If the world economy is doing so well why is everybody cutting interest-rates?

Today is European Central Bank day as we await details of the major part of its new Quantitative Easing Programme. It is also Bank of England day as it reaches the sixth anniversary of its cut to a supposedly temporary emergency Base Rate level of 0.5%. However cries of Happy Birthday to its interest-rate “lower bound” (or at least until Governor Mark Carney had yet another rethink) are likely to be drowned out by news of this.

Following the confirmation by the Serious Fraud Office (SFO) that it is investigating material referred to it by the Bank of England, the Bank can now confirm that it commissioned Lord Grabiner QC to conduct an independent inquiry into liquidity auctions during the financial crisis in 2007 and 2008.


Central Banks are supposed to investigate others not be investigated themselves as we add this to the LIBOR (Arise Sir Paul Tucker) and FOREX debacles. Oh and how about the auctions where it purchased some £375 billion of UK Gilts, I do hope that there was no early wire on those. The whole banking sector just gets ever more tainted doesn’t it? Oh and as to the Special Liquidity Scheme which is being investigated readers may want to look up the meaning of “Phantom Securities”. Let me help out a little from the Bank of England in March 2010.

Accepting raw loans would also ensure that securities taken in the Bank’s operations have a genuine private sector demand rather than comprising ‘phantom’ securities created only for use in central bank operations.


ECB Interest-Rate reduction

Of course the official ECB interest-rate is a lowly -0.2% and apparently also the lower bound. There are a multitude of lower bounds around these days! But my main point here is that recent ECB interest-rate cuts have come in another area which is that of bond yields. When the rumours of a substantial ECB QE operation began in December 2014 the ten-year bond yield in Portugal was around 3% and it is now 1.88% illustrating the change seen here. Remember a default is still a considerable risk in Portugal as markets front-run central bank intervention or in other words create a false market. Something to consider as we mull the Fraud Office investigating the Bank of England.

Also other bond yields have dropped like a stone as this from today’s FT Alphaville section highlights.

Across all European investment grade credit, the proportion of issuance yielding more than 2 per cent has shrunk to just 5 per cent.

In less than a year the proportion yielding less than 0.5 per cent has gone from none to almost 1-bond-in-3

Yesterday all my troubles were so far away

Well apparently not in India and Poland so let us review what took place there. From the Reserve Bank of India.

reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect.


Okay why?

it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation.


Preempting the boost from lower oil and commodity prices? Oh hang on a minute…

Now Poland as the NBP makes its move.

The Monetary Policy Council decided to decrease NBP interest rates by 0.50 percentage points: reference rate to 1.50% on an annual basis;

I believe that is an all-time low for interest-rates in Poland and the rationale was/is?

In Poland, the pace of economic growth in 2014 Q4 slowed down slightly, but stayed close to 3%……..The seasonally-adjusted unemployment rate has been declining driven to a large extent by rising employment.

So we find that Poland joins Sweden in cutting interest-rates at a time of strong economic growth. That of course used to be a rationale for raising interest-rates! Indeed you may note that the NBP spoke of an improved economic forecast as well.

At the same time, the annual GDP growth rate – in
line with this projection – will be with a 50-percent probability in the range of 2.7÷4.2% in 2015 (as compared with 2.0÷3.7% in the November 2014 projection), 2.2÷4.4% in 2016 (as compared with 1.9÷4.2%) and 2.4÷4.6% in 2017.

Up is indeed the new down these days!

Central banks are willing to “look through” a good growth performance when inflation is low in the way that they do not do so when inflation is high! Asymmetry again.


The Financial Times has given us an explanation of why China cut interest-rates by 0.25% only last Saturday.

China’s ersatz parliament, the National People’s Congress, kicked off today. The leadership set its GDP growth target to “around 7 per cent”, down from the heady heights of much of the past two decades or so and even last year’s 7.5 per cent as the country enters a “new normal”.

I suppose it is a response to lower expected economic growth although many countries would love to be able to forecast an economic growth rate of 7%. However if we return to circumstances in India last weeks Economic Survey from the Finance Ministry tells a rather different story.

The reality and prospect of high and rising growth, combined with macroeconomic stability, is the promise of India going forward……In the coming year, real GDP growth at market prices is estimated to be about 0.6-1.1 percentage points higher vis-a-vis 2014-15. Using the new estimate for 2014-15 as the base, this implies growth at market prices of 8.1-8.5 percent in 2015-16.

