The Green central banking of Christine Lagarde and digital coins

The mood music around central banks has changed quite a bit in recent months. The Covid-19 brought an answer to the question are their monetary policies “maxxed out” ( hat tip Mark Carney)? We saw more interest-rate cuts and much more QE bond buying. But now things have gone much quieter in that area as last week’s frequent announcements by central banks proved. What we are now seeing is a concentration on other areas which in one case has nothing to do with inflation targeting at all and in the other has a dark secret.

Let us start with the European Central Bank which presently is in a mess on two counts. There was not a lot to say on Thursday but even so Christine Lagarde managed to confuse both herself and everyone else.

 So, those are really, I’d like to think in terms of this, the compass and the anchor and the two of them interact in order to assess whether or not we need to adjust and calibrate our purchases of any period. Because don’t forget that PEPP is intended to preserve the financing conditions, is earmarked by flexibility, and that flexibility, you’ve heard me say before, is flexibility along time sequences, flexibility in asset classes, flexibility in countries.

This is not helped by the fact that Chief Economist Phillip Lane seems to keep making some more equal than others.

The bilateral calls with ECB watchers, including chief economists and research directors, took place within this
framework and were fully disclosed via the regular publication of diaries…… ( A letter to an MEP from Christine Lagarde)

Again language is a casualty as briefing some privately is described as being “fully transparent”

Green Policies

When you are under fire, one route out is to try to do something you think is popular. Hence this from Christine Lagarde at the World Economic Forum this morning.

It is with this history in mind that I want to talk about the role of central banks in addressing climate change.

One similar feature to monetary policy is there which is the counterfactual.

Yet the transition to carbon neutral is not so much a risk as an opportunity for the world to avoid the far more disruptive outcome that would eventually result from governmental and societal inaction.

Indeed it is time to note the reference to “Be afraid! Be very afraid!” from the film The Fly as we recall how the scenarios for monetary policy have gone.

Scenarios show that the economic and financial risks of an orderly transition can be contained.

Are those like the scenarios which showed Greece growing at 2% per annum from 2012 onwards? Anyway don’t worry if they are wrong (again) because it doesn’t really matter.

Even a disorderly scenario, where the economic and financial impacts are potentially substantial, represents a much better overall outcome in the long run than the disastrous impact of the transition not occurring at all.

Still it is a growth area for ECB officials.

At the ECB, we are now launching a new climate change centre to bring together more efficiently the different expertise and strands of work on climate across the Bank. Climate change affects all of our policy areas. The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves.

Is this an example of re-invention in the way that former Bank of England Governor Mark Carney has morphed into a fearless climate change warrior? It seems that Christine Lagarde is on her own road to Damascus.

Climate change is one of the greatest challenges faced by mankind this century, and there is now broad agreement that we should act. But that agreement needs to be translated more urgently into concrete measures. The ECB will contribute to this effort within its mandate, acting in tandem with those responsible for climate policy.

Oh and let me refine my view that this has nothing to do with inflation targeting. Because they can use it as a way of raising inflation to 2% per annum although it would make everyone worse off. Perhaps that is why it has to come with such apocalyptic imagery.

The effective price of carbon is expected to rise if the EU’s targets for reducing emissions are to be reached. Modelling by the OECD and the European Commission[7] suggests that an effective carbon price between €40-60[8] is currently needed, depending on how stringent other regulations are.

The heat is on across many countries as this from Reuters  over the weekend highlights.

The House of Commons’ Environmental Audit Committee – which looks at public bodies’ impact on global warming – said buying bonds from firms such as energy companies with high carbon emissions contravened government goals to reduce global warming.

“The Bank must begin a process of aligning its corporate bond purchasing programme with Paris Agreement goals as a matter of urgency,” the committee’s chairman, Philip Dunne, wrote in a letter to BoE Governor Andrew Bailey.

Just in case you thought that the corporate bond purchase programme could not be more of a shambles. Indeed as it has found itself buying the bonds of European companies as it is could we see it and the ECB in a race to buy green bonds and thus bidding up the prices?

Central Bank Digital Coins

These are also back in the news and some of it is misleading. Here is Benoit Coeure formerly of the ECB.

If banknotes keep declining, a world without CBDC is one where financial institutions, but not citizens, can access the central bank balance sheet. Is it safe? Does it support trust in the currency? Is it politically acceptable?

This is to say the least curious and some may consider it an outright lie. If we look at the latest numbers for currency in circulation for last November we see that in the last three months it has risen by 9 billion Euros, then 8 billion and then 13 billion. So they are rising rather than falling and if anything growth has risen. Indeed the annual rate of growth is now 11.1%! The only possible thing you can say is that it is slower than overall narrow money growth (M1) at 14.5% but seeing as they have been throwing the kitchen sink at that and frankly the bathroom sink too that is no surprise.

I guess next they will return to claiming that the growth they claim doesn’t exist is all down to criminal activity.


It is revealing that these days central bankers want to talk about anything but monetary policy these days. Well at least in public because they seem keen on doing so in private to a select crew and maybe their future employers. After all they can afford it.

BOSTON (Reuters) – The world’s 20 best-performing hedge funds earned $63.5 billion for clients in 2020, setting a record for the last 10 years during a chaotic time when technology oriented stocks led a dramatic rebound from a pandemic induced sell-off, LCH Investments data show.

If we return to climate change then regular readers might like to recall my regular refrain that you should never believe anything until it is officially denied.

 This is not “mission creep”, it is simply acknowledging reality.  ( Christine Lagarde )

Next comes the issue of central bank digital coins or CBDC. To my mind the real rationale now is the fact that they would help enable increasingly negative interest-rates. Or as Sweet informed us many years ago.

Does anyone know the way, did we hear someone say
We just haven’t got a clue what to do
Does anyone know the way, there’s got to be a way
To Block Buster



What can the ECB and Christine Lagarde do next?

Today is a policy meeting day for the European Central Bank and it has a lot to think about. One way of reflecting on this is just to simply note where it presently stands in terms of policy.

First, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent respectively.

The operative rate for the banks was in fact not mentioned last time around,perhaps it is considered too embarrassing at -1%. But it looks increasingly permanent.

Third, the Governing Council decided to further recalibrate the conditions of the third series of targeted longer-term refinancing operations (TLTRO III). Specifically, it decided to extend the period over which considerably more favourable terms will apply by twelve months, to June 2022. Three additional operations will also be conducted between June and December 2021.

So rather than further interest-rate cuts the mood music has shifted towards keeping them where they are for longer. It is a relief that they do not seem to be looking at the “Micro-Cuts” hinted at yesterday by the Bank of Canada. After all the interest-rate cuts we have seen does anyone sensible actually believe another 0.1% would make any difference?

Next comes the issue of bond buying or the manipulation of longer-term interest-rates or bond yields. Here we have a rather extraordinary situation where the ECB is running two programmes at the same time! The main one was extended in both size and time at the last meeting.

Second, the Governing Council decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

There was a time when 500 billion Euros seemed a lot but no longer in this context. Also the previous programme appears as something of an after thought these days which is revealing.

Sixth, net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion

The other part that is revealing is the way it now fits with our “Too Infinity! And Beyond!” theme.

