Today the Bank of England announces its monetary policy decisions. In this era of leaks and early wires it is a particular shame that it voted yesterday as this morning some are no doubt more equal than others. Although in the arena of interest-rates this may not be that big a deal as after all it is 7 years now since they changed Bank Rate. Also Governor Carney is probably weary and to tired for another u-turn after competing in the ski marathon in St. Moritz at the weekend. However Sir Humphrey Appleby might describe as masterly inaction has consequences if we move to the currency markets and look at the UK Pound’s response to a slowing economy.
UK Pound £
The stronger phase for the UK Pound £ has faded and been replaced by falls. In the media the falls are currently being blamed on Brexit risks and any rallies ignored. In round numbers it has fallen from the US $1.49 of late 2015 to US $1.43 now but in many ways more remarkably from 1.36 against the Euro to 1.27 now. The latter is more remarkable because Mario Draghi and the European Central Bank have only recently cut interest-rates and added an extra 20 billion Euros a month of QE asset purchases to help drive the Euro lower.
The UK trade-weighted or effective exchange-rate has fallen from 90.42 to 85.42 in 2016 so we have under the old rule of thumb the equivalent of a Bank Rate cut of 1.25%. Quite a difference to the actual rate! Also the 5 year Gilt yields ( think fixed mortgage rates) has fallen from 1.35% to 0.84%. So there you have it financial markets have eased policy for Governor Carney whilst he waffles along with Forward Guidance Mark 15.
The US Federal Reserve
Last night Janet Yellen and her colleagues on the US Federal Reserve gave us their thoughts. There was after the consumer inflation report an opportunity to be hawkish and even to raise interest-rates. Whilst the media obsessed on a monthly fall there were rises in the services area of 3.1% in annual terms telling us what will happen as the good price disinflation fades. But instead we got this.
However, global economic and financial developments continue to pose risks.
This scapegoating by central bankers has been repeated this morning by the Swiss National Bank on that subject what is Swiss for “Johnny Foreigner” please? But of course as we all live on the same planet you find that in the arrow points back at you. The net effect of all this was that now the number of interest-rate rises promised by the Fed has dropped from the rather odd “3-5” to a maximum of two.
The US Dollar
This dropped like a stone giving us an easing of US monetary policy if sustained. In a way the most remarkable move was against the UK Pound which had fallen to below US $1.41 in response to the UK Budget news. Suddenly the only way was up for the UK Pound as it bounced to US $1.43 and pretty much went back to where it began as Janet gazumped George.
If we move to the trade weighted Dollar Index we see that it fell to 95.1 so that we note that in 2016 it has fallen in broad terms from 99 to 95. Whilst this is not the measure used by the Federal Reserve Stanley Fischer gave us a rule of thumb last November which indicates that if this continues there will be around a 0.5% boost to Gross Domestic Product or GDP.
Adding in the impact of bond yields shows a further easing as it is the 30 year yield or long bond which impacts on US fixed-rate mortgages and it has fallen from 3.03% to 2.66% so far this year.
An odd mix is it not where the Bank of England has found policy loosened for it and the US Federal Reserve which is supposed to be tightening has eased as well?!
Where have currencies tightened policy?
Mario Draghi must be crying into his glass of Chianti as he reviews a Euro exchange-rate that has pushed up above 1.13 versus the US Dollar this morning. In fact it is going up as fast as economist can predict it is heading for parity. I pointed out earlier the rise of the Euro versus the UK Pound £ as Mario surveys failure on more than one front.
The trade-weighted exchange-rate tells us the story as the recent nadir was 90.4 in late November and it started 2016 at 92.7. With all the easing it should be lower right? Er no as the ECB had it at 94.14 yesterday and as it used a US Dollar exchange rate of 1.106 a large upwards move can be expected today. After all his monetary policy easing Mario Draghi may well get out his copy of Alice In Wonderland.
My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.
Bank Pictet estimate that the latest ECB easing will add around 0.3% to inflation. Whereas a rise in the effective exchange rate from 89.7 to 95ish over the past year will probably subject more than that.
If there is upset in Frankfurt well that must be a tea party to how current foreign exchange developments are seen in Tokyo! Economic policy or Abenomics is essentially predicated on a lower value for the Japanese Yen and this weeks announcement of only minor changes to monetary policy has found the same response as the interest-rate cut to -0.1% which is a stronger Yen. That is also supposed to support the rise in inflation to the 2% target whereas in fact a rise of 8% over the past year means that it is cutting inflation. A problem for Abenomics and its many media cheerleaders – readers may like to note they seem to have gone quiet – if not for Japanese workers and consumers.
Of course the Bank of Japan is also concerned with the competitive devaluations going on in Asia so let us look at its trade-weighted exchange-rate. According to the Bank of England it has risen from 128 to 135 in 2016 so far. So all that easing and monetary policy has tightened via the exchange rate. Time to move from trillions to Quadrillions? So far it has all been a BitterSweet Symphony.
I’ll take you down the only road I’ve ever been down
I’ll take you down the only road I’ve ever been down
As we stand central banks are like Janus as they try to look in two directions at once. However the old rule of monetary policy that you can only look at the internal economy or the external one is coming bank to haunt our supermen and wonder women. As fast as they move policy they find that their exchange rate is mostly offsetting it and sometimes more than negating it. But still they plough on. Over to you Norway.
At its meeting on 16 March, the Executive Board decided to lower the key policy rate by 0.25 percentage point to 0.50%.
Oh and what is it with Scandanavians and negative interest-rates?
Should the Norwegian economy be exposed to new major shocks, the Executive Board will, however, not exclude the possibility that the key policy rate may turn negative.
Seems a bit after the Lord Mayor’s Show now the oil price has shown signs of stability. Also this happened.
Norway cuts rates&…krone strengthens!