainties are provided by Trump himself. He has opted for a protectionist policy that focuses on his own economy. For example, the US repeatedly imposes punitive tariffs on imports, which lead to an artificial increase in the price of goods and therefore affect their competitiveness. The trading partners do not like this practice and also charge additional duties on American products. If both sides can not find an amicable settlement, it will result in a trade war that will have a negative impact on the world economy. The observers therefore believe that a maximum of three increases can take place.

These measures ensure a neutral monetary policy. The most important indicator is inflation. Economists estimate that this should be about 2 percent. Raising interest rates will be particularly beneficial to investors as they now earn more on their savings accounts. These are currently below the inflation rate, which is why an unnoticed reduction of their own purchasing power takes place. Although the increase in the cost of credit is a result, it is within acceptable limits and a small challenge. Jobs are therefore safe and there is no reason to fear an increase in the unemployment rate.
The bond purchase program that the Fed carried out ended in 2014. Here a clear difference to the ECB is visible. This still carries out the acquisition of government securities. As a further consequence of this decision, the balance sheet size and value decreased. Moneys have now been partially reissued, leaving reserves at just $ 4.2 trillion. In times of support it was up to $ 4.5 trillion. Since the experts assume that no further assistance is needed, these amounts will continue to melt over the next few years.

The European approach is different

Since the problems here are stored differently, the monetary guardians in Europe are using a different tactic. Many challenges have not yet been overcome and more threats are emerging. Greece is still dependent on aid and therefore needs capital from the ECB and other member states of the EU. In addition, there are first indications that Italy is facing financial collapse. If these fears prove to be true, then this will not only affect the economic performance of the southern Europeans. The entire European economic area would be endangered, which the world economy also manages.

Likewise, there will be a monthly purchase of government bonds in the billions. Here at least an end is foreseeable, since the program expires at the end of December 2018. But the time interest is still at 0.00 percent. The costs for external funds are thus minimal for those interested. Investors must therefore look for riskier ways to increase money. Furthermore, there is still a penalty rate for banks if they do not want to make their capital available to customers. This is currently 0.40 percent of the stored value. Although the dangers of a default on borrowers are reduced, a loss is nonetheless inevitable.
Market participants expect that changes from October 2019 are possible. However, this is not because Mario Draghi will then leave the financial center. The overall situation is responsible for this, which has stabilized over a longer period. Even a minimal increase in the key interest rate would be a positive sign. If the deposit facility also falls away, the overall circumstances change drastically. That this is possible is proved by the British central bank, whose purchases have long since ended and whose balance is steadily shrinking. Two levels of interest rates were raised, which was particularly important for the London financial center. For financial institutions, there are now new opportunities, as their financial offers are now more interesting again.