End of QE possibly good news ...

C

Codogly

Registered User
Messages
182
Hi
Just a though , is it possible that when the ECB withdraws QE this will be good news for tracker mortgage holders ?
Simplified example ( not even sure if this is correct )
After QE wholesale bank rates ( inter bank rates will likely rise making the tracker mortgages even a bigger burden on banks P&L ... well at least until ECB starts rising it's interest rates?
 
There is no history of QE, so no one knows what will happen.

If the ECB rate remains at zero, I presume that the wholesale rates will be very low as well.

If ECB rates rise, then a tracker will be less valuable. In an ordinary market, the banks should be able to get deposits at less than the ECB rate and lend it out at more.

Brendan
 
Thanks Brendan ... my simplethinking was along the lines of if the ECB are no longer pumping Billions into the bond markets then there will be less money overall to spread around between bonds and banks thus the amount of money available falls and price rises ...perhaps there is plenty still around on deposits ?
 
When rates do start to rise, would the banks pass all the rates increase to trackers, and leave variable & fixed alone. In a short period a tracker could be more expensive then e.g UB 4 year rate 2.6%. Thus a majority of customers may abandon the once lucrative trackers......
 
Thanks for the replies lads ... still think there will be s consequence when billions are no longer pumped into the markets ...just not sure whT that will be.
 
QE has more effect on long-term interest rates, whereas the ECB directly controls short-term interest rates.

So QE affects bond yields, rather than 1m-12mth rates.

As QE is wound down, and maybe reversed, then a large scale buyer of bonds has stopped buying.

This means less support for bond prices, and so will lead to higher bond yields.
 
If QE stops after Sep 2018, well the main ECB rate could well stay at 0% for many months after that.
 
Hi Protocol,
Thanks for your insight on bond prices after end of QE ...again forgive my ignorance but if Bond prices rise after QE would that not mean that banks were achieving a very small return on funds they have loan out as trackers while the bond market was increasing its return thus widening the gap ? Would banks not be tempted to switch to bonds ( I.e ... buy out trackers and invest in bonds ) ?
Or is that totally off the wall ?
 
Codogly said:
Thanks for the replies lads ... still think there will be s consequence when billions are no longer pumped into the markets ...just not sure whT that will be.
Click to expand...

Id imagine the price of Chinese Emperor owed vases to fall back close to their estimated worth instead of the crazy prices of today to be one consequence.

https://www.rte.ie/news/newslens/2018/0612/969991-vase-france/

From €500,000 (estimated value) to €16m in 20mins!!
 
Codogly said:
is it possible that when the ECB withdraws QE this will be good news for tracker mortgage holders ?

After QE wholesale bank rates ( inter bank rates will likely rise making the tracker mortgages even a bigger burden on banks P&L ... well at least until ECB starts rising it's interest rates?
Click to expand...

If the bank's cost of finance rose, which is likely after QE ends, then banks profits on trackers would fall, or losses increase.

That might tempt banks to make offers to redeem trackers.

The ECB rate would likely rise in line with the banks cost of finance, thus increasing the income to the bank from trackers.

So to answer the question, in my opinion probably not.
 
renter45 said:
When rates do start to rise, would the banks pass all the rates increase to trackers, and leave variable & fixed alone. In a short period a tracker could be more expensive then e.g UB 4 year rate 2.6%. Thus a majority of customers may abandon the once lucrative trackers......
Click to expand...

The banks cannot increase the margin on trackers, the are fixed to the ECB rate. Thus tracker rates will rise in lockstep with ECB rates, the banks have no control over this.

I think it is unlikely that the ECB rate will rise more than the 2.6% you mention, if it did the bank would have to finance the fixed rates at a loss and they obviously are not expecting that. Of course they were wrong before.
 
I guess an issue will only arise for the banks if there is a long period of time between the End of QE and whenever the ECB starts to raise interest rates... personally I can see this gap been longer than most seem to expect.
 
I still wouldn't be over concerned about Irish banks raising their rates, whist they will obviously hike trackers I think the variable and fixed rates might be left alone to allow them to gradually come in line with the rest of the eurozone.
 
You must log in or register to reply here.
Back
Top