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.
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