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Debt costs up for business despite ECB rate-cut talk

Debt costs up for business despite ECB rate-cut talk

Borrowing costs for small and mid-sized businesses in Ireland increased in the first three months of the year, despite the wider speculation in the economy that interest rates will fall.

Irish SMEs already pay some of the highest borrowing costs in Europe.

The latest Central Bank data on credit for small and medium enterprises (SMEs) indicates that firms remain extremely cautious about borrowing.

Despite Ireland having one of the fastest-growing economies in the EU, gross new lending to Irish-resident SMEs slowed to €1.1bn in the first quarter of 2019 from the previous quarter’s €1.5bn flow.

Debt repayments exceeded new lending to all Irish SMEs by €397m in the period.

Nervousness ahead of Brexit, originally scheduled to happen on March 31 is likely to have been an issue, according to Investec Ireland chief economist Philip O’Sullivan.

“When set against the backdrop of heightened Brexit uncertainty and international trade spats, it is not a surprise to see that Irish SMEs adopted a defensive posture with regard to leverage in the opening months of 2019,” he said.

Of the 15 segments of SMEs tracked, only three saw an increase in new lending activity.

Even so, the credit data suggests the economy is performing highly despite continuing to deleverage, he said.

Borrowing costs are rising, however.

The weighted average interest rates on outstanding SME loans increased slightly in the first quarter of this year to 3.51pc.

New lending rates are higher, and now stand at 4.14pc for new drawdowns with the highest costs in sectors including agriculture and transport/storage that are likely to be on the economic front lines in the event of a no-deal or crisis Brexit.

The rise in the cost of debt for businesses is in contrast to the declining cost of credit to lenders.

The ECB’s indication that monetary policy is set to become even looser, with potential interest rate cuts on the way, has pushed down borrowing costs on capital markets.

Borrowing costs were already low for the banks.

Last year the main banks stopped using the State’s Strategic Banking Corporation of Ireland (SBCI), which was set up to channel low-cost finance to SMEs, because the lenders were able to access cheap money in their own right.

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ECB won’t raise rates until at least mid-2020

ECB won’t raise rates until at least mid-2020

The European Central Bank yesterday signalled that it would not raise interest rates until the first half of 2020.

That compares to a previous guidance that pointed to a rate rise towards the end of this year – something that, in itself, was a delay on its previous plans.

The decision comes as the euro zone’s lacklustre economic recovery faces new headwinds – including China’s slowdown and transatlantic trade tensions.

“Over the last three to four weeks we’re beginning to see central banks across the world decide that they need to support the global economy more,” said Niall Dineen, chief investment officer with Appian Asset Management.

“We’re see rate cuts out of Australia and New Zealand and we’re seeing the Federal Reserve in the US talk about cutting rates as well. So I don’t think it’ll be a huge surprise that we’ve seen the ECB getting on board with everybody else,” Mr Dineen said.

This is a marked turn around from 12 months ago, when most central banks were moving rates upwards and the ECB was poised to follow suit.

According to Mr Dineen a number of factors, but particularly those around global trade, are weighing on economic performance.

“I think the reality is that the trade war rhetoric that we’ve been listening to over the past twelve months has had a real impact on the global economy,” he said.

“There is also weakness in China. There’s a real risk that parts of the Chinese economy could be in a recession and a lot of this is dragging down economic growth numbers across the globe,” he added.

That is prompting central banks to look again at offering supports to economies – rather than trying to take the heat out of markets with rate rises.

The problem for the ECB is that its interest rate remains at zero – while it already has trillions of euro of bonds on its balance sheet from the recently-completed round of quantitative easing. That leaves it with limited scope for further stimulus measures should the euro zone economy require it.

“Central banks will argue that they can always do more on the rate side in terms of forcing banks to lend, or they can do more quantitative easing,” Mr Dineen said.

“But maybe the reality is that the next part of support for the economy has to come from governments and has to come from fiscal spending – maybe that’s the thing that’s been lacking in this cycle. We have to get away from this idea that it’s always going to be central banks that provide this support,” he stated.

The support Europe’s central bank may be willing to offer could also hinge on the person at the helm, as Mario Draghi is due to step down at the end of October. His successor could set a different tone for the authority following what has been a prolonged period of accommodation.

“We have to recognise how positive Draghi has been for Europe,” Mr Dineen said. “He has put the ECB front and centre of keeping the euro zone together as it went through its own crisis and keeping the stimulus measures in place.

“Is there a risk that if we get, maybe, a German head of the central bank that the underlying philosophy will change? I think it’s a small risk – I don’t think it’s a huge risk,” he stated.

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ECB still has ammunition left to fight recession – Lane

ECB still has ammunition left to fight recession – Lane

The European Central Bank’s policy arsenal has not been depleted and fiscal policy could help stimulate investment, the ECB’s incoming executive Board member Philip Lane has said.

Investors fear the ECB’s window to potentially raise interest rates has closed, meaning it has little in its toolkit to face the next recession.

But in some of his first public remarks since securing the job of replacing current ECB chief economist Peter Praet, Central Bank Governor Philip Lane said the ECB still had options.

“The idea that the ECB lacks potency is very far from where we are,” he told academics and diplomats at Ireland’s embassy in London.

Professor Lane added that fiscal policy could also help reduce policy uncertainty, and encourage the private sector to resume investing.

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Safe-haven Euro zone bonds dented by Brexit but buffered by ECB

Safe-haven Euro zone bonds dented by Brexit but buffered by ECB

Germany’s 10-year bond yield edged up on Thursday as a no-deal Brexit was avoided for now but held firmly below zero percent thanks to a signal from the European Central Bank that it will do all it can to fight low economic growth and inflation.

European Union leaders early on Thursday gave Britain six more months to leave the bloc, meaning it will not crash out on Friday without a treaty to smooth its passage.

The news bought some relief to markets but the selloff in safe-haven assets such as German government bonds was limited as investors focused on the dovish message being sent from major central banks.

ECB President Mario Draghi on Wednesday raised the prospect of more support for the struggling euro zone economy if its slowdown persisted, saying the ECB had “plenty of instruments” with which to react.

And minutes from the Federal Reserve’s March meeting released on Wednesday showed the Fed is likely to leave interest rates unchanged this year given risks to the US economy.

Germany’s 10-year bond yield was up around a basis point at minus 0.023pc, off Wednesday’s one-week low.

Still, having spent much of the past week skirting around the zero percent level, German Bund yields are back within sight of 2-1/2 year lows hit last month after Draghi flagged the ECB is looking at ways to offset the impact of negative interest rates.

“The April ECB meeting had a dovish ring to it which, put in the context of the March dovish surprise and stabilisation of economic indicators, caught rates markets off guard,” said Antoine Bouvet, a rates strategist at Mizuho in London.

“What really stood out was his (Draghi’s) willingness to signal the ECB is studying whether NIRP (negative interest rate policy) side-effects need mitigating.”

Across the euro area, benchmark 10-year bond yields were around a basis point higher on the day .

Renewed talk about further ECB policy measures to lift economic growth, especially the notion of tiered interest rates, means speculation about euro zone rates is starting to build.

Eonia money market futures dated to the ECB’s December meeting price in 1.5 basis points worth of rate cuts, which analysts say equates to roughly a 15 percent chance of a 10 basis point rate cut.

“Since there is no new evidence that issuer limits could be raised, for QE (quantitative easing) to be restarted, the logical conclusion would be that rate cuts may have to be reconsidered in the future under an adverse scenario,” said Pictet Wealth Management Frederik Ducrozet, referring to the ECB’s rules for asset purchases.

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