Why are so many central banks cutting interest-rates?

The headline may seem a little bold but the contradiction between it and what we keep being told is my point. If we look at the United States then the Federal Reserve had a policy meeting last night which if we jump back in time a mere 3 months was one at which many expected an interest-rate rise. Of course that did not arrive as the Fed under Janet Yellen continued its Forward Guidance policy of promising an interest-rate rise but not actually delivering one. On that line I found this bit of the press conference to be fascinating.

Sometimes too much attention is placed on the timing of the first increase in the federal funds rate

Although Janet herself is not averse to hinting yet again that an interest-rate rise is just around the corner.

if economic conditions unfold in the way that most of my colleagues and I anticipate we see it as appropriate to raise rates. And as you can see the largest number of participants anticipate that those conditions should be in place later this year.

In a repetition of the Bank of England line we were told that it is more important to focus on the likely path of interest-rate rises. For the two members of the Fed who think that interest-rates will be at 3% at the end of 2016 then rises will have to be both swift and regular, but I guess that they may be literally the only two people who think that.

However we are on a familiar path here where the Fed and indeed the Bank of England hint regularly at an interest-rate rise that so far has not arrived. It was over a year ago at Mansion House that Bank of England Governor Mark Carney stated that a Bank Rate rise could happen “sooner than markets expect” whereas at best it is later.

The Bank of England

Yesterday many thought that the Bank of England was again hinting at a Bank Rate rise in its latest meeting Minutes. Presumably this was based on the fact that 2 members of the Monetary Policy Committee thought the situation was “finely balanced”. On the day one could throw in a soupcon of a recently improved pattern for wage growth. But those two members were actually voting for a rise not so long ago so in a way they have retreated.

In my opinion there is another factor which is operating against this and it is the return to strength of what in other times was jokingly referred to as the Great British Peso (with apologies to readers in Mexico). In these times the balance of power between interest-rates and exchange-rates has shifted in favour of the latter in terms of monetary policy. In the light of that a UK Pound £ which has risen to nudge US $1.59 this morning and above 195 Yen as well as being above 1.39 to the Euro is having an economic impact. For followers of the UK economy this has been one of those relatively rare periods where we discover what it is like to have a strong currency.

Putting that into a Bank Rate equivalent then the rise in the UK Pound £ over the past year is the same as five 0.25% increases. I hope you are sitting comfortably for the two-year comparison which would have Bank Rate some 3% higher. If you imagine what it would do if we raised Bank Rate you begin to understand why I think that an actual rise is not on the horizon and in fact why I think a cut is not as impossible as many would have you believe.

Another way of looking at it has been provided by today’s UK retail sales numbers.

Average store prices (including petrol stations) fell by 2.7% in May 2015 compared with May 2014. This is the 11th consecutive month of year-on-year price falls.

Whilst the oil price fall of late 2014 and early 2015 is of course a major player here it is also true that the strength of the pound has been pushing prices lower and the recent rise against the US Dollar will add to this.

Odd don’t you think that the US Dollar has started to fall recently when so many tell us an interest-rate rise is nailed on? A case of people not putting their money where there mouth is?

As to UK Pound £ strength I think that the tweet I quote from below is rather droll.

The EU referendum uncertainty has pushed the Pound to a 7 year high (@minefornothing ).

Interest-rate cuts

This list got longer at 9 am this morning as Norway nudged it up to 29 nations so far in 2015.

Norges Bank’s Executive Board decided to lower the key policy rate by 0.25 percentage point to 1.00 percent.

Actually they were not quite finished as they threw this into the mix.

The current assessment of the outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the course of autumn.

In some areas the Scandinavian countries are seen as models to follow. If that should apply in the monetary policy arena then we have three with negative interest-rates ( Denmark -0.75%, Sweden -0.25% and Finland -0.2%) and Sweden and Finland also have Quantitative Easing too. Well now Norway may be heading down the same road

Interestingly the usual rationale for an interest-rate cut in these times is not at play here as inflation is close to its 2.5% target.

Consumer price inflation has varied between 2% and 2½% in recent months.

If this was a response to the lower oil price they certainly took their time! It has been relatively stable over recent policy meetings.

Also in a familiar theme of these times house price growth gets shuffled into the recycling bin.

House prices increased by 1.7 per cent from the 4th quarter of 2014 to the 1st quarter of 2015 when adjusted for seasonal variations.