The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The Euro

There has been a little relief here for the ECB as the Euro has weakened a little recently. It is a bit over 1.21 versus the US Dollar and the UK Pound £ has rallied above 1.13 this morning. However the ECB started its open mouth operations versus the Euro some months ago at 1.18 versus the US Dollar so it has lost ground.

The real issue here is a more conceptual one as the ability of a central bank to influence its currency has changed in the credit crunch era. It is hard for an interest-rate cut to have much of an impact when interest-rates are so low in so many places. The issue of QE is the same except it is hard for more of it to have an impact. There was a time when the extra 500 billion Euros announced last time would depress the currency but in fact it was expected and over that period the Euro rose. That leaves intervention against a strong currency but as the Swiss have discovered although in theory it should work, in practice even promising unlimited intervention has achieved nothing much. At best it has stopped the Swiss Franc going even higher, but that is almost impossible to quantify.

The other tactic is open mouth operations and there the ECB does have a strength in Christine Lagarde as she can be relied upon to say something stupid. Who can forget the claim that the ECB was not their to “close bond spreads” last year which torpedoed the Italian bond market? Also there was her claim that the Greek bailout was “shock and awe” although to be fair that was partly true as the economy collapsed and went into a depression from which it has never recovered. Maybe they could add something to the script she reads from at the press conference.

The Economy

The problem here is that we were supposed to be in the recovery now whereas economies will contract again this quarter. The central banking response is simply to push the recovery back in time.

Nevertheless, real GDP will recover only gradually, reaching the 2019 pre-crisis level by mid-2022 and exceeding it by 2½% in 2023.

Essentially they took 1% off growth this year as reality forced them too but rather than learn from that they simply added it to 2022! But there is a catch because we will be weaker for longer with the implication for debt and people’s incomes as well as business survival.

I would say the forecasts are a random number generator but I think that is unfair on random number generators. Once the restrictions ease we know the economy will bounce back and in the third quarter of last year it did so more strongly than people thought. But we do not yet know when they will be over and we do not know how the economy will then grow? We came into the pandemic with a Euro area that already was struggling for economic growth. This has been a credit crunch era issue.


We can take that forwards and give ourselves some perspective by simply asking when the ECB will raise interest-rates. On growth grounds that looks awkward to say the least as the economy is still shrinking and the ground that will hopefully eventually be regained merely takes the ECB back to a place where it felt things were bad enough to ease policy. Inflation could rise towards and indeed above target as we note the way the oil price has risen with Brent Crude Oil around US $56 per barrel and other factors such as shipping costs rising.

But there is a rub as Shakespeare would put it. That is that all the extra debt taken on by the weaker countries has been oiled by the low bond yields we see. Indeed as a result of the ECB’s policy many are negative even in places you might not expect. As countries borrow ever more due to the longer lasting nature of the pandemic the amount of debt taken on will make it ever harder to raise interest-rates and bond yields. We got some news on this front from Eurostat earlier.

Compared with the third quarter of 2019, the government debt to GDP ratio rose in both the euro area
(from 85.8% to 97.3%) and the EU (from 79.2% to 89.8%): the increases are due to two factors – government debt
increasing considerably, and GDP decreasing.

If we look ahead to the bounceback then we can (hopefully) omit the “GDP decreasing” impact but the Euro area had in the year to then added approximately I trillion Euros of extra debt. That will be continuing last quarter and this. As an aside Greece was just on the edge of 200% relative to GDP (199.9%).

Another way of looking at this is that once you deploy monetary policy on this scale you become a subsidiary of fiscal policy and QE becomes something sung about by Queen.

I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go, go, go
There’s no stopping me

It is also going to get ever harder to explain another consequence of all this to first-time buyers.

In the third quarter of 2020, house prices, as measured by the House Price Index, rose by 4.9% in the euro area
and by 5.2% in the EU compared with the same quarter of the previous year


The Bank of Japan has endgamed itself

This week is one where the main news is coming from the East and the Orient. Indeed today we will be looking at so many of our themes being in play that it is hard not raise a wry smile. So let me start with the apparent news that an institution which is one of the world’s biggest control freaks is considering some ch-ch-changes.

The BOJ will also consider loosening its grip on yield curve control (YCC) to allow super-long interest rates to rise more, as its dominance in the market keeps yields in an extremely tight range, they said.  ( Reuters)

I have no idea where the journalist thinks they are going with the reference to “super-long” but anyway here is a reminder of what Bank of Japan yield curve control is.

With this in mind, yield curve control, in which the Bank seeks a decline in real interest rates by controlling short-term and long-term interest rates, has been placed at the core of the new policy framework.

So control-freakery as we note the more precise details below.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.
While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.2

They have bought just under 534 trillion Yen of them which I think is a new record in terms of large numbers for us. So we can mull “the yields may move upward and downward to some extent ” because if you wish to buy a Japanese Government Bond you do so at a yield and price which the BOJ has decided. Just in case that point was not rammed home you may note I have left point 2 in above. What does it say?

In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.

So yields may move up or down just not up! Indeed as I have been pointing out for a while not down either. This is because the purchases are at or very close to 0% for the ten-year yield which keeps it there when otherwise it would have gone much lower. Otherwise it may well have been more like Germany with its benchmark yield more like -0.5%, so this has been a shambles which most have ignored. It was supposed to cap yields and instead put a floor under them.

What can the Bank of Japan do? Blame the markets as they can’t really complain because they do not exist anymore.

“Prolonged easing has made markets rigid and complacent, so the BOJ needs to change that,” one of the sources said.

“The key is to heighten flexibility in the BOJ’s policy so it can respond to any big shock effectively,” the source said on condition of anonymity, a view echoed by four other sources. ( Reuters)

So the open mouth operation is to blame somebody else which the journalist has fallen for.

The Tokyo Whale

We can now switch to the 35 trillion Yen of purchases of equities which have helped drive the Nikkei 225 index above 28,000. Indeed it was up another 391 points at 26,833 overnight. Whenever there is a down day the Bank of Japan buys providing a put option and acquiring the moniker of The Tokyo Whale.

TOKYO, Jan 18 (Reuters) – The Bank of Japan will discuss ways to scale back a controversial programme that buys massive amounts of exchange traded funds without stoking market fears of a full-fledged retreat from ultra-loose policy, sources say.

Again we are back to the concept of “market fears” when policy has been to destroy the market. So we are in a blame game. In this instance the market has not be a neutered as the bond market bit there is an issue.

The programme will come up in the BOJ’s March policy review, largely because of policymakers’ concerns over the ballooning size of the central bank’s stock exchange-traded funds (ETF) holdings which, at 35 trillion yen ($337 billion), account for roughly 80% of Japan’s ETF market, said five sources familiar with the BOJ’s thinking. ( Reuters )

Have you noticed that however much the BOJ increases its purchases it still apparently only holds 80% of the ETF market? Regular readers will find something familiar about the next bit from Reuters.

It also pledges to buy ETFs at an annual pace of up to 12 trillion yen, although actual purchases have slowed well below this level in recent months as Tokyo stock prices rally.

Remember 2/3 years ago when we were told by the media that the BOJ was going to taper its ETF purchases? Well that was from 6 trillion whereas now it is 12 trillion. Up was the new down. The next bit is rather revealing as why is it buying at all when markets are calm?

The BOJ will also look at ways to more flexibly slow ETF buying when markets are calm, the sources said.


