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?