Whilst the annual rate of growth has drifted lower to 7.2% the index which was set at 100 in 2005 is now 179.5. Also we see another feature of these times as prices in the capital Oslo rose by 3.1% in the first quarter of 2015 making the annual rate of growth 11.9%. Still who in the central banking world worries about a house price boom these days? After all they will try to represent it as an increase in wealth rather than inflation. Good luck with them in their effort to present it as an increase in wealth to first-time buyers.

The Norwegian view on world growth does not seem to be especially optimistic.

Global economic developments have so far been slightly weaker than expected in March,

Comment

We remain in the same situation which is that whilst interest-rate rises are promised in the UK and US the reality is that 29 central banks have cut interest-rates in 2015 on more than 50 occasions. I am trying to think of any voluntary (not forced by exchange-rates) rise. Sooner or later it will be discovered that this particular Emperor is a bit short of clothing.

Waterloo

The place of my birth was named after the battle which took place some 200 years ago today. A landmark in history which defeated Napoleon although the Duke of Wellington also saw the consequences.

The only thing worse than a battle lost is a battle won.

However there was an economic impact that you might not expect and it is a grisly one. From Number One London.

Of the 50,000 men who fell at the Battle of Waterloo, most were young and healthy and their teeth were of a generally good standard, much better than the teeth employed in the majority of dentures. Having been plundered from the battlefield, most of these teeth made their way back to Britain, the country best placed to afford the new top-quality dentures which would incorporate them. These then became known as ‘Waterloo Teeth,’

Precursors of the Bene Tleilax?

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20 thoughts on “Why are so many central banks cutting interest-rates?

    • Hi therrawbuzzin

      Yes that is one way of looking at it. Many borrowers have benefited from this but the game has been to bail out the banks. In another form that has played out tonight in the negotiations over Greece as with the threats and leaks the spectre of capital controls and even more punishment for savers there grows.

  1. Hi Shaun

    I think it is very unlikely that we will get more than token increases in IRs this side of a recession. If significant rises do take place they will be forced and this is something I wouldn’t discount, certainly not in the UK.

    The Fed look more and more like clowns with each passing month; it’s not so long ago that they hinted that IRs would be increased if unemployment went below 6.5%; it is now 5.5% and there is still no sign of an increase; it’s just talk, talk, talk. The penny will eventually drop and people will realise that they will never increase rates beyond a token amount; indeed Yellen herself said this yesterday when she hinted that although rates might go up in the short term by 0.25%(!) they may not go up much more and even then quite slowly – see, we can increase rates but then we’ll stop! I believe these people actually have a droll sense of humour and making fools of the commentariat who, amazingly, hang on their every word and seem quite incapable of seeing the proverbial wood from the proverbial trees.

    There are holes in aggregate demand and we have filled those holes for many years with debt (public and private)and interest is the price of debt and this price needs to be lower to encourage uptake, until of course we reach “peak debt” and everyone is tapped out at which time the whole thing will fall apart. As you yourself know the OBR has assumed substantial increases in personal debt to underpin their GDP forecasts but one has to ask: how realistic is this in relation to debt sustainability, even with the present ZIRP regime?

    My belief is that we will get a recession before we get rate increases and then the CBs will have no ammunition and the fun will start.

    • Bob J, I agree with your debt sustainability justification. Demand has been created with printed money and debt and there is no way back to endogenous demand, indeed naturally occurring needs. Govt. just cant put its trust in proletariat and their choice, how unpredictable and uncontrollable is that? Carry on pumping up assets, ensnaring the greedy abd the desperate in crazy self torture around artificial shortage.

      Rentier Britain has run amock…here in Bristol car parking charges were always rampant, hundreds of traffic wardens patrol the streets whilst video camera cars catch those who dally near yellow lines AND now we have resident permits across the central areas, tons of car parking spaces have been liberated and all day long but now there’s absolutely no where for proles to put their car without extorsion… unless you are a multi-millionaire property owner and your postcode permit makes the kerb paved with gold.

      • Paul C I take it you’ve recently been nailed by a traffic warden but rentiers have been about for a long long time.

        Every one talks about it like a new phenomenon. A rentier is any one who lives on income from any kind of property e.g. flats, houses, warehouses, factories, offices, equities, bonds.