So is The Tokyo Whale getting cold feet? I do not think so. Central banks indulge in so much PR these days or what we have come to call “Open Mouth Operations”. This often suggests a reduction in policy as an intention but as I have noted with the ETF tapering plan an intention to taper from 6 trillion Yen a year morphed into buying 12 trillion Yen a year. Indeed even the Reuters leak hints at this sort of thing.

While replacing the numerical guidance on the pace of ETF buying is among options being discussed at the BOJ, some are cautious for fear of triggering a market sell-off, they said.

The last thing the BOJ wants is a communication mishap that jolts markets at a time many Japanese firms close their books at the March fiscal year-end.

When you force a market to a particular level as the Bank of Japan has done there is no reason for it to stay there should you depart. We are back to Elvis Presley.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

If investors wanted to buy the Nikkei 225 at 28,000+ they would have bought it but the BOJ would not wait. Even worse for it many will have bought learning on its purchases and thus may sell if it exits. So it can talk as much as it likes but unless the world suddenly has a lust for Japanese equities how can it even stop buying without the market dropping? Let alone ever sell.

The bond market one is different because the BOJ completely misfired here and in price terms rather than keeping it up it has prevented it from rising as I explained earlier. With the Japanese concept of “face” it cannot admit this but it could buy at different levels which might mean letting the “market” rise and yields fall. Awkward.

With Japan’s large national debt and fiscal deficits it has to keep buying in some form as the government’s position would deteriorate quickly should bond yields rise.

So in summary the BOJ is in a mess of its own central planning making. If we switch to the objective of inflation at 2% per annum all I see is utter failure.

  The consumer price index for Japan in November 2020 was 101.3 (2015=100), down 0.9% over the year before seasonal adjustment, and down 0.4% from the previous month on a seasonally adjusted basis.

All that effort for prices to go nowhere. The truth is that the bond purchases oil the wheels of government spending and the equity ones give profits to those owning equities. So some gain but remember others lose as for example any long-term saving at these levels looks expensive at best.

Also there is no real market or price discovery. In response to this news the Japanese bond future dropped 30 ticks from 151.88 which is not much and then closed at 151.72 as people realised a reality where the BOJ is trapped.

Oh, oh I’m trapped
Like a fool I’m in a cage
I can’t get out
You see I’m trapped
Can’t you see I’m so confused?
I can’t get out ( Colonel Abrams)

There is some inflation around as Platts noted last week but best of luck with telling Japanese consumers it will make them better off.

 In Japan, day-ahead power prices breached Yen 220/kWh, or $618/MMBtu on Jan. 12, Japan Electric Power Exchange data showed. This compares to around Yen 100/kWh a week earlier and single digit price levels in December, indicating a surge of more than 40 times.



What are the prospects for the economy of Germany?

One of the issues in economics is that we sometimes do not know what has just happened let alone where we are going. It was once explained to me as like driving a car with the front and side windows blacked out. Well maybe Germany has on this occasion provided a chink of light from one of the rear side windows.

WIESBADEN – According to first calculations of the Federal Statistical Office (Destatis), the price adjusted gross domestic product (GDP) was 5.0% lower in 2020 than in the previous year. After a ten-year growth period, the German economy suffered a deep recession in 2020, the year of the corona, a situation similar to that of the 2008-2009 financial and economic crisis. However, the economic downturn on the whole was less serious in 2020 than in 2009 (-5.7%), according to provisional calculations.

We can look at this in several ways of which the first is that this is likely to be a relatively good performance even though care is needed as this is an average for 2020 rather than where the economy is now. Next comes the issue of whether this is an ongoing depression including the credit crunch? In Germany’s case the answer is no as it is still above the previous peak in output terms. It has been a weak period overall but there was some progress most of it in the initial rebound of 4% in both 2010 and 11. As to the comparison with 2009 the numbers get a lot tighter in calendar adjusted terms as 2009 was -5.6% as opposed to the number below.

In calendar adjusted terms, the GDP declined by 5.3% in 2020, as the number of working days was higher than in 2019.

Breaking it down

I doubt many of you will be surprised to learn which was the worst affected area.

In industry (excluding construction), which accounts for just over one quarter of the total economy, the price adjusted economic performance declined by 9.7% on 2019, in manufacturing even by 10.4%. Industry was affected by the consequences of the corona pandemic especially in the first half of 2020, for instance, due to temporary interruptions in the global supply chains.

That of course came on the back of a 2019 which was influenced by the “trade war”.

The services sector was also hard hit.

The economic slump was particularly strong in the service sector where decreases were partly as severe as never before. Examples include trade, transport, accommodation and food services where the price adjusted economic performance declined by 6.3% compared with 2019.

Although as we have seen in so many places there were large shifts within the services sector.

However, opposite trends were also recorded: online trade increased markedly, while permanent retail trade in part declined substantially. The tight restrictions in accommodation, restaurant and similar services led to an outstanding decline in accommodation and food services.

Maybe they have similar problems to the UK in measuring construction as I am unsure how it could have risen but the official number is below.

A sector that could sustain its position in the crisis was construction: price adjusted gross value added even increased by 1.4% year on year.

Domestic Demand

You will not be surprised to read that private consumption headed south.

 In contrast to the financial and economic crisis, when the economy was supported by all components of consumption expenditure, household final consumption expenditure in 2020 fell a price adjusted 6.0% year on year, which was an unprecedented decrease.

Nor that government spending boosted things.

 Government final consumption expenditure saw a price adjusted 3.4% increase and had a stabilising effect even in the corona pandemic. This was, among other things, based on the acquisition of protective equipment and hospital services.

You may note a quite different treatment to the UK official statistics as Germany measures a much higher input rather than peering into theoretical declines in output in health (and education).


This area highlights one of the problems with Gross Domestic Product numbers as GDP falls to allow for the fact that there are losers on both sides of trade.

The corona pandemic also had a massive impact on foreign trade. Exports and imports of goods and services in 2020 decreased for the first time since 2009, that is, exports by a price adjusted 9.9% and imports by 8.6%. The decline was particularly large for imports of services; this was mainly due to the high proportion of tourism, for which a sharp fall was recorded.

Whilst exporters lose 9.9% and importers 8.6% the GDP numbers only show the subtraction which is calculated as a 1.1% fall. There is another twist as in terms of the nominal numbers the statisticians then found some imported inflation to reduce the import decline to below the exports number. I wonder where that was as we are do often told there is no inflation and the Euro was strong overall in 2020?

Labour Market

There are several ways of looking at this. Even the favourable one shows us this.

On an annual average in 2020, the economic performance was achieved by 44.8 million persons in employment whose place of employment was in Germany. That was a decrease of 477,000, or 1.1%, on 2019. Due to the corona pandemic, the upward trend in employment ended, which had lasted for over 14 years

Fair play to them for pointing out an inequality that has developed.

This affected especially marginally employed people and self-employed, whereas the number of employees subject to social insurance remained stable.

Also the sentence below is doing a lot of heavy-lifting.

Dismissals seem to have been avoided especially by the extended regulations regarding short-time work.

This has also been added to by the furlough scheme in Germany.

