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Cheap Money’s Days Are Numbered


Image source: Alexandros Michailidis / Shutterstock.com

What's going on?

In light of a continued improvement in economic growth, the European Central Bank (ECB) took another step on Thursday towards removing the extraordinary support it’s provided to the eurozone in recent years – and it’s all part of a chorus of factors pushing up interest rates globally.

What does this mean?

The ECB held its latest meeting this week. As expected, it kept all of its main target interest rates on hold – but, significantly, it removed language in its post-meeting statement that committed it to buying more euro-denominated bonds should economic growth deteriorate. Basically, it’s another nod to investors that the ECB will keep reducing quantitative easing (QE), which has been its primary means of keeping interest rates low. The plan is to keep removing support gradually, but the end is nigh: the ECB could stop buying bonds as soon as September.

Why should I care?

For markets: This is possibly a precursor to much less supportive ECB policies.

The ECB’s current president, Mario Draghi, has been a huge proponent of QE. Meanwhile, representatives from Germany’s central bank who sit on the ECB’s committee have argued strongly in favor of stopping the program much more quickly. Draghi’s term as president ends in late 2019, and it’s reasonably likely that a German will take over – meaning investors should expect a less supportive ECB in the coming years.

For you personally: European interest rates have a huge impact on your investments.  

Over the past few years, the European and Japanese central banks have bought a truly astounding amount of bonds. They only buy bonds from within their respective economies, but the higher prices force investors to look elsewhere for decent returns – and so they buy US and other countries’ bonds (or other investments, like stocks and real estate). As such, the value of virtually all investments goes up. As the ECB – and, from 2019, perhaps the Bank of Japan – remove their support, the impact on global markets could be heavily felt.

Originally posted as part of the Finimize daily email.

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