        In other words “investments”, so a professional investor would be a “rentier” yet they’ve been around for more than a hundred years.

        If you are paying into a pension or stocks and shares ISA which you later rely on for income in retirement then you will be a “rentier” at that time.

        It seems to me the meaning of the term has become confused in general usage referring in a derogatory way to someone who “preys” on others through renting out property or space but that is only one class of rentier.

  2. Hi Shaun,

    Thanks for shining a light on this subject. I had no idea until your recent blog on this subject that so many countries have recently cut when all the talk in the media is when rates will rise. The question of what happens next is probably being watched keenly by potential borrowers, so presumably there’s a perceived element of urgency to set up a loan whilst rates are low. I wonder if this is contributing to the increase in personal borrowing?

    • Hi Zummerzetman

      The interest-rate issue clashes with the currency war theme. We have seen some countries explicitly (Denmark & Switzerland) cut to reduce the value of their currency but there are many more implicitly at the game such as the Euro area. Then there is Japan which is indulging in ever more QE to lower the value of the Yen. So if the UK raises interest-rates we have a problem that we may push the UK Pound £ even higher. I am one of those who thinks that a gentle appreciation of the £ was no bad thing but a surge from here would be a problem.

      When Abenomics looked likely 125 Yen or so bought a UK Pound now it takes 195 of them. So it is currencies in my view which are the fly in th ointment.

      As to your question it would be sensible to get a fixed-rate for borrowing right now as places that have gone to negative interest-rates have so far not passed on the improvements to debtors. How familiar is that?

  3. Hello Shaun,

    I did mention yesterday that the BoE will raise , or would want to raise , rates if they detected wage increases .

    However their hand is tied by the Fed

    These are truly interesting times as we ‘ve been told that the market will settle all problems , except we don’t have a free market anymore . The game is rigged , the Banks must still be bust and there’s a “war” going on

    And if they raised the IR then millions will not be able to pay their mortgages , and the Banks will go bust , try getting a polly to support that! , aint gonna happen !

    best to get some popcorn , cans to be kicked and Banks to be saved ……

    Forbin

    Yellen : – “Mark? Should I get the bag of beads and trinkets?”
    Carney : “Woman, I know what I’m doing!”

    No wheels on my wagon
    So I’m not rolling along –
    The Cherokees captured me
    They look mad
    Things look bad
    But I’m singing a happy song!

    Are we at one wheel or none ?

    • Hi Forbin

      Yes that poor battered concept of a “free market” it has taken as many kickings as that poor battered can covering Greece. In a way that has just been illustrated in the last 20 minutes.

      “BoE’s Shafik: System Of Accountability Needed For Fair Markets — WSJ”

      Ah yes who are the central banks accountable too? Still spouting such rubbish got her a ” Dame Commander of the Most Excellent Order of the British Empire” title only recently.

      Meanwhile the ECB has been busy today undermining Greece and via one or two rumours having a go at starting or perhaps more realistically enhancing a bank run. What twisted times we find ourselves living in!

      • This is what I mean when I say that the EU is at war with its own citizens.
        People have to suffer for rejecting neo-liberal redistribution of wealth.

  4. Hi Shaun, why would you expect an interest rate increase from the Fed at this juncture? I certainly don’t, neither did I 3 months ago, nor was one promised by now, but as I have said here many many times since January wait for September/October and pray Greece doesn’t make things a whole lot worse.

    As to next year I think it’s fantasy to speculate on 3% US rate when indicators are now starting to say growth will soften in the US in 2016.

    “For followers of the UK economy this has been one of those relatively rare periods where we discover what it is like to have a strong currency.”

    Is that serious or tongue in cheek? Check this out – http://www.dollars2pounds.com/Charts

    If you are saying that $1.59 to the pound represents a strong pound then it follows that there is nothing”rare” about the strong pound as it has spent approximately 9 years of the last 10 at or above $1.59. In fact, as I have said before I think the pound’s “fair value” against the dollar is in the band $1.50 – $1.60. Unfortunately it has been over valued imo for 8 – 9 years of the last 10 years which leaves us with the notion that either I am wrong or the market has managed to remain irrational for a long time.

    “Odd don’t you think that the US Dollar has started to fall recently when so many tell us an interest-rate rise is nailed on? A case of people not putting their money where there mouth is?”

