The central banking parade continues

The last 24 hours have seen a flurry of open mouth operations from the world’s central bankers. There are a couple of reasons for this of which the first is that having burst into action with the speed of Usain Bolt they now have little to do. The second is that they have become like politicians as they bask centre stage in the media spotlight. The third is that their policies require a lot of explaining because they never achieve what they claim so we see long words like “counterfactual” employed to confuse the unwary.

The land of the rising sun

Let us go in a type of reverse order as Governor Kuroda of the Bank of Japan has been speaking this morning and as usual has uttered some gems.

BoJ Gov Kuroda: Repeats BoJ Would Not Hesitate To Add Additional Easing If Needed -BoJ Has Several Tools And Measures To Deploy If Required ( @LiveSquawk )

This is something of a hardy perennial from him the catch though comes with the “if required” bit. You see the April Economic Report from the Ministry of Finance told us this.

The Japanese economy is getting worse rapidly in an extremely severe situation, due to the Novel Coronavirus…….Concerning short-term prospects, an extremely severe situation is expected to remain due to the influence of the infectious disease. Moreover, full attention should be given to the further downside risks to the domestic and foreign economy which are affected by the influence of the infectious disease.

So if not now when? After all the Japanese economy was already in trouble at the end if 2019 as it shrank by 1.8% in the final quarter. Actually he did kind of admit that.

BoJ’s Kuroda: Japan’s Economy To Be Substantially Depressed In Q2

Then looking at his speech another warning Klaxon was triggered.

In the meantime, it expects short- and long-term policy interest rates to remain at their present
or lower levels.

This raises a wry smile because in many ways the Bank of Japan is the central bank that likes negative interest-rates the least. Yes it has one of -0.1% but it tiptoed into it with the minimum it felt it could and stopped, unlike in other easing areas where it has been happy to be the leader of the pack. Why? Well after nearly 30 years of the lost decade it still worries about the banking sector and whether it could survive them and gives them subsidies back as it is. Frankly it has been an utter disaster and shows one of the weaknesses of the Japanese face culture.

Oh and as we mull the couple of decades of easing we got this as well.


This morning there was just over another 100 billion Yen of equity ETF purchases as we mull another refinement of the definition of temporary in my financial lexicon for these times. It appears to mean something which keeps being increased and never ends.

The Bank of England

The new Governor Andrew Bailey gave an interview to Robert Peston of ITV last night which begged a few questions. The first was how its diversity plans seem to involve so much dealing with the children of peers of the realm and Barons in particular? This of course went disastrously wrong with Deputy Governor Charlotte Hogg who seemed to know as little about monetary policy as she did about the conflict of interest issue which led to her departure. During the interview Robert Peston seemed to be exhibiting a similar degree of competence as I pointed out on social media.

@Peston  now says that buying hundreds of billions of debt is different to a decade ago when the Bank of England bought er hundreds of billions of debt. It is frightening that this man was once BBC economics editor.

There was a policy element although it was not news to us I am sure it was to some.

Governor of the Bank of England Andrew Bailey has told ITV’s Peston show that one of the main purposes of the Bank buying £200bn of government debt – and probably more over the course of the Covid-19 crisis – is to “spread the cost of this thing to society” and help the government avoid a return to austerity. ( ITV)

To the extent that there was a policy announcement the whole interview was very wrong as it should be on the Bank of England website for all to see rather than boosting the career of one journalist and network. As I note how that person’s career had been under pressure we see the UK establishment in action. I also note that two subjects were not mentioned.

  1. The apparent dirty protest at the FCA on Andrew Bailey’s watch
  2. The doubling of overdraft interest-rates after a botched intervention by the FCA on Andrew Bailey’s watch.

The United States

Something rather ominous happened last night as The Hill reports.

“He has done a very good job over the last couple of months, I have to tell you that,” Trump told reporters during a meeting with the governors of Colorado and North Dakota. “Because I have been critical, but in many ways I call him my ‘MIP.’ Do you know what an MIP is? Most improved player. It’s called the Most Improved Player award.”

We noted back in November 2018 that The Donald was taking charge of US monetary policy and that Jerome Powell had become something of a toy. Indeed there was more.

The president said he still is at odds with Powell over his stance on negative interest rates. Trump has for months pushed negative interest rates, arguing the U.S. is on an unfair playing field if other countries have negative rates.

Whilst I disagree with The Donald on negative interest-rates he is at least honest and we know where he stands. Whereas Chair Powell said this.

