ECB to halve €60bn bond buying programme

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The European Central Bank (ECB) will cut back its scheme designed to boost the economies of the eurozone.

From January of next year, it will reduce the amount of assets it buys every month to €30bn from the current level of €60bn.

The programme, which aimed to fend off the threat of eurozone deflation and help boost employment, could finish by the end of next year.

Inflation is likely to be below the 2% ECB target for the next few years.

The ECB said the reduced programme would run to the end of September 2018, “or beyond, if necessary”.

If economic conditions become less favourable, or if no progress is likely to be made towards the ECB’s inflation target, it could increase bond-buying again, it said.

“Our programme is flexible enough that we can adjust its size smoothly,” ECB President Mario Draghi told a press conference.

“Today’s monetary policy decisions were taken to preserve the very favourable financing conditions that are still needed for a sustained return of inflation rates towards [target],” Mr Draghi said.

He said the ECB will reinvest the principal investment from maturing bonds for an extended period after the end of the bond-buying programme, which could run to billions of euros per month.

The decision to cut quantitative easing measures was not unanimous among ECB policymakers, and a large majority favoured keeping monetary stimulus open-ended, he said.

Markets muted

Mr Draghi has been signalling for months that the bond-buying scheme will be reduced.

“Mario Draghi’s main goal for months now has been to gently steer markets into thinking that this tapering would come today. He’s done that so markets take the announcement in their stride, which they will,” said Patrick O’Donnell, Aberdeen Standard Investments senior investment manager.

The ECB kept the key interest rate for the countries that use the euro unchanged at 0%, and its deposit rate at -0.4%.

The central bank charges banks and other financial institutions to deposit excess money with it to encourage banks to lend.


Currency rates hit new low at airport bureaux de change

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Travellers buying their currencies at UK airports are being offered as little as 86 euro cents to the pound.

Foreign exchange broker FairFx, which carried out a survey for the BBC, said this rate, from Moneycorp at Southampton airport, was the worst at any airport bureau de change.

The average euro rate across 16 big UK airports was higher, at 95 euro cents to the pound.

Ten months ago the average at these outlets stood at 99 euro cents. James Hickman, chief commercial officer at FairFX, said the fact that airport rates are so low – much worse even than at High Street banks – shows that the bureaux de change firms are taking advantage.

“In reality they are ripping off the customer, who is effectively captive as they have nowhere else to buy their money at an airport,” he said.

“At most airports and terminals individual companies have a monopoly.

“They should be regulated as there is simply no justification for charging someone 14% [the average margin between the tourist and money market rates] to change their pounds to euros,” he added. That margin is as high as 26% at Moneycorp’s Southampton airport outlet.

Pauline Maguire, Moneycorp’s retail director, said: “The reason for our higher airport rates is the significant cost associated with operating there – from ground rent and additional security, to the cost of staffing the bureaux for customers on early and late flights.”

“An easy and more cost-effective way for customers to buy travel money is to pre-order online and collect at the airport,” she said.

The best euro rate for tourists detected in the airport survey was 1.05 euros, from Travelex at Newcastle airport.

Wide variation

The average tourist rate for the pound against the US dollar is also very low.

Currently the average is $1.12 to the pound at UK airports, ranging from $1.05 at ICE at Norwich airport to $1.15 from Travelex at Heathrow Terminal 3.

Koko Sarkari, chief executive of ICE, which runs bureaux de change at Belfast, Birmingham, Heathrow and Luton airports, dismissed the idea his firm was exploiting a captive market.

“We work hard to keep our prices fair and competitive around the world,” he said.

“However, due to differences in distribution, costs of operation, regional competition and other factors such as ongoing volatility in the market, as we are experiencing now, online prices may not be the same as our ICE branch prices and prices may also vary between branches because of these factors.”

‘Brexit uncertainty’

One reason for the poor rates on offer to tourists is the continued decline of the pound on the foreign exchange markets, in the wake of last year’s Brexit vote.

The pound’s money market rate – the one at which banks buy and sell to each other – has dropped from $1.31 to $1.29 in the past 12 months.

Against the euro it has dropped much more in that time, from 1.18 euro to 1.08 euro.