So both falling economic growth and rising economic growth are now reasons for an interest-rate reduction?! Actually there is something even more extraordinary in the Indian situation as the upwards arrow on the chart shows quarterly growth exceeding 10% on an annualised basis. Yes this is a country which has now cut the official interest-rate twice so far in 2015.

Whatever happened to the BRICs?

For those unaware this acronym was a produce of a Vampire Squid employee and covered Brazil,Russia,India and China. I have covered the interest-rate cuts in India and China so what about the other two? Well Russia has found itself forced into interest-rate rises by the fall and indeed plummet in the value of the R(o)uble and last week as Brazil raised interest-rates to 12.25% it was in the same position although in the explanatory statement you have to look very hard to find it.

combined with the depreciation of the BRL (Brazilian Real)

Perhaps the latest rise to 12.75% will have it.


This article could have been entitled the rise of the disappearing interest-rate! Of course not everybody has cut this year as Brazil and Ukraine for example have raised interest-rates but they have in effect been forced to by the fall in their exchange-rates. The discretionary or voluntary moves have all been downwards. Even Russia had a 2% trim in early February. If we now move to economies where central banks promise interest-rate increases such as the Bank of England and the Federal Reserve of the United States then they will really be bucking a trend if they do so. I feel that they are promising something that they hope they will find it not necessary to deliver or another form of “open mouth operations”.

As for the US Federal Reserve well it has been here before. From the Wall Street Journal.

Philadelphia Fed President Charles Plosser was already looking ahead to raising interest rates. His forecast for inflation, he said on April 28, “requires that we begin raising the funds rate by the end of this year, certainly by early next year, and then continue to raise it throughout the forecast period. I have it reaching 3½ percent by the fourth quarter of 2011.” In fact, the federal funds rate has remained lodged near zero since December 2008,

I am not so sure that JP Morgan via ZeroHedge are right with this call but I would not be surprised if the ECB did go further into negative territory.

ECB will reduce interest for cash deposits to minus 3% 

As to my view on any such scenario well let me hand you over to the delightful Ms. Taylor Swift.

I knew you were trouble when you walked in
So shame on me now
Flew me to places I’d never been
Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble


21 thoughts on “If the world economy is doing so well why is everybody cutting interest-rates?

  1. Hi Shaun

    the Baltic Dry Index has been falling for some time now and is, I believe, the lowest it has ever been. As this is an indicator of, at least, international trade flows it would appear to paint a distinctly gloomy picture of at least some aspects of real economic activity. Reported in Zerohedge here:http://www.zerohedge.com/news/2015-03-04/one-last-look-real-economy-it-implodes-part-1

    The dissonance between financial markets and the real world is becoming ever more marked and I suspect that we are going to see a slowdown at least over the next few months, and possibly worse and this will not be at all welcome in the La La land of the Dow et al. As I have mentioned before all this CB talk of raising rates is just that – talk; it will never happen this side of a recession.

    I wonder what CBs will do if we do fall into recession (or even very low growth) having already cut to effectively zero? I suspect that one or more Minsky Moments are beckoning!

    • Hi Bob J

      The fall in the Baltic Dry shipping index is troubling. However as well as being a measure of world demand it is also a measure of the supply of shipping and this increased in 2009/10 in response to the China boom that was happening back then. so now the index is falling because there are too many ships as well as lower demand.

      The Harpex index by contrast for container shipping shows a weak reading of 496 which is way down on the credit crunch peak of 901 but has been improving in 2015. In short the oil price fall has helped it but it is still low. it fits better with events I think as in yes some things have got better but it is still a weak picture.

  2. Hi Shaun, I saw last week the first use of the term MIRP, so we are well into a whole new paradigm. The days of ZIRP are now officially over, according to the FCA at least.

    In terms of personal pension fund illustrations, the FCA now oblige pension providers to illustrate a negative rate of return at “the lower bound”. I have just seen one for a client close to retirement who is using a Money Market fund for a proportion of his holdings (basically a cash/near cash fund). You know what annual rate of return the provider is being forced to illustrate at? Go on, guess!

    You got your answer?

    Nope… not even close! Honestly, you’ll laugh at this! The answer is a staggering -3.00%pa. No, not -0.30%pa, the FCA assume pension (gross) cash will return a full MINUS THREE PERCENT each year.