Germany`s «Kurzarbeit» Program spent EUR22.1bn last year subsidizing payroll for companies working at reduced levels ( @acenaxx)

Some 1.95 million were still being supported in the final quarter of the year which provides quite an appendix to the employment numbers we looked at above.

Fiscal Policy

You could argue that Germany is finally applying some logic. As you can see their statisticians have got quite excited by it.

General government budgets recorded a financial deficit (net borrowing) of 158.2 billion euros at the end of 2020, according to provisional calculations. It was the first deficit since 2011 and the second highest deficit since German reunification and was exceeded only by the record deficit in 1995 when the debt of the Treuhand agency were integrated in the general government budget.

The reason I mention the logic point is that Germany is being paid to borrow, so why not do some? For most of 2020 ( from March) that applied to even the 30-year maturity which fell to nearly -0.5% in the March pandemic panic. There is an irony in Germany’s safe haven status as it moved away from one definition of a safe haven but then that was 2020 in a nutshell.

In terms of ratios we are told this.

Measured as a percentage of nominal GDP, this was a 4.8% deficit ratio of general government for 2020.

In relative terms this is low but does represent quite a shift on the previous surplus policy.


It is interesting that Germany has provided us with an update including the final quarter over a fortnight before it considers sensible to produce them. However as things stand the picture is in the circumstances good. As to the future there are two perspectives and let us start with the business survey or PMI.

Though down on its level between July and
October, the Germany Composite Output Index ticked up from November’s five-month low of 51.7 to 52.0.

If Germany’s Q4 GDP was indeed flat as seems likely from today’s number that has already not gone so well for the PMI. Now there are the lockdowns which seem set to last until the spring and issues with the supply of vaccines.

Angela Merkel admits Germany faces wait for Covid jabs … Germany is facing a Covid-19 vaccine shortage and may not be able to secure sufficient stocks until July, Angela Merkel privately told her MPs ( @TradingFloorAudio)

On that basis expectations that Germany will be back to pre pandemic levels at the end of this year look very optimistic.



Where next for interest-rates and bond yields?

2021 has opened by reminding us that the world has become increasingly bi-polar.Perhaps I should refine that to the human world. Prospects for interest-rates are doing that as well and let me give you an example of one trend.

Government bond #yield keeping higher: 10 year German #Bund yield at -0.48%, 10 year UK Treasury #Gilt yield at 0.32% and 10 year US #Treasury yield at 1.15%. (@CIMBank_News)

The player here is the United States. I noted yesterday the impact of higher US bond yields on the price of Gold and in the meantime the ten-year has nudged higher to 1.15%. Part of this has been caused by the way that the prospects for Yield Curve Control ( essentially more QE bond buying) have collided with this.

WASHINGTON (Reuters) – The Federal Reserve could begin to trim its monthly asset purchases this year if distribution of coronavirus vaccines boosts the economy as expected, Atlanta Fed President Raphael Bostic said on Monday in what amounted to a bullish outlook for the coming months.

As you can see they have been talking bond yields higher just as they were expected to be heading in the opposite direction. So much for Forward Guidance! This is more like a car crash as we wait for the handbrake turn. Just to add to the land of confusion there was also this.

In separate comments, Chicago Fed President Charles Evans also said policymakers were poised to push bond-buying in either direction – adding more if the economy seems to need it but also open to cutting back if the recovery and vaccines gain traction. ( Reuters)

On a technical level this just reminds us how useless Forward Guidance is. We have seen central bankers and their acolytes push it as a policy tool but right now they are pulling in every direction. How can anyone take guidance from this.

Mr and Mrs Market have decided to push bond yields higher and see if they break.Those who remember what was called the Taoer Tantrum and the climb down of the US Federal Reserve in the face of pressure from President Trump will no doubt be thinking when they climb down. Such thoughts are no doubt behind the rise in bond yields because so far QE has been an example of the genius of the song Hotel California.

“Relax”, said the night man
“We are programmed to receive
You can check out any time you like
But you can never leave”

Negative Interest-Rates

On the other side of the coin is the negative interest-rate enthusiast of the Bank of England Silvana Tenreyro. Yesterday she gave a speech setting out her views on them.

Financial-market channels appear to be unimpeded under negative rates, and some may even be
stronger than usual.
 While pass-through to household deposit rates can be constrained near zero, pass-through appears
to be less constrained for corporate deposit rates, which may stimulate spending by firms.
 There is strong evidence of transmission into looser bank lending conditions, even if this is
somewhat constrained relative to ‘normal’.
 There is no clear evidence that negative rates have reduced bank profits overall, and a number of
studies find positive impacts, once you take into account the boost to the economy.
 Taking these points together, the evidence suggests that negative rates can provide significant

Let us examine these in detail. Her view on the financial market channel is really rather extraordinary, so let us take a look in more detail. The emphasis is mine.

For example, estimates from the Bank’s suite of models suggest that financial market channels – operating via the exchange rate, firms’ cost of capital and households’
financial wealth – account for a third to two thirds of the total medium-term impact on output from Bank Rate
changes, and a half to three quarters of the impact on inflation.

Yes we are back to wealth effects again with no addressing of the issuing for younger people of how they will have to buy more expensive assets is inflation for them.We look at this usually in terms of housing. Also if firms cost of capital responded to Bank Rate in the manner hinted at we would not have had the Funding for Lending and Term Funding Schemes. 

Next is the issue of corporate deposit rates which “may” stimulate corporate spending. Well after the years of evidence now about the impact of negative interest-rates in the Euro area then if you can only say “may” it means the answer is no. Although Silvana keeps plugging away at this.

This suggests one aspect of the banking channel of negative rates which could be more powerful than usual.

How bank lending can be both “looser” and “somewhat constrained” speaks for itself so I will leave that there.

Next comes the issue of the banks. The issue her is one of profitability or rather lack of. Her Silvana finds herself trapped between her theories and real world examples where people are backing their views with their money.

Interestingly, a number of studies48 – though not all49 – find that bank equities tend to fall after policy rate
cuts below zero are announced. That seems at odds with the more sanguine results on bank profitability.

Revealingly she decides that she is right and they are wrong.

One interpretation is that financial markets initially focussed on net interest income, but did not initially
account for the indirect boost to profits from negative rates arising from improvements in other sources of

Indeed they have been wrong for quite some time according to her. It would be too cruel to look at the Italian banking sector so let us go to the benchmark for the Euro area banking sector which is Deutsche Bank. Back in 2015 there were two occasions when its share price approached 29 Euros whereas now it is 9.57 Euros. If we take out the Covid-19 pandemic then we see it does not change much as in February last year it was 10.2 Euros. So the share price has plunged over the era of negative interest-rates and bond yields because markets have failed for over five years to spot the “improvements in other sources of income.” Come to think of it the accountants and auditors have missed it as well!

We seem to be entering something of an alternative universe here.

And I have previously highlighted that in the UK interest rates affect inflation more quickly than in the past.

The ECB in fact published some work a few years back suggesting the reverse. I can only think that Silvana has misunderstood what happened in the summer of 2016.

Also we already have negative UK bond yields in the UK at the shorter maturities mostly due to all the QE bond buying she does not think is that important.Meanwhile that influences the increasing number of fixed-rate mortgages. On that road Bank Rate is ever less important which she seems to miss.


