An extended period of low European Central Bank interest rates could increase the risk of a sudden surge in risk premia, and policymakers should consider the implications of financial imbalances, Bundesbank President Jens Weidmann said on Friday.
The ECB expects its key rate to stay deep in negative territory for years, potentially increasing risk-taking and inflating asset bubbles as investors are forced to turn away from fixed-rate securities to seek returns.
This has raised concerns that bubbles could burst or that the eventual end of ultra-loose policies could trigger a sudden market reversal.
But policymakers have tended to play down stability concerns, arguing that no bubbles are evident for now and the ECB's main task is to meet its inflation objective.
"They (asset managers) might become increasingly nervous the longer monetary policymakers try to maintain the low-interest-rate policy," Weidmann told a conference. "This, in turn, could raise the probability of a sudden hike in risk premiums, the longer that forward guidance is in place and the more aggressively quantitative easing is pursued."
Dollar enjoys reprieve as euro, sterling feel the heat
The dollar clung to modest gains early on Friday, having bounced off one-month lows as the euro took a heavy spill while sterling stayed under a cloud on jitters over the upcoming Brexit vote. The dollar index stood at 94.130 , pulling away from a trough near 93.400. Driving the index's rise was a bearish turn in the euro, which slid to USD 1.1316 from a one-month high of USD 1.1416.
A Reuters report on Commerzbank looking to put billions of euros in vaults rather than pay a penalty charge for parking them with the European Central Bank appeared to have unsettled an already nervous market.
A fresh batch of US data on Thursday was more encouraging with a surge in wholesale inventories in April prompting economists to lift their second-quarter economic growth estimates.
BlackRock, the world's largest asset manager, said financial markets may be under pricing the risk of Britain leaving the EU.
IMF: Gulf states must cut deficits
Gulf oil exporters must cut spending and narrow their budget shortfalls to keep their currencies pegged to the dollar, the International Monetary Fund (IMF) said.
While substantial foreign assets have allowed the six members of the Gulf Cooperation Council (GCC) to fix the value of their currencies to the greenback, keeping the status quo comes at a price as lower crude prices strain public finances, the lender said in a report titled “Learning to Live with Cheaper Oil.”
“When a country faces prolonged fiscal and external deficits, policy adjustment must come from fiscal consolidation measures,” the IMF said in the report authored by Martin Sommer, deputy chief of its regional studies division.
Their debt-to-GDP ratio is expected to rise to 45% in 2021 from 13% last year as governments issue debt to plug their budget gaps.
Foreign assets give governments varying amounts of “fiscal space” to cope with lower oil prices, with Kuwait, Qatar and the UAE enjoying sizable buffers to finance more than 20 to 30 years of projected deficits, the IMF said.
Even so, the GCC and Algeria needed a fiscal “adjustment” of about 10% to 15% of gross domestic product, with every US$10 increase in the price of oil reducing that amount by about the equivalent of 4% of GDP, the IMF said.
Oil prices dip on stronger dollar
Oil prices likely need to recover to roughly $70 a barrel — and stay there — before U.S. shale drillers start investing in new production, Tom Petrie said Thursday.
Drillers need access to debt and equity markets in order to invest in new production, Ward told "Squawk on the Street" last month. Oil and gas companies have slashed capital spending because crude prices have been too low to support new investment.
Oil prices rebounded 98 percent from February's 12-year low of $26.05 to a 10 ½-month high of $51.67 reached on Thursday. The rally has stoked fears that U.S. drillers, desperate for relief, will turn on the taps to get more oil — and cash — flowing, resulting in another supply-driven crash in crude prices.
U.S. output ticked up for the first time in three months last week, according to weekly production figures released Wednesday by the Energy Information Administration.
Thai
Eng