What's going on?
You can’t be too careful in times like these, which might be why the European Central Bank (ECB) announced even more support measures late last week.
What does this mean?
With new coronavirus hotspots forcing parts of Europe back into lockdown, the ECB’s concluded that the region’s economy will shrink 2% this quarter compared to the one before. So on top of calling for individual governments to help their countries directly, the central bank announced extra support of its own: it’ll spend an additional $600 billion buying eurozone bonds, and reinvest the money it earns into other bonds until 2023 – longer than it’d originally planned.
When central banks buy lots of bonds, it pushes their prices up and yields – which investors use to determine interest rates on new loans – down. So by upping the amount of its bond-buying program and extending its length, the ECB has effectively promised businesses and governments to keep those rates low. That low cost of borrowing should then encourage them to take out loans, spend money, and help grow the economy.
Why should I care?
For markets: Big move energy.
The euro rose by about 0.2% versus the US dollar after the ECB’s announcement, which is a pretty significant move for a currency (even if it doesn’t sound like one). That suggests European assets are becoming more popular with investors again – not least with the ECB itself, which will, according to Bloomberg, own 40% of all German government bonds by the end of next year.
The bigger picture: Envy, thy name is European banks.
Across the Channel, the Bank of England gave UK banks the go-ahead to start paying dividends again – an early Christmas gift for shareholders who rely on that income. There were various strings attached to make sure they don’t find themselves short of cash if there’s another downturn, but at least they can pay something: European banks’ own dividend ban looks like it’ll keep going into next year…