There are several contexts here so let me set out my view. There is a clear asymmetry between how central bankers regard interest-rate rises and cuts. The former are a vague wish and the latter are a clear desire often implemented via panic. Indeed interest-rate rises are often reversed ( the UK is an example of this ) and the new scenario is lower. For example the Bank of England told us the “lower bound” for UK interest-rates was 0.5% whereas Bank Rate is presently 0.1%. In a sane world we would be projecting interest-rate increases but in the insane one we inhabit any further economic weakness will see more cuts.

Next comes the issue of negative interest-rates which so far have been singing along with Muse.

Super massive black hole
Super massive black hole
Super massive black hole
(Super massive black hole)

The main place that has implemented them which is the Euro area is still there. In fact last year it cut again, although contrary to the Tenreyro rhetoric it only cut by 0.1% showing it sees risks. If negative rates had the impact claimed surely things would have got better and interest-rates could have been raised or at least returned to zero? The Riksbank in Sweden has raised back to 0% but that only illustrates the issue. It cut into negative territory in a boom and ended up so unsure about it all that it raised interest-rates in a bust. If they worked surely Sweden would have them now?


The Bank of England wants to control UK house prices?

Today has given us an opportunity to bring together several of our ongoing theme at once. Let me open with news that will be announced to smiles at the Bank of England morning meeting.

“Average houses prices rose again in December, stretching the current run of continuous gains to six months.
However, the monthly rise of 0.2% was the lowest seen during this period and significantly down on the 1.0% increase in November. The average house price was therefore little changed, but nonetheless still reached a fresh record of £253,374.” ( Halifax)

The smiles will have then turned to cheers and only Covid-19 social distancing will have stopped a round of high fives.

“All this left average prices sitting some 6.0% higher at the end of 2020 when compared to December 2019, a notably
strong performance given the anticipated impact of the pandemic earlier in the year. Whilst the annual rate of inflation did fall compared to November (+7.6%) to stand at its lowest level since August, it should be noted that this also
reflects a particularly strong period for house prices towards the end of 2019 as political uncertainty at that time began to ease”

With the rather parlous state of the economy this is really rather extraordinary but seen through the eyes of our central bankers this is quite a triumph. In their circle the numbers from Italy ( 1% annual house prices growth) we looked at yesterday will be seen as a disaster. Indeed PhD’s will be instructed to explain how the Bank of England monetary easing in March boosted the change in 2020 observed below.

“2020 was a tale of two distinct halves for the housing market. Following a strong start, the first half was dominated by the restrictions on movement due to COVID-19, and prices were subsequently down 0.5% at mid-year as the market effectively ground to a halt. However, when the market reopened, prices soared as a result of pent-up demand, a desire amongst buyers for greater space and the time-limited incentive of the stamp duty holiday.”

Indeed some started early back in June and if you want your research sponsored by the Bank of England this this the way to do it.

The average house in the UK is worth ten times what it was in 1980. Consumer prices are only three times higher. So house prices have more than trebled in real terms in just over a generation. In the 100 years leading up to 1980 they only doubled

So confident are they after displaying such a number that they are willing to countenance a central banking heresy.

Recent commentary on this blog and elsewhere argues that this unprecedented rise in house prices can be explained by one factor: lower interest rates. But this simple explanation might be too simple.

But just as the Governor’s temper is tested they save the day by pointing out the contribution of other monetary policy measures.

Mortgage debt expanded rapidly as house prices rose in the UK before the crisis, so this could be an important channel for the UK.

This fits neatly with the £128 billion of the Term Funding Scheme which has pumped up the quantity of mortgage debt banks can offer without any need to attract any of those pesky depositors and savers. There is an irony here as, of course,  the money supply numbers I looked at on Monday show there has been a surge in deposits as savings have soared post the Covid-19 pandemic.

Central Control

I now wish to switch to a rather revealing speech by Andrew Hauser of the Bank of England yesterday. He opens by describing a scene which for a modern central banker sends a chill down the spine.

Increasingly we look to financial markets, rather than banks, to care for our savings or provide credit.
Millions save via pension, investment or exchange traded instruments……… And firms, large and small, borrow from capital markets or non-bank lenders.
Taken together, fully half of all financial assets are now held outside the banking system.

I guess we are reminding ourselves that a central bank has bank in its name. Because when you look at the liquidity mismatches which banking relies on this is quite a cheek.

Some of that reflects vulnerabilities in business models and practices of specific market participants: including liquidity mismatch in funds; leveraged and trend-following investment strategies; or insufficiently forward-looking margining practices.

Does “trend-following investment strategies” apply when the banks all piled into ( and then left with singed fingers) estate agents? Or when they lacked capital when the credit crunch hit as that is another form of margin? Anyway I am sure you have got the idea.

The issue is highlighted as we note the reference to the standard for this sort of thing.

And the canonical description of how to
achieve that is given by Walter Bagehot’s description of the ‘Lender of Last Resort’ (LOLR), which
(in essence) recommends stemming financial panics by lending freely, to sound institutions, against good
collateral, and at rates materially higher than those prevailing in normal conditions

It opens well as the Bank of England did splash the cash but at a time when the US Federal Reserve was liberally applying US Dollar swaps then “sound institutions” had a hollow ring in some cases and what is “good collateral” these days? I could write a whole article on that alone! For now let’s put that under Hmmmmmmm. Then the operations involving a Bank Rate cut, a surge in QE and the TFS were designed to give us rates materially LOWER than in normal conditions. You do not need to take my word for it as we get a confession later in the speech.

The Bank of England provided extra liquidity to banks through a wide range of facilities, at
favourable rates, in the early stages of the March crisis.

Next we get to the crux of what we might call the Hauser matter.

‘Market Maker of Last Resort’ (MMLR). Buiter
and Sibert believed that central banks, acting as MMLR, should be ready to tackle dysfunction in securities
markets relevant to monetary or financial stability, by making two way prices to buy and sell those securities,
or lending against them.

You can figure where that is going,especially if you have followed the mission creep of central banks in the credit crunch era. It is hard not to laugh as the Bank of England purchases of corporate bonds is used as an example because they were an example of a dictum used in the early stages of the Desert War ( World War Two) “order, counter order, disorder”

In case you had not figured out where we are being led.

The review of the Bank’s liquidity framework carried out by Bill Winters in 2012 recommended formalising the
Bank’s approach to MMLR, setting out public principles under which future interventions might occur……
But in the event, the Bank –
in common with other central banks – chose to say relatively little in public.


I wish now to give an example of the muddled thinking going on here. Let me start with this from the speech.

Since March of last year, G10 central bank balance sheets have risen by over $8 trillion.

As even in these inflated times those are large numbers they have intervened on a grand scale. But apparently they do not influence the price at all.

Purchases typically took place at prevailing market prices

It gets worse.

While not charging an ‘insurance premium’ to market participants for an extended period may be understandable in a severe unexpected pandemic,

Actually they did exactly the reverse they actually paid an “insurance premium” to sellers of government bonds. What I mean by that is that they drove the price of them to record highs. For example they bought the UK’s 2068 bond in the 230s which is extraordinary for a relatively recent bond. This issue of the extraordinarily high prices paid gets ignored in the debate because these days the concentration is usually on yields. For those who prefer that the signal is that up to around the 6 year maturity the UK has negative bond yields and is paid to borrow.

