Early this morning saw yet another official interest-rate cut from a central bank. If we skip to a world down under we saw this from the Reserve Bank of Australia.
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.25 per cent, effective 4 February 2015.
So even Australia which has benefited from the resources based boom has joined the club which reduces interest-rates to all-time lows. I doubt it will be their last move in what is also a familiar theme and trend of these times. Also I note that it is not just short-term official interest rates which have gone down.
Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns reaching new all-time lows over recent months……. overall financing costs for creditworthy borrowers remain remarkably low.
This morning the ten-year bond yield in Australia has fallen to a record low of 2.36% as a bass line is added to the drumbeat. One of the issues here is that it is as we have discussed before become something of a South China Territories but even this has only protected it from the cold winds of interest-rate cuts for a period.
What about Canada?
In what is looking like something of a post colonial theme it was only yesterday that I was discussing the recent interest-rate cut in Canada.
The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent.
In another development the interest-rate which comes from a low-level of only 1% was in spite of the fact that the official forecast was for growth.
The oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada in recent quarters.
So even a relatively strong economy-so far anyway- only had an interest-rate peak of 1%?
A new tactic in the interest-rate elimination wars came from the Riksbank of Sweden last year.
The Board is cutting the repo rate by 0.25 percentage points to zero per cent, and making a significant downward revision to the repo-rate path.
So we saw the Riksbank literally begin a Zero Interest-Rate Policy or ZIRP as its rate was cut to 0% but take a look at the rationale!
In Sweden, economic activity is continuing to improve, primarily driven by good growth in household consumption and housing investment……….. The labour market will continue to strengthen in the years ahead and there will be a clear fall in unemployment.
You are permitted an Eh? At this point. Some improving economic activity combined with an improving labour market makes a case for an interest-rate cut? It used to be the foundations for an interest-rate rise as savers feel a chill in their bones at the implications of this.
If we continual the post colonial link we see that there was a case for another interest-rate rise in New Zealand.
Annual economic growth in New Zealand is above 3 percent, supported by rising construction activity and household incomes. The housing market is showing signs of picking up, particularly in Auckland.
But it did not happen partly because of all the interest-rate cuts elsewhere and fears of a currency appreciation. This of course begs the question of when an interest-rate rise can be made these days?
These are increasing prevalent especially around the Euro area as linked economies try not to be affected by its travails and groundwash. I have analysed the way that the Swiss National Bank planned to cut to -0.25% and ended up cutting to-0.75% as the former proved insufficient. Next came Denmark’s Nationalbanken which learned nothing from Switzerland and ended up pretty much copy-catting it as it did this.
Effective from 30 January 2015, Danmarks Nationalbank’s interest rate on certificates of deposit is reduced by 0.15 percentage point to -0.50 per cent
At the same time we have seen the development and spread of negative bond yields which has been driven at least partly by negative official rates. Banks have been trying to avoid the negative rates at the central bank and so they have bought short-dated bonds instead which has often pushed yields negative there too. Danish and Swiss yields are negative quite a long way up their yield curves which leaves a saver with fewer and fewer alternatives.
Also so far I have not pointed out that the European Central Bank went over to the dark side a while ago and has an official interest-rate of -0.2%. It also now has a litany of countries with negative bond yields and some of these are no longer so short-term as in Germany even the five-year maturity is negative.
What about the UK?
We do not have negative interest-rates but we have had an “emergency” Base Rate of 0.5% for what feels like “forever,ever,ever” as Taylor Swift put it but is in fact since 2008. What we have had is downwards pressure on savings rates from the policies of the Bank of England as it has operated several implicit bank bailout policies. Whilst the largest policy was the £375 billion of QE (Quantitative Easing) it was the Funding for Lending Scheme which provided banks with cheap funding reducing their reliance on savers to provide them with liquidity and cash. So from the summer of 2012 even more downwards pressure was applied to savings rates as we are reminded of the words of the hapless Bank of England Deputy Governor Charlie Bean. From Channel 4.
I think it needs to be said that savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.
In a move that makes him now seem a right Charlie he offered hope for the future and please remember this was September 2010!
It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels but there will be times in the future as there have been times in the past when they will be doing very well out of the fact that interest rates are at a relatively high level and I think that’s something that savers should bear in mind.
Savers may well be wondering when the next roundabout is?! By contrast Mr.Bean did not have to dip into his pension which rose and rose to an index-linked £119,200 per annum.
What about UK savings rates?
Swanlow Park have produced some annual averages which sing along to Alicia Keys.
I, I, I, I’m fallin’
I, I, I, I’m fallin’
I keep on
In 2008 they calculated the average rate as 5.09%, these following the Base Rate cuts and we saw around 2.8% in 2010-12. But following the Funding for (Mortgage) Lending Scheme we saw 1.75% in 2013 and 1.48% in 2014 as the new push from the Bank of England impacted on savers one more time. Indeed savers might quite reasonably think that this from Status Quo applies.
Again again again again, again again again again
Or of course there is.
Down down deeper and down
Down down deeper and down
Get down deeper and down
There are several issues to consider here of which the first is simple fairness. How long in a democracy can one-sided policies continue which benefit borrowers at the expense of savers? However there is an economic impact too which is that such Keynesian style policies have a time limit i.e they change things for a period and by the time that is up then the situation is supposed to be different as in better. The catch is that at best we are now singing along with Muse.
Time is running out
Actually it is my opinion that it ran out some time ago and central banks are going back to the same play-book because they combine desperation with a lack of imagination. But whilst some (US Federal Reserve and the Bank of England) tease us with talk of interest-rate rises none have actually arrived and I note that the ECB tried it and now has negative interest-rates. So savers continue to be in the chill of what feels like a nuclear winter as I wonder if it will be followed by even more fall-out? After all the current disinflationary trends allow central bankers to talk of rising real interest-rates for a while at least.