    Isn’t that terrific, even the regulator thinks it’s a race to the bottom!

    Happy to forward the relevant proof if you’re interested.

    • the implications of this is that the Pensions Industry will implode , what of workplace pension schemes? who in their right mind will invest knowing that they will be better off stuffing the cash under a mattress ?

      likely this is planned attempt to boost housing in the UK , well atleast prices ? fortune smiles again 😉

      now add in a MIRP savings rate and they implode

      now add in Banks charging you for your money and nickel and dime you on every turn , take all your money out , pay in cash . Your employer ,if your lucky , will finance the bank charges as otherwise we’re back to the weekly cash run

      Banks will of course collapse at this point as frankly they’re still bust ……

      But can I borrow near to this mythical 0.5% rate

      apparently not

      from “interesting Times ” curse to

      ” minus interest times ”


      Perhaps the football chant is appropriate

      ” ‘ere we go, ‘ere we go , ‘ere go ! “

      • Hi therrawbuzzin

        The Danish authorities seem to be travelling down that very road. Their efforts seemed rather confused but yes they were hinting at negative taxation. From Bloomberg last week.

        “The committee will look into “tax matters concerning negative rates and how investors should report negative returns on mortgage bonds,” he said.”

        “The government said on Friday that negative rates on deposits can be deducted from taxes. “Negative rates, as far as the matter of tax is concerned, should be treated the same way as positive rates,” the tax ministry said. “Interest costs are deductible and interest income is taxable.” The government is still in talks to decide whether more adjustments in the legislation are needed to cope with the interest-rate climate, it said.”

        Good job they thought it through before jumping…

        • Thanks guys, don’t forget to deduct plan charges from your minus 3%…

          I should have realised I’d seen MIRP here first, good work Forbin. I also see Ros Altman must have seen this blog as she’s just issued something on these lines.

    • Hi Andy Z

      I see that Forbin is happy that his MIRP acronym is beginning to be used…

      As to the illustration yes I would like to see it please. It all seems a little bizarre but we know these days that bizarreness is no barrier to something happening!

  3. Thanks for the blog Shaun, I really enjoy it. Today’s piece provoked the following idle thoughts: did 2007-8 mark the end of capitalism, and we have just not realised it yet? Perhaps we are now under a new system we might label “fiatism”, since its engine is the manipulation of fiat money by central banks. In the late 20th Century, capitalism seemed (but only seemed) to have found a way to produce enough winners and enough cushion for losers to be politically stable. Fiatism has a much smaller group of winners (at least in USA and Europe) and they are taking away the cushion for losers. What comes next, I wonder?

    • You ask an interesting question.
      My view is that it is not the end of capitalism, but the end of crony capitalism/corporatism and rigged markets.
      Whilst economics trumps politics eventually, there are short term political spikes which “correct” malfunctioning markets. Unless popular discontent is addressed there is usually a revolution or other political upheaval.
      The UK doesn’t do revolutions, but we are in the midst of a political upheaval. After the next election the UK will probably in effect be dissolved, with Scotland becoming effectively an independent socialist country. As for England, who can say?

      • I wonder if with globalisation, free trade and the advance of technology we have edged towards a more extreme version of capitalism.

        When people quote Adam Smith and the “invisible hand” they talk in terms of it reconciling the interests of the community with that of the individual, However, in the Wealth of Nations he talks about the invisible hand in quite another way. He says that, ceteris paribus, entrepreneurs would invest in the lowest cost markets rather than in the home country as such in order to realise the maximum return ( in those days you did of course have slavery in many places). However, they would see that this could, and probably would, cause unemployment and economic disruption in the home country and they would recognise a “home bias” and would therefore, by means of an “invisible hand” resist the temptation to act purely in their own self interest and be inclined to invest at home rather than overseas,

        Well, since WW11 the Ricardian free trade model has taken hold and there seems to be rapidly reducing “home bias” and very little in the way of the invisible hand to be seen in terms of sentiment restraining investment overseas. There surely can’t be much doubt that the economies of many of the older developed countries (perhaps the UK in particular) have become “hollowed out” by virtue of these movements.

        In my view capitalism together with technology has a tendency to monopoly or at least oligopoly (via barriers to entry) and that this would, in the long run, precipitate its own downfall because, as said above, the rewards go to fewer and fewer people and this is not politically sustainable.

