Monthly Bulletin April 2008 - European Central Bank - Europa

ECONOMIC
AND MONETARY
DEVELOPMENTS
Monetary and
financial
developments
pricing identical cash flows using a yield curve estimated using all other bonds and notes (“offthe-run”).
For reasons partly related to the functioning of the repo market, the on-the-run note
is in particular high demand also under normal market conditions, and trades at a lower yield
than otherwise comparable securities. 2 As can be seen from Chart B, this premium has increased
substantially since mid-2007 and reached a level of about 25 basis points in February. Hence,
using the on-the-run yield as the comparable nominal yield for break-even calculations, which
is a common practice, currently leads to a significant underestimation of the ten-year break-even
inflation rate (see Chart C) and even more so of long-term forward rates. It is preferable instead
to perform the calculation based on nominal yields from an estimated off-the-run curve, as this
reduces significantly the discrepancy between the liquidity premia embedded in the real and the
comparable nominal yields.
To sum up, sizeable liquidity effects in the government bond markets have recently complicated
the interpretation of important indicators derived from bond market data. Specifically, it seems
that temporary liquidity factors and their subsequent unwinding, rather than genuine changes in
inflation expectations and inflation risk premia, have been the principal factor behind the recent
large swings in break-even inflation rates in both the euro area and the United States.
2 For a discussion of the rationale behind the on-the-run premium, see M. Fisher (2002), “Special Repo Rates”, Economic Review,
Federal Reserve Bank of Atlanta, second quarter, pp. 27-43.
2.5 INTEREST RATES ON LOANS AND DEPOSITS
In January 2008 MFI interest rates on loans to non-financial corporations decreased moderately,
although to a lesser extent than their respective risk-free rates. Interest rates on loans to households
remained broadly unchanged. Since the onset of the financial market turmoil, short-term MFI interest
rates have increased broadly in line with money market rates, while developments in long-term MFI
interest rates have mainly reflected the rise in the cost of funding on the bond market for MFIs.
In January the broad decline in money market interest rates did not have a clear-cut effect on
MFI rates on deposits and loans (see Table 4 and Chart 15). The interest rates on deposits from
households and non-financial corporations diminished for short-term loans (less than a year).
However, developments in these rates should be cautiously evaluated as they tend to be quite
volatile. As regards short-term loans to households, a significant change took place in interest rates
on new loans to households for consumption, which increased by 24 basis points between December
and January. However, interest rates on new loans to households for house purchase with a floating
rate and an initial rate fixation period of up to one year remained unchanged in January. With regard
to short-term loans to non-financial corporations, MFI interest rates on both small and large new
loans with floating rates and an initial rate fixation period of up to one year dropped by 15 and 21
basis points respectively. These developments suggest that the sharp decline in the three-month
money market rate of 37 basis points in January was only partially reflected in MFI rates. Available
data for February suggest that, overall, MFI short-term interest rates continued to decline slightly,
in parallel with, but by less than, money market rates.
Overall, since June 2007, short-term MFI interest rates have increased broadly in line with
movements in money market rates. Between June and January 2008, the three-month money
market rate rose by 33 basis points. Over the same period, MFI short-term interest rates on deposits
ECB
Monthly Bulletin
April 2008
27