15 December 2016 News

Hannover Re parent welcomes US rate hike, suggests ECB may follow

Hannover Re parent Talanx has welcomed the decision of the US Federal Reserve to increase its key interest rate calling it a step towards the normalisation of monetary policy conditions for capital markets and suggesting that the European Central Bank (ECB) may follow suit.

The US Federal Reserve raised the federal funds rate on Wednesday, December 14, to a range of between 0.50 percent and 0.75 percent.

The Federal Reserve also signalled a faster pace of increases in 2017 as central bankers adapted to the incoming Trump administration's promises of tax cuts, spending and deregulation. The Fed now anticipates three rate hikes in 2017 instead of the two foreseen as of September.

The low interest rate environment has impacted the ability of re/insurers to generate yield from investments, negatively affecting the sector’s profitability.

“Talanx welcomes the decision by the US Federal Reserve to increase its key interest rate,” said Immo Querner, chief financial officer of Talanx.

“Not only does this send out the right signal for greater optimism in a US economy that is well on the road to recovery after eight years, it is also an important step towards the normalisation of monetary policy conditions for capital markets. Interest rates would therefore seem to have passed their lowest point.”

Querner also suggested that interest rate increases in Europe could also be underway. “If the oil price now rises and hence also the inflation rate, interest rates in Europe will similarly be able to move higher,” he said.

An interest rate hike by the ECB would reduce pressure particularly on German life insurers, which are increasingly unable to generate investment yield levels to cover the guaranteed rates of the products they sold.

“It is to be hoped that the European Central Bank follows the lead set by the Fed. With its protracted zero-rate policy the ECB is compelling German insurers to put loans on their books, the returns on which are no longer commensurate with the risk,” Querner said.

“Furthermore, with its programme of asset purchases the ECB is constricting the market for liquid instruments, hence promoting an additional price decline and forcing investors into an unholy chase for adequate returns. The signal sent out by the US opens the way for the ECB to reconsider its expansionary monetary policy. It should not miss the opportunity."

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