    Well no I don’t think it’s odd given narrow money has been collapsing in the US since February accompanied by US corporates reigning back their capital expenditure. I think this is a case of market adjustment to uncertainty as it sees the day of the start of the taking away of the wet blanket of loose monetary policy getting nearer and it fears how things will go. We currently see a knee jerk reaction to good (for these times) numbers in respect of UK employment and wage growth which the market expects to translate to more expenditure in the economy but see my comments yesterday re real wage growth in the UK by year end. Regards money where your mouth is, I’m already there and have been all along and intend to stay, certainly until year end.

    “The EU referendum uncertainty has pushed the Pound to a 7 year high (@minefornothing )” – Is that 7 year high (presumably against the US dollar) or 7 month high?

    I expect when the Fed moves the rest will slowly begin to move in the same direction – kicking and screaming every millimetre of the way.

    • Apologies, I meant the pound has spent approximately 9 years out of the last FIFTEEN years at or above $1.59 but my point remains the same.

      • Hi Noo2

        No problem. My point on the currency front did use the recent rise against the US Dollar as an example but the main issue has what it has done overall. In March 2013 we dropped to pretty much the lows again since the credit crunch fall which Mervyn King was such a fan of. So in trade-weighted terms we fell from the 105s to the 77s where 2005=100. But today we nudged into the 93s so over the past 2 years we have seen quite a strengthening or if you prefer 55-60% of the overall loss has been regained. After the enormous monetary loosening that does represent a fair tightening.

        As to the 7 year high I took it to mean the trade-weighted index and have just checked the monthly averages to see that it was indeed the summer of 2008 we were last in the 93s.

        Returning to the US Dollar I remember someone a while back calculating quite a long-term average which came out in the mid 1.60s so we are indeed below that. But of course the US Dollar had a long strong run before the recent weaker phase.

        As to “money where your mouth is” just to be clear I was referring to those who are presented as experts by the media not to those like yourself who do exactly that.

  5. Central bankers are mindlessly following the herd, currently running down hill. A modest surprise may see panic moves in the opposite direction.

    I’d add that I’ve seen several new German cars (50K+ Mercs + BMs) with Greek numberplates in Sofia this week. Then the penny dropped -> they’re probably getting their dosh out of Greece.

    • Hi Expat

      It is a shame that the central bankers are running downhill as going the other way is much better according to Kate Bush

      “Be running up that hill,
      With no problems.”

      As to the car point I completely agree that this is being used as a way of exiting cash from Greece. And after tonights news from the Eurogroup I think that maore cash and presumably cars will leave.

      http://www.reuters.com/article/2015/06/18/eurozone-greece-banks-idUSL5N0Z44M820150618

      It hardly matters now if it is true or not as in a state of fear rumours rule..

      The ECB is supposed to be having an Emergency ELA meeting tomorrow now which is odd. Aren’t central banks supposed to stop bank runs rather than start them?!

  6. Thanks Shaun, yours is one of a very best financial & monetary blogs available. You always ask the questions other financial commentators avoid & offer answers they are afraid to give. Your dogged perseverance on statistical matters with the RSS (on our behalf it must be said) confers on you great professional distinction. Long may your blog continue…….

  7. The Fed will have to act regardless of the impact upon the Federal budget. They raised rates under Volcker to insane levels, despite the fact that it raised the national debt from $1 trillion to $6 trillion on interest rates alone. So, the budget has NEVER prevented the Fed from raising or lowering interest rates in the past. However, raising rates in this environment will cause national debts to explode. This is the Fed now trapped and this is what central banks are scared about. They have lost control and the old theories are collapsing. The desperate move is to tax money, eliminate cash, and go negative on rates but that too would compel selling of government debt producing the same net effect as raising rates – eventual monetization. Negative rates will compel the central banks to buy the debt when private entities will not, while raising interest rates will explode the deficits. Either way leads to monetization. Manipulating interest rates is its only real tool. Buying in paper as in QE1 to 3 is indirect and there is no guarantee those who sell them the debt are domestic holders, so the stimulus leaves.

    • Hi AnnD
      A very enlightening view on which I hope Shaun will comment,I think he’s
      still in bed! If TPTB are in a “Damned if they do and damned if they
      don’t”situation,how do you see things unravelling?

      JRH

    • I think the Fed will raise but only slightly and rely on a growing economy and tax revenues to help star reducing the national debt – a very very long road if they ever make it to the start of that road!

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