Speaking to the Peterson Institute for International Economics, Powell said negative interest rates are “not something that we’re looking at,” ( Forbes)

Is that an official denial? Anyway it does not go that well with this.

The economic toll has taken an outsized toll on lower-income households, Powell said, with 40% of those employed in February and living in a household that makes less than $40,000 a year losing their job in March.

Conceptually this is a real issue for the US Federal Reserve as such people are unlikely to have many holdings ( or indeed any…) of the assets it keeps pumping up the price of.


As we survey the scene some of it is surreal. I noted on Tuesday that the US had already seen two examples of negative interest-rates and one has deepened in the meantime. US Feds Funds futures have moved as high as 100.025 for the summer of 2021 and 100.05 for the autumn. Now -0.05% is not a lot but these things have a habit of being like a balloon that is about to be inflated.

You may also note that those who have claimed central banks are independent of government have been silent recently.Perhaps they are busy redacting past comments?

Missing for today’s update so far has been the European Central Bank or ECB. This is because it is involved in something of an internal turf war.

The shock at the ruling is palpable in the corridors of power in Berlin as Karlsruhe’s three-month deadline runs down.

Officials are trying to work out a way of satisfying the court without eroding the independence of the ECB, which has kept the euro zone intact through a decade of crises.

One lawmaker described feeling like a bomb disposal expert, “because the Constitutional Court has put an explosive charge under the euro and the EU”. ( Reuters)

Hang on! Someone still thinks central banks are independent…….

19 thoughts on “The central banking parade continues

  1. So………….

    If negative interest rates haven’t worked after decades why is Japan thinking of more of the same and further, particularly as some economies did go negative and reversed the measures?

    Well the short answer is, as I have said a number of times over months and months, there has been no country really tried negative rates in a meaningful way.

    There have been suggestions in the press of -1% -2% and -3% but no country yet gone down this route, so no country knows what effect this would have.

    Yet the world economy is worsening by the day and the FED now warning of a prolonged recession, and the World Health warning we will have to live with corona-19 and a vaccine may never be found.

    The stock markets around the world falling again the last two days, the markets were looking for a rebound after the lockdown was easing around the world and now having to reassess how the pandemic is affecting the world economy.

    There is one thing for certain now and a V shaped recovery seems to be being abandoned now and its going to be a long haul back to anything like we were before the pandemic.

    Exceptional circumstances suggest exceptional ways of dealing with the world economy and austerity isn’t on the minds of the government right now, so in my mind far deeper negative rates may well be on the horizon with the caveat that I am no way suggesting this is the right or wrong thing to do as I only have a simplistic understanding of economics.

  2. ….negative interest rates are “not something that we’re looking at,”

    A bit like the UK ministerial/ Bank of England official version of denying something, right up to the point where you actually do it:

    “Currently we have no plans to…. “fill in the blanks.

    Fed fund futures are already discounting negative rates later in the year so yet again Wall St is front running the Fed or if you prefer it, they have cocked the gun and are pointing it at Powell’s head, as recent history has shown, it is only a matter of time before he complies.

    It’s a win win for them anyway, as if he doesn’t comply, they will just crash the market below the March lows which will force him to throw more QE at the market and probably start buying ETF’s(officially this time as opposed to covertly).

    • Hi Kevin

      The Plunge Protection Team is something my former boss used to go on about regularly. He turned out to be correct implicitly and in Japan at least explicitly. As to Fed Funds the volumes are not great but Red July has traded over 3k lots so there is some volume there. For those that do not follow this sort of thing years are colour coded and Red is next year aka 2021.

      Should the S&P 500 take another dive then I am sure Chair Powell will have The Donald on the phone with some new orders.

    • Remarkable how just a few months ago the BOE indicated negative rates were not on the agenda and we are as close to negative rates its almost a certainty now UK 2 year gilts are negative.

      With rates going negative it seems to me in order for banks to survive they will have to think of also going negative.

      Has worldwide borrowing ever been this cheap?

      I don’t know the answer to this but lower borrowings must assist massive defaults.

      But what else is going to happen in these strange markets, are we going to see deflation, stagflation, or inflation?

  3. As I said yesterday, no-one seems to question this crazy policy. No-one asks what is being asked about Covid19 – namely, what is your way out of this?

    As Germany is on the news with the Constitutional Court ruling, I suppose the answer is that the ECB is not under the direction of one individual with a stupid haircut.