Let me give you another example of what is at best muddled thinking.

driving term repo rates and government bond yields sharply higher.

Okay so the UK benchmark ten-year yield went to around 0.8% which in another perspective is historically extraordinarily low. Central banks intervened on a massive scale and it fell to 0.08% but apparently that is a “market price”

No the Bank of England set the price for UK bonds via the large scale of its purchases so could it set policy for house prices? Well this year I think we are about to find out.


Do negative interest-rates make Switzerland a currency manipulator?

When we consider the impact of negative interest-rates then we can learn a lot from Switzerland which qualifies by both how low they have gone and how long it has had them. The saga began back pre credit crunch when the combination of low Swiss interest-rates and ones higher elsewhere particularly in Eastern Europe was seen as an opportunity by some bright sparks. They organised deals where for example mortgage borrowers in Eastern Europe could borrow at near ( there was a fee of course) Swiss Franc interest-rates.Everyone’s a winner or so it appeared although the risk ( that borrowers had a currency position short the Swiss Franc) was there.

When the credit crunch hit the latter issue came to the front of investor’s minds and indeed to foreign currency borrowers wallets and purses. The safe haven status of the Swiss Franc saw it rally from its artificially depressed level and this was added to by the beginning of reversals of the carry trade. If we look at the Hungarian Forint we see that a pre credit crunch exchange rate of 143 was replaced by one of 200 in about 6 months and 260 at the end of 2011. As monthly mortgage payments were based in this there was a house of pain but from the point of view of the Swiss their currency rapidly became expensive.

Currency Manipulator

We can in fact bring this up to date.

WASHINGTON (Reuters) – The U.S. Treasury labeled Switzerland and Vietnam as currency manipulators on Wednesday…….. the Treasury said that through June 2020 both Switzerland and Vietnam had intervened in currency markets to prevent effective balance of payments adjustments.

Let me now switch to this mornings policy meeting at the Swiss National Bank.

In the light of the highly valued Swiss franc, we remain willing to intervene more strongly in the
foreign exchange market. In so doing, we take the overall exchange rate situation into consideration.

Not much rolling back there and President Thomas Jordan went further here.

Second, the negative interest rate and our foreign exchange market interventions counter the upward pressure on the Swiss franc. This pressure is especially high in periods of uncertainty,and a strong appreciation would weigh particularly heavily on the economy in the crisis. We
have therefore made considerable foreign exchange purchases this year to maintain appropriate monetary conditions.

More precise details were given by board member Maechler.

On a trade-weighted basis, the Swiss franc is almost 1.5%
stronger in nominal terms than at the end of June. It thus remains highly valued. As reported in our interim results, we carried out foreign exchange market interventions
totalling CHF 90 billion in the first half of this year. On a trade-weighted basis, the Swiss franc has strengthened some 5% in real terms since the beginning of 2020.

Indeed there was also this.

Indeed only last night the US Federal Reserve confirmed my To Infinity! And Beyond! Theme.

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

For the moment it would appear that the US Federal Reserve is winning the currency wars.

Before I move on there is something of a curiousity in currency markets.

It may, then, provoke some alarm that the latest auction of three-month loans from the Swiss National Bank saw $1.2bn-worth of dollars granted, leaving the total amount of these loans outstanding at just short of $5bn. While that is nowhere near as high as during the spring — when around $11bn was outstanding — a few months ago the figure was less than $1bn. ( FT Alphaville 1st of December)

Actually I have just checked and it is now some US $7.2 billion according to the New York Fed. An extra US $1.34 billion was borrowed on the 9th for 84 days so taking us comfortably beyond the year end as someone sings along with Aloe Blacc.

I need a dollar, dollar a dollar is what I need
(Hey hey)
Well I need a dollar, dollar a dollar is what I need
(Hey hey)
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

The Policy Rate

This saga starts simply.

The SNB is keeping the SNB policy rate and interest on sight deposits at the SNB at −0.75%.

It is the leader of the negative interest-rates pack for official rates although of course banks in the Euro area can access cash at -1%. Also it looks as though it will not be rising for quite some time.

In the longer term, the inflation forecast is unchanged from
September. The forecast for 2020 is negative (−0.7%). The inflation rate is likely to be higher again next year (0.0%) and slightly positive in 2022 (0.2%). The conditional inflation forecast is based on the assumption that the SNB policy rate remains at −0.75% over the entire
forecast horizon.

Indeed even if that were not true this would keep it there.

However, in October coronavirus also spread rapidly again in Switzerland. This has resulted
in a renewed deterioration in the economic outlook. The containment measures implemented
thus far are restricting economic activity less than was the case in the spring. Nevertheless,
momentum is likely to be weak in Q4 2020 and Q1 2021.
The SNB expects that GDP will shrink by around 3% this year.

So the idea that negative interest-rates would stop recessions has not worked.

Also there is this.

A moderate decline in yields was also observed in Switzerland. For example, the latest reading shows the yield on 10-year Confederation bonds just below the
mid-year values, at around –0.6% ( SNB)

As you can see the Swiss yield curve is almost flat and having just checked the thirty-year yield ( -0.37%) we see that not only does that continue but the Swiss are being paid to borrow across the yield curve. I wonder if they issued a century bond whether that would remain true?


I have left until now the point that this has lasted nearly 6 years. So any argument that this would be temporary has long gone and in fact it looks ever more permanent. Indeed 2020 has been more likely to see a further cut than a rise. This means that long-term investment has a problem as Swiss Info pointed out earlier this year.

Savers: For some years now, savings have been earning interest at rates just above zero.

Pension funds: Until about ten years ago, pension funds were able to pay substantial interest to their policyholders, thereby making a significant contribution to the growth of their old-age assets. This is no longer the case………The state pension scheme also faces similar problems, although to a lesser extent.

On the other side of the coin the SNB is in fact setting policies which help the government finance itself.

The State: With a total debt of almost CHF200 billion, the government, cantons and municipalities have largely benefited from the low cost of money.

Oh and the housing market.

Property owners: Because mortgage interest rates have been at unprecedentedly low levels for several years, property owners also benefit from negative interest rates. At the same time, the prices of houses and apartments in many regions of Switzerland have practically doubled within a decade.

Who gave the central bankers the power to transfer money from one group to another?

Japanification and Turning Japanese

As we approach the end of 2020 the subject of Japan and its economy should be in our thoughts.There is the traditional Japanese policy of introducing moves when us gaijin are celebrating Christmas and the New Year. Also there is the issue of us turning Japanese a subject we have been noting for years but has been rebadged as Japanification.

Interesting article in Asia Times, addressing how the Japanese government basically nationalized the Japanese stock market ( The Market Ear)

Here is the Asia Times.

The concept of a creature dining on its own tail – suggesting a self-generated growth cycle – is a macabre one. So how about blowing it up to its logical limit: A whale eating its own tail?

In fact, this “whale of a tale” – excuse the puns – is exactly what is happening in Japanese financial circles.

Slightly different from The Restaurant At The End Of The Universe where it is a cow which advises you to eat it but in line with out Tokyo Whale theme. It then goes further.

The Bank of Japan recently became the nation’s top holder of stocks, owning more than US$430 billion’s worth. That means Japan’s monetary authority is now the nation’s investment “whale” – pulling the title away from its Government Pension Investment Fund, or GPIF.