Continuing Brexit uncertainty is feeding into sterling weakness, said Simon Derrick, a managing director at BNY Mellon.

Traders are looking to see what will happen over the next two months, with the attempted incorporation of EU law into UK legislation through the Great Repeal Bill, and EU negotiator Michel Barnier reporting back to the European Parliament on Brexit talks.

Sterling also hasn’t done that well in August after the Bank of England monetary policy committee voted to keep rates on hold – investors see no prospect of a rates rise any time soon, he said.

However, there are two sides to the story. The euro is also getting stronger because “the eurozone economy is really starting to show some signs of life,” he said.

Eurozone consumer confidence seems to be picking up, and investors think the ECB will start to tighten monetary policy as inflationary pressures build.


Markets stabilise after Italian referendum

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Financial markets have rebounded after initial falls following Italian Prime Minister Matteo Renzi’s heavy defeat in Sunday’s referendum.

The euro was hit after Mr Renzi announced his intention to resign. At one stage the euro hit $1.0505, its lowest level against the US currency since March 2015.  But it rebounded from that low to stand at $1.0634, a fall of just 0.3%. Shares in Italian banks opened lower before recovering ground. The troubled Monte dei Paschi was down by more than 5% in the first few minutes of trade, but then rebounded and had edged into positive territory. Shares in Unicredit and Intesa also fell sharply at first before recovering.

Analysts say Mr Renzi’s defeat was already priced into the market. Kathleen Brooks, research director at City Index Direct, said there was caution among investors but not panic. “While the markets are likely to remain nervous as we start a new week, they haven’t fallen off a cliff, so far,” she said. “Either markets are becoming immune to political risk, or they are taking the view that the Italian issue will be a slow-burner, even if the president can’t form a government, he still has 70 days to try, and that seems quite far away at this stage.” However, the Italian economy is in a fragile state and a period of political uncertainty could do it further damage. Italian banks including Monte dei Paschi di Siena have been under pressure

‘Beleaguered’ banks

Analysts are particularly concerned about Italy’s banking industry, which is seen as vulnerable to a loss of confidence. Many banks are struggling with a burden of bad debt and are in need of refinancing. That finance would be harder to come by amid a political crisis. “Italy’s banks don’t have time to waste to try and boost their capital buffers. A win for the Yes camp in this referendum could have seen investors help to recapitalise the banks. However, it is unknown whether investors will do so now that the No camp has prevailed,” said Ms Brooks. “Without a sitting government, will there be official help for Italy’s beleaguered banking sector?” The size of Italy’s government debt is also a concern. Government borrowing, depending on which figures you look at, is one of the largest in the eurozone.

Analysis: Simon Jack, BBC business editor

Although the share price of Europe’s oldest bank Monte dei Paschi is little changed, that could soon change if the consortium of investors planning a €5bn cash injection abandon their rescue attempt amid the political vacuum opened up by Matteo Renzi’s departure. They will meet this afternoon to decide their response. The boss of the bank has described this plan as getting “several holes in one in a row”. Golfers will know how hard that is and the wind of political risk has just picked up. If they do decide the plan is now too risky then the government may have no choice but to nationalise the bank. That would trigger a so called “bail in” which means people who lent the bank money would have to write it off. Unfortunately, 65% of those creditors are ordinary retail investors so the damage would be widespread and politically toxic. Italy’s cost of borrowing rose sharply in early trading on Monday. The country’s 10-year government bond yield was up from 1.896% at the end of last week to 2.0516%. Yields rise when the price of bonds fall. However, the yield then fell back below the 2% mark to stand at 1.988%. Analysts said yields appeared to be bearing up despite the fact that the European Central Bank had not stepped in to buy bonds.

‘Critical importance’

Mr Renzi’s defeat adds to pressure on the European Union following June’s Brexit vote in the UK. “It’s not very hard to see a new election on the horizon, and it’s not very hard to see the 5-Star Movement taking power with stated aims to either leave the EU, drop the euro, or both,” said Mark Wills from State Street Global Advisors. “For Italy, establishing stable governance and a plan to guide the nation is of critical importance given the fragility of the economy, challenging policies and the liquidity problems in the banking system.”

 


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