Monetary policy looks ever more “Maxxed-Out”

This morning has seen several of the themes of this website out in full force already. The opening salvo in the currency and interest-rate wars was fired on the other side of the world as show below.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points from 1.50% to 1.25%.

Okay so why have they done this?

Looking at the Korean economy, exports have continued their trend of decline and the improvements in domestic demand activities such as consumption have weakened, while the sentiments of economic agents have also been sluggish.

For a country which has based itself on exports talk of a trend decline leaps off the page at you. Of course the South Korean Won has been caught up in the currency war in that area with Abenomics pushing the Japanese Yen lower over the past 3/4 years and more recently falls in the value of the Chinese Yuan.

It also poses a deeper question for the world economy. Firstly we have seen around 60 official interest-rate cuts in 2016 so far which does not fit well at all with the theme of economic recovery. Also if an exporter like South Korea is finding the going tough we get a bit more than a hint of the same theme.

Also I note that all around the world now the weather has competition as a scapegoat for economic events.

In this process it will closely monitor the possibility of a British exit from the European Union,

UK Gilt Yields

On Monday I explained again the clear trend as bond markets continue to favour the lyrics of Alicia Keys.

Oh baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’

I keep on

This morning the business media have caught up a bit. From fastFT.

Gilt yields: How low can they go?………Government bonds rip higher…..10-year Gilt yield hits new record low.

Also Francine Lacqua of Bloomberg TV.


I sent a message to Francine suggesting she interviews Bank of England Governor Mark Carney to discuss this.

All those who remortgaged on the back of Forward Guidance from Mark Carney at the must be getting angry!

To be more specific fixed-rate mortgages tend to follow the 5 year Gilt yield which has fallen to 0.73% this morning. Of course this also poses a question for the Chancellor of the Exchequer George Osborne who has raised the spectre of soaring mortgage rates.

Also if we think a little more laterally there is a big question posed for Sky News whose “research” produced this.

Sky News discovered some £65bn either left the UK or was converted into other currencies in March and April – the fastest rate since the financial crisis in early 2009.

I have experienced phases in my career where such numbers have turned out to be completely wrong so am cautious about them especially when markets which should be hit by that are soaring! Although one reporter at the Financial Times sees it all rather differently.

10-year Gilt yield just hit a new low. One of the few UK assets not terrified of Brexit (@JoelLewin)

Assets terrified, who knew? Still it maybe explains why the FT is surprised so regularly.

Maxxed- Out?

This brings me to the question of whether monetary policy is now maxxed-out? In case you are wondering this refers to a claim several years ago by Bank of England Governor Mark Carney that it was not. We all know what official denials mean but more and more evidence is building that it is.

The fact that the Bank of Korea has cut interest-rates to a record low of 1.25% poses a challenge as we ask, why? After all if all the interest-rate cuts were working why do we forever seem to need more of them? The Bank of Korea is hardly alone in this as I pointed out earlier. Moves in interest-rates have so far headed for an apparently bottomless pit but if they are working why do we always need more?

The same line applies to bond yields and longer-term interest-rates. They get ever lower with more than US $10 trillion of them at negative interest-rates but the problem is that such a development shifts money from investors to governments. Or to put it another way it works as a tax. So negative bond yields give government finances a boost but take away from everyone else.

Mario Draghi

The phrase with which ECB President Mario Draghi has become most associated with over the past year or so has been that there are “no limits” to monetary policy. So he is clearly a paid-up member of the group claiming monetary policy is not “maxxed-out” via his Open Mouth Operations. But this morning a different band struck up a tune.

The situation of central banks is better described as independence in interdependence, since other policies matter a great deal.

Nice of him to make even a partial admittal the ECB is not independent but there is a confession about monetary policy here. This is what other policies (fiscal) can do to it.

They can buttress or dilute the effects of our policy. They can slow down or speed up the return to stability. And they can determine whether stability is accompanied by prosperity, which is directly relevant to the social cohesion of the euro area.

This poses a multitude of questions as for a start the monetary policy of Mario Draghi has influenced fiscal policy. As the QE and other policies drive bond yields ever lower governments can switch spending from debt interest to other areas. This gets little media attention as of course politicians want the credit for this.

The next bit is especially awkward for those who recall that the ECB was one of the cheerleaders via its role in the troika ( now renamed the institutions) for austerity.

Second, it matters for monetary policy whether fiscal policy is steering aggregate demand in the same direction, and how strongly….Fiscal policy was contractionary for several years in the euro area following the loss of confidence in sovereign credit in 2010, and the negative effect on growth was exacerbated by the fact that consolidation in some countries was implemented mainly through tax rises rather than current spending cuts.

As an example the ECB pressed Mario’s home country Italy for fiscal austerity and it is odd that this seems to have slipped his mind. Accordingly this bit is breathtaking in its cheek.

This is why the ECB has said many times that fiscal policy should work with not against monetary policy

Maybe more recently but not before Mario. anyway the calls for more fiscal policy are a clear hint from Mario that monetary policy will not bring home the bacon.

Mario has more regularly called for structural reform although he seems to do that in a vacuum. But this morning his own policy has contradicted that. From Bloomberg.

The European Central Bank bought corporate bonds in euros for a second day as it expanded its stimulus program for the region’s flagging economy…..Purchases included securities issued by troubled German carmaker Volkswagen AG due in 2019,

Can anybody spot a problem in buying bonds issued by the company which started dieselgate by lying about its test results? Especially when you are supposed to be the advocate for structural reform. There is a deeper problem here as the ECB is kind of “picking winners” as it is buying bonds which boost equity values. There is a clear moral hazard in that. But even worse the winner will be big business one more time as we get ever more rhetoric about helping smaller firms. Actually that is another type of Turning Japanese.