There are several contexts here. It is interesting that the state and the central bank are not being separated in a trend I welcome. It is only really those who want a job at a central bank who plug the line that they are independent these days. On a technical level such purchases have to be backed by the national treasury in case of losses at which point the central bank is singing along with Colonel Abrams.

Oh, oh I’m trapped
Like a fool I’m in a cage
I can’t get out
You see I’m trapped
Can’t you see I’m so confused?
I can’t get out

As to nationalisation I think we are on that road but not fully there yet. You can indeed control something by owning less than 100% of it but I do not think that 35.1 trillion Yen and rising is enough. So far in December the Tokyo Whale has contented itself with a light snack of 1.2 billion Yen a day of purchases. On the other side of the coin it has been associated with a much higher equity market with a succession of near 30 year highs being recorded on its way to 26.732.

Looking at from a flow point of view with the Tokyo Whale buying large amounts on down days we do get closer to a nationalisation point of view. Anyway it is in at around 19,500 so has a profit which is over 10 trillion Yen according to the NLI ( Nippon Life) Research Institute. Of course taking the profit is rather problematic because we are at these levels because of the purchases. A perspective on this is provided by the fall in March to 16.358 when the Tokyo Whale was losing quite a bit. Been quite a rocker ride since then hasn’t it? So well done if you have been long.

The Yen

Here I plan to look at the Yen versus the place which looks in most danger of Turning Japanese which is the Euro area. First let me address the US Dollar where if we ignore the March moves the Yen has been around 104 for a while. There is a cautionary note because many of you may remember that it going there in early 2019 in the “flash rally” was a shock and indeed an overnight one. So the Yen has been both strong and mostly stable neither of which fits with the Abenomics arrow for this area.

Now let me switch to this morning and here is the Reuters Global Markets Forum.

#ECB‘s Panetta Says Inflation Will Remain Subdued For A Protracted Period… Panetta Says For Monetary Policy, This Means Providing Certainty About Financing Conditions Well Into The Future; Says The #PEPP Envelope Can Be Further Expanded And Extended, If Warranted.

He could be describing Japan where inflation has been subdued for decades now. As of October there was a complete failure for the Bank of Japan as the CPI was -0.4% as opposed to the 2% which is apparently always around the corner. In the Euro area inflation was -0.3% and is expected to be -0.3% for November as well.

The idea of QE bond purchases being extended is very Japanese too as I stopped counting when we were on the nineteenth version of it in Japan. Indeed it must have been seen as a loss of face as it was officially renamed QQE to solve that problem. Or as the Asia Times put it.

Two years ago, the BOJ’s balance sheet surpassed the size of Japan’s $5 trillion economy amid governor Haruhiko Kuroda’s quest to end deflation.

Switching to interest-rates then in theory at least the Euro has the advantage in the global depreciation game with a deposit rate of -0.5% versus the -0.1% of the Bank of Japan. But the crucial point here is that it is the Euro which has been rallying and is at 126 Yen. It has a way to go to reach the 135 of January 2018 but over the past year it has been rising.

Conventional metrics may be failing us here and it may be the interest-rate differential that is weakening the Euro via a new carry trade. If so it may be stronger than it looks.

The economy

This is far from inspiring as this from the NLI ( Nippon Life) Research Institute highlights.

The real GDP growth rate is forecast to be minus 5.2% in FY 2020, 3.4% in FY 2021 and 1.7% in FY 2022. It will take
time for the level of economic activity to return to pre-Corona levels, as securing social distance will continue to curb the consumption of face-to-face services. Real GDP levels will recover to pre-Corona levels (October–December
quarter of 2019) in the July–September quarter of 2022. The economy will return to its most recent peak (July–
September 2019) before the consumption tax hike in FY 2023.

This morning has brought some slightly better news from the Tankan survey.

TOKYO (Reuters) -Japanese business sentiment improved at the fastest pace in nearly two decades in October-December, a key central bank survey showed, a welcome sign for the economy as it emerges from the initial hit of the coronavirus pandemic.

But companies slashed their capital expenditure plans for the year ending March 2021 and a measure of near-term sentiment worsened, as a resurgence of infections reinforces expectations any recovery in the world’s third-largest economy will be fragile.

Again we are left mulling something of a similarity between the Euro area and Japan in terms of economic prospects.


There is another familiar beat to all of this so let me dip back into last week.

TOKYO (Reuters) – Japan announced a fresh $708 billion economic stimulus package on Tuesday to speed up the recovery from the country’s deep coronavirus-driven slump, while targeting investment in new growth areas such as green and digital innovation……..The package, approved by cabinet on Tuesday, would bring the combined value of coronavirus-related stimulus to about $3 trillion – roughly two-third the size of Japan’s economy.

Money is being fed into the system and looking back this is a case of same as it ever was. Yet the problems do not get solved as we observe a feature of Japanification we have all copied which is the central bank financing its government via its bond purchases. Not explicitly but implicitly.

In spite of the issues with this we have copied it and I have pointed out before the Euro area seems nearest with its trade surplus and strong currency giving it a touch of The Vapors.

I’m turning Japanese
I think I’m turning Japanese
I really think so
Turning Japanese
I think I’m turning Japanese
I really think so



The rise and rise of negative interest-rates

This week is ending with a topic that has become something of a hardy perennial in these times. By these times I mean the way that the Covid-19 pandemic has added to the credit crunch. An example has been provided this morning by Bank of England Governor Andrew Bailey.

BoE’s Bailey: As You Go Towards Zero And Into Negative Territory, Academic Research Says Impact Of Structure Of Banking System On Transmission Tends To Increase Most Countries That Have Used Negative Rates Have Not Used Them For Retail Deposits ( @LiveSquawk)

This has reminded markets again about the Bank of England looking at negative interest-rates which as an aside is none too bright at a time when the UK Pound is seeing pressure. Perhaps he has gone native early and started the old tactic of talking it lower. But on the subject of negative interest-rates he is both reinforcing a point made by some of his colleagues and disagreeing with them. The agreement is with this bit from Michael Saunders on the

In my view, there may be some modest scope to cut Bank Rate further but, if we do, it may be preferable to move in relatively small steps.

The disagreement has been over the impact on banks with both Michael Saunders and Silvana Tenreyro claiming they can help them a view which I consider to be evidence free. It is also contradicted by this from the Saunders speech.

For example, if the TFS (or TFSME) interest rate is
below Bank Rate, then banks could borrow funds at the (lower) TFS rate and earn the (higher) interest rate
on reserves. This subsidy for banks would come at the BoE’s expense.

Firstly nice of him to confirm my point that such policies are indeed a bank subsidy. But why so banks need a different interest-rate to everyone else especially if they are unaffected.

But the clear message here has been the development of the effective lower bound or ELB. I still recall Governor Carney telling us this.

The Bank of England’s website says that the “effective lower bound” for the interest rate it sets, Bank Rate, is the current rate of 0.5%.

This is the level, according to the Bank, “below which it cannot be set” – the lowest practicable official interest rate. ( BBC March 2015)

Of course that became 0.1% when we cut to 0.1% and Governor Carney had previously contradicted his own rhetoric by cutting to 0.25% after the EU Leave vote. Well now according to Michael Saunders it has got lower again.