    The idea seems to be that people and companies will load themselves up with cheap debt, while govts go on a spending bender to restart the economy. Yet, over up to thirty years, this has not happened. This raises the interesting question of where all this funny money will go. Shares have tanked as there has been a reversion to looking at fundamentals, while housing really depends on what multiple people are prepared to borrow. In the latter case, likely job losses and falling prices tend to suggest a reversion to the old 3x income. This money is not in consumption for similar reasons, not least as many people are loaded with debt already. Companies had that folk memory from the early 90s of offloading lots of staff only to have to reemploy them on contracts quite quickly, so they have retained surplus jobs in the hope of better days – but that depends on consumption, which has tanked. Those surplus employees flattened productivity for a decade and consequently, pay didn’t increase much.I can only really think this funny money is going to finish up financing the dole queue and providing more subsidies for Taylor Woodrow.

    Looks like “No, he can’t”

    • “but that depends on consumption, which has tanked”

      the housing market , sorry economy , was in dire straights before Sars-cov2.

      Frankly it looks like money for nothing…

      • ECB

        “PARIS (Reuters) – The European Central Bank will prevent volatile market conditions from letting bond yields spiral out of control, ECB policymaker Francois Villeroy de Galhau said on Thursday.

        “We will not allow adverse market dynamics to lead to unjustified interest rate increases in some countries, which would put at risk the smooth transmission of our common monetary policy,” said Villeroy, who is also head of the French central bank.

        “To put it simply: yields and spreads do matter, even if we don’t target fixed levels,” he said in a speech online to members of Milan’s Bocconi University.”


        • “To put it simply: yields and spreads do matter, even if we don’t target fixed levels,”

          I’ll re-write that for him

          “To put it simply: yields and spreads don’t matter, even if they do, we don’t care, the Euro is all”



          • LOL

            Yes they do matter and its a case of being economical with the truth. The fact of the matter is we are in the mire worldwide and the bankers and economists pulling their hair out wondering how to get back out the mire.

            A black large hole is clouding their vision.

        • Lagarde tried that recently and the end result was more printing to close the Italian yield gap. This is the wheel that will most likely break the euro – Italy.

    • But…but..but….what about the wealth effect!? What about all those people that have bought McMansions they cannot pay for…….?

      Dave, get your point about no one ever questioning their actions, buy just look at who you have as economic correspondents at the BBC for gods sake, Kamal Ahmed(Political Science degree), could you imagine him giving a Bank of England official or a chancellor a tough interview with the sort of questions raised on this blog?(Ravaged by a dead sheep?)

      Pesto with his PPE(no, not face mask – PPE degree), and Joe Hills ITV’s Business and Economics Editor -who?Couldn’t find any details of his qualifications other than he passed his Cycling Proficiency exam first time.

      • It just seems such an obvious thing to do, especially the approach Starmer and others are using on coved-19. I was going to tackle Prof Kay (coauthor with Penfold of the recent book on uncertainty), but the lockdown did for that. However, I did raise the issue on the CISI mag board and to my surprise, my comments are still there. Maybe it is time to say “The Emperor has no clothes”.

      • I bought Pestons book about the 2008 financial crisis from a WHSmith when going on holiday in 2010, i was almost tempted to read it again as i was sure no one claiming to be an economist of sorts could be so utterly stupid. (binned it instead)

        His background is the epitome of a liberal lefty, champagne socialist who cheered on the 1997-07 bubble as he thought boom and burst had ended thanks to MMT.

  4. By the way, I am teaching the young lad next door how to grow his own food. He’s a keen learner & I’d advise you all to learn what you can, as the next step is that countries stop exporting food in order to protect their own, whilst we have been importing more than half our food from the EU.
    Even if things go well and it’s not necessary to survive, you’ll get an idea of the poor level of quality we’re getting from the EU, and some delicious food.

  5. ‘You’ have probably seen this?
    The rate of interest – the price of money – is said to be a key policy tool. Economics has in general emphasised prices. This theoretical bias results from the axiomatic-deductive methodology centring on equilibrium. Without equilibrium, quantity constraints are more important than prices in determining market outcomes. In disequilibrium, interest rates should be far less useful as policy variable, and economics should be more concerned with quantities (including resource constraints). To investigate, we test the received belief that lower interest rates result in higher growth and higher rates result in lower growth. Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth. If policy-makers really aimed at setting rates consistent with a recovery, they would need to raise them. We conclude that conventional monetary policy as operated by central banks for the past half-century is fundamentally flawed. Policy-makers had better focus on the quantity variables that cause growth.

    Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan”

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.