The official view is that monetary policy is still not “Maxxed-Out”. However as we look around us we see that this is being contradicted on ever more fronts. If it is working why do we need “More,More,More” of it some 8 years or so into the credit crunch? Next we have the issue of central bankers like Mario Draghi calling for help from fiscal and political authorities. Added to that comes his cries for reform whilst he instructs functionaries to buy the bonds of big companies which has ony on its second day reached a nadir by boosting Volkswagen.

Brexit Update

From this morning’s UK trade release.

This resulted in a widening of the trade in goods deficit with EU countries to a record 3 monthly level of £23.8 billion in the 3 months to April 2016.





10 thoughts on “Monetary policy looks ever more “Maxxed-Out”

  1. Off topic but will ever fulling bond yields cause more company bankruptcy due to pension funds not being funded?

    • Hi Thepessimist

      This is an issue for UK companies with final salary schemes which for those who are unaware the liability and hence deficit grows with lower interest-rates. Engaged investor puts it thus.

      ” Interest rates on high-quality corporate bonds are used to determine a plan’s expected risk-free return in the future, or the discount rate. If the discount rate falls, a pension plan needs more assets today to generate sufficient investment returns to pay a projected amount of benefits in the future, or so the theory goes.”

      So by the likely knock-on effects the ECB buying of corporate bonds which started yesterday is likely to make UK pension fund deficits larger. So at the margin some may go to the wall.

      It is a shame this has not been raised in the BHS pension debate.

  2. Hi Shaun,

    I see a lot of talk about importance of the demarcation between fiscal policy and monetary policy
    particularly in regards to recent discussions on helicopter money.

    I’m trying to understand if this demarcation is still relevant.

    From my uneducated view, it seems what distinguishes Monetary policy(MP) from fiscal policy(FP) is that MP is supposed to be politically agnostic. For example it used to just involve targeting a externally (and politically) set inflation target via interest rate changes, this being largely technical and politically agnostics process. While FP (tax and spend) on the other hand is an obviously political process with clear distributional consequences.

    However it seems we’ve long since entered the era when MP now involves central bankers – as you say – picking winners, in terms of various asset classes – bonds, housing, and now as you note the assets of specific companies. This has clearly distributional and of course political ramifications. As such doesn’t this make the distinction between what is MP and FP considerably more fuzzy?



  3. Hi Shaun,

    Excellent as always.

    I presume South Korea is having to compete as a major exporter on the race to the bottom on interest rates and currency strength.globally, but especially in Asia.

    Most of the top export orientated countries have had problems with global overcapacity and lack of export consumers. Japan’s being the longest and most well known, this has now been followed by China and to lessor extent South Korea. The one major exporter from this list that has not suffered is Germany and normally an early sign is falling corporate profits, where prices are cut to keep up volumes, so how is German corporate profitably holding up? If Germany does catch an export cold where will that leave their still very exposed banks, which we have already seen with Deutsche Bank a few months a go?

    Wealth and growth have to be nurtured. The EU and ECB have both been discussing structural reforms since 2008, but they both seem to have taken their lead from Greece where it is always a job for tomorrow!

    • Hi Rods and thank you

      South Korea has indeed been squeezed by Japan and China amongst others. As to Germany you reminded me to take a look at today’s trade data for it.

      “Germany exported goods to the value of 104.3 billion euros and imported goods to the value of 78.7 billion euros in April 2016. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 3.8% in April 2016 year on year while imports remained nearly unchanged. ”

      However whilst it looks as though it is carrying on regardless there is a difference as this shows.

      “Compared with April 2015, exports to the EU countries increased by 7.3%,”

      Trade elsewhere shrank a bit.

      So in the circumstances okay but bears watching to see if the quality image German exports have is affected by a Volkswagen effect. As to the German banks well Deutsche has enough trouble as it is!

    • Structural reforms often require painful changes, with the losers seeing losses quickly and complaining loudly. The majority of gainers see benefits in the longer term – and politicians cannot see beyond the next election and/or their own pockets.

      Some big structural reforms include trimming the bloated EC budget, bringing accountability to the ECB, letting the banks (not the tax payers) suffer Greek bond writedowns and allowing Europe wide referendums to neutralise Euro lobbyist bribery power. All of which hurt the interests of Euro politicians ….

      • Good point and this is why the EU will never be reformed as it is easier for the commission and politicians to use their momentum and continuation of their gravy train to kick the can down the road until economic decline gets so bad that they have no choice but to act. This will take some considerable time as the drop in EU world trade is at double the rate for the US, but we are not relatively poor enough yet.

        I suspect the big game changer is going to be bio technology where in the next 10 years or so there will be expensive treatments available that will considerably extend people lives. This is logical step where global fertility is going down rapidly and where the Western world is already not replacing themselves this is a global trend.

  4. The question that you pose is whether these weird monetary policies are maxxed out. I would say that there are two different answers to that:
    1. Have they outlived any usefulness and are they harming things? yes
    2. Will central banks stop? NO
    There is the usual disconnect here between the elite, which want to protect the banks and the rest of the world…

    • Central banks are all under political control where any independence is nominal and there is no politician that can resist furthering their career with ‘free’ QE money. The growth in US debt since 2008 is truly frightening under Obama and this is not going to end well.

      Obamacare is costing much more than planned, insurers have gone bankrupt or withdrawn from the market to survive with their dysfunctional health system. One has to question why does it cost almost double, at 18% of GDP, compared to around 10% in Europe with comparable results?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.