      • I still think that it’s the inevitable progression of globalised free-market capitalism. If you get into a position of wealth/power, you’re going to do everything you can to protect that, more often than not, at the expense of the same capitalist ideas you believe were entirely responsible for making you rich. An entirely reasonable strategy to want the best for your offspring leads to an inequality of opportunity for that generation.

        Extrapolate up from that thinking and you inevitably develop what is disingenuously labelled ‘Crony Capitalism’ but I honestly feel human nature makes it inevitable.

        Globalisation created opportunities for the entrepreneurs, yes, just as many, if not more for the exploiters. It allows people in one country to exploit the unsafe/unfair/illegal labour laws in another country, that allow an underclass to be exploited. A slavery-once removed if you will.

        …and then you have countries like China and India who seem all to willing and able to continue to exploit their own underclasses.

        The invisible hand has become as ethereal as it sounds.

        • IMV economic policy is all geared to helping financial institutions; we are, in effect, still bailing out the banks, and I don’t really think that can be called capitalism.
          How about corporate socialism?

        • I think that demonises socialism unnecessarily. Capitalism is about individual wealth accumulation. Individual Wealth accumulation naturally leads to doing everything one can to protect that wealth. Protecting that wealth via lobbying/monopolies/croneyism/inheritance is at odds with what Capitalism is supposed to be about.

          The higher that level of wealth, the worse the problem gets, and yet in the last 30 years successive governments have feted the ultra-rich at almost every turn, gradually eroding democratic power in the process.

  4. “many countries would love to be able to forecast an economic growth rate of 7%”
    – although presumably they would then cut their base rates to -3% !

  5. Hi Shaun,

    With all of the QE liquidity that has been pumped into many economies, you would expect the reverse to what is happening. Certainly, assets such as shares, property and collectables have been rising, but the glut of commodities especially energy, means they are heading in the opposite direction. The US where they are barred from exporting oil are running out of storage space and have the highest reserves for 80 years!

    Is the weak demand due to a non-recovery of productivity in Western nations and is this an effect of ever more onerous regulation and non-productive box ticking? Is the growth of the one-to-one service sector and the expense of one-to-many factories the cause? The alternative is that productivity will recover, so is this a prolonged lull before a storm of high inflation?

    With pensions, those that invested in UK funds based on the UK stock market, since 1999 will have with seen their funds rise to about a 7000 stock market peak each time, but once the 1-2% admin costs and inflation are taken into account, the real value will be much lower. People heading towards the last 10 years before retirement tend to move from more volatile emerging markets to safer stock and bond options, so this along with falling earnings on their capital or the purchase of an annuity means their pensions are falling well below their expectations. Retiring at 60 to 66 is going to be much more difficult for the majority and realistically, how many people are going to have the physical or mental capacity to work well beyond 66?

    To my knowledge there have never been economic times like these, so there are no historical crib sheets to consult, so this has become an ‘economic brave new world’ with many differing policy experiments. The worry is that we will only know afterwards, what has worked and what hasn’t.

    • Hi Rods

      There have been various lessons learnt in the QE era. The first is that the central banks can supply liquidity but that it often does not have much impact at all on the wider monetary measures (bank lending etc.) which it was planned to influence. Even on the narrower measures it has not been as clear cut as you might think as for a time in the UK our banks deposited some £260 billion back with the Bank of England. The clear winners have been asset markets..

      Here is a thought for you. The pension fund system of moving into safer assets towards retirement age have people investing in what are the most overpriced assets of all! Whilst a UK Gilt ten-year yield of 1.86% may seem expensive compared to the Euro area but in my opinion is way,way too low.

      Pensions service is dreadful. I have a money purchase one from a former job which had begun such a move. I contacted them 9 months ago asking for a change and in the end the service was so poor I changed my retirement age to manoever out of it rather than giving new instructions.

  6. Shaun, I like your reference to the Bank of England investigation. At first I thought well foul play would involve buying securities that didn’t exist, that would be a raw deal for the “nations” printed money but then on second thought I realised maybe that was exactly what was meant. We need to give liquidity to our poor bust banks and the exchange of paper is just a charade, a way of giving them money without robbing them of any foundation captial or diluting their asset base. So is it dishonest to dress it as a auction? Glad to see Forbin’s MIRP acronym is getting airplay, he should have copyrighted that instead of munching on popcorn. 🙂

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