As discussed above, I suspect the ELB is probably somewhat below zero, but there is uncertainty around this. With this uncertainty, it may be preferable to make any further rate cuts in relatively small steps, less than the normal 25bp increments.

So 0.5% became 0.1% ( after they cut to 0.25%) and now it is somewhere below 0%. Were it not so serious this would be a comedy version of central banking 101. The other ridiculous part was claiming it was 0.5% when only across The Channel the ECB had cut below 0%.

The road below zero has been littered with official denials, although the record remains with Governor Kuroda of the Bank of Japan who imposed negative interest-rates only 8 days or a Beatles week after denying any such intention in the Japanese parliament.


We did not get an ECB interest-rate cut partly because they had reined back on that and partly because it looks as though there was some dissension in the camp.

FRANKFURT (Reuters) – European Central Bank President Christine Lagarde brokered a difficult compromise this week to secure backing for a new pandemic-fighting package of measures, but her battle to convince sceptics among her colleagues and investors has only just begun.

Her claim that she had ended dissension has gone the way of well many of her other claims. But there was a nuance to the interest-rate debate as she simultaneously said down and then up.

She starts by saying “we are enlarging the volume of lending that can be obtained at those rates” And then says “we are slightly changing the reference period…. to make it a little more challenging” Seems at cross purposes… ( @LorcanRK)

It has turned out that there has been some potential tightening here, but I would not worry about it too much as once they realise it will hurt The Precious! The Precious! it will be changed. The interest-rate of -1% remains but how much of that banks can access has potentially been reduced.

I would not worry about this too much as once somebody points out to Christine Lagarde that she has made another mistake this will be reversed.

Bond Yields

We can continue the theme of mistakes by President Lagarde as someone was keen in the ECB messaging to make sure there would not be another “we are not here to close bond spreads” debacle.

We will conduct our purchases under the PEPP to preserve favourable financing conditions over this extended period. We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy.

This was a subplot to the main event in this area.

Second, we decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. We also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

We can now move to what The Frenchman in the Matrix series of films would call cause and effect.


The 10-year Spanish bond yield turned negative for the first time ever. Still somewhat of a national embarrassment that Portugal went there first, I suppose. ( @fwred)

Fred has rather stolen my thunder about what had happened in anticipation of the move.

Yesterday Portugal joined the euro zone’s growing pool of negative yields as 10-year YTM dropped to -0.1% for the first time in history.



As I have been typing this there has been a reminder of old times for me and well you can see for yourselves.

Money Markets Assign 65% Probability Of 10 Bps Bank Of England Interest Rate Cut By March 2021 Vs 16% At Start Of Month ( @LiveSquawk)

It is hard not to laugh as a cut of 0.1% after cuts approaching 5% would do what exactly? But it would appear that for rate cuts central bankers keep singing along with the Average White Band.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time (One more time)
One more time (One more time)

In terms of the UK we do already have negative interest-rates as both the two-year ( -0.14%) and the five-year yields ( -0.11%) are already there and as a real world issue they feed into mortgage rates because so many are at a fixed rate these days.

In terms of the world well it is arriving right now in a land down under.

An auction of three-month Australian notes on Thursday saw an average yield of 0.01%, with buyers who bid most aggressively at the sale receiving a yield of minus 0.01%. ( Bloomberg)

Adding in time to this.


How can the ECB help the economy of France?

Tomorrow the ECB starts its policy meeting and it is a live meeting with ch-ch-changes expected. At the last meeting we were told all options were on the table but there has been something of a retreat from that position as the latest speech on its website tells us.

We have always said we will consider all instruments, and we will do a cost-benefit analysis of all the available instruments and possibly new ones. We are looking at the effectiveness of the instruments, potential side effects, complementarities between instruments and so on. So far in the pandemic, the combination of the PEPP and TLTROs has worked very well. In the past we decided against further interest rate cuts. ( Isabel Schnabel)

So they have moved away from an interest-rate cut and the hype about the PEPP and TLTROs gives us a clue as to what she at least plans.


The last couple of days have brought us more up to date on the state of play in La Belle France. Its statistical office Insee has concluded that one area was hit as badly by the recent lockdown as the original one.

The shock to household consumption would appear to have been of a fairly similar order of magnitude (–14% estimated in November, compared to the pre-crisis level), but was undoubtedly a little harsher than the shock to GDP.

Their explanation for this is below.

 In fact, although we witnessed a growth in distance sales and other home delivery services, the purpose behind the health restrictions was to reduce the numbers of people mixing together and thus they mainly affected specific areas of household demand (closure of restaurants and bars, closure of certain “non-essential” leisure activities and businesses, limited transport).

However other areas were not affected as much and this means that the overall pycture in their opinion is below.

The business tendency surveys collected from companies and households, along with high-frequency data, give the same diagnosis for economic activity in November in France. Overall, activity losses appear to be lower than in the spring, although considerable nonetheless: in November, activity within the meaning of GDP would seem to be around 12% below its pre-crisis level – a slightly lower estimate than that given in the previous Economic Outlook,

This means that 2020 looks like turning out to be quite a shocker in terms of economic output.

All in all, taking into account these hypotheses for the end of the year, GDP in Q4 2020 is likely to shrink by 4½% as a quarterly variation (after a rebound of +18.7% in Q3, as a result of the lifting of the first lockdown). Across the whole of 2020, GDP is expected to decline by about 9% compared to 2019.

It turns out that they may end up being right via the route of being consistently wrong!

On the one hand, coming out of lockdown for the first time resulted in a more vigorous economic rebound than expected. On the other hand and conversely, the resurgence of the epidemic put a strain on economic activity in Q4.

That in itself gives us a warning for 2021 which we hope will be the year of the rebound.

Looking Ahead

We can start with the view on the month we are now in.

We estimate that in December economic activity within the meaning of GDP could be at 8% below its pre-crisis level. Household consumption should rebound a little more sharply than GDP, to be 6% below its pre-crisis level.

Then there is the recovery in China.

The Chinese economy in particular is continuing its recovery, after a shock that was certainly very severe but limited to Q1.

Next if we go back to the October forecasts there is hope for next year from what took place this summer.

As a result, bank card spending by residents
on accommodation and catering rose during July and August to levels that were at least comparable
to those of the summer 2019 season.

Whilst that is only domestic tourism it does offer hope that tourism in general will return relatively quickly to past levels. We started the pandemic by noting the importance of tourism to the French economy and I have been a little surprised it has not been reflected more in the figures.


This morning’s release give us an idea of the broad trends.

Between the end of June and the end of September 2020, payroll employment rebounded by 1.6%, that is 401,100 net job creations after –2,7% (–697,100 jobs) in the first semester. At the end of Septembre 2020, it thus remained below its pre-crisis level at the end of 2019 (–295,900, or –1.2%), but returned to a level comparable to the end of 2018

As to absolute levels we have the issue that the furlough schemes count as employed.

Debt and Bonds

I thought I would link to the issue that the ECB is most engaged in and we see that the Financial Times has been looking at something we have been following.

Senior Italian officials have recently stirred up the idea once more, suggesting the ECB could forgive debt bought through its asset purchase programme or swap it for perpetual bonds, which are never repaid.

France does get a mention in deficit terms.

Many countries are running budget deficits above 10 per cent of gross domestic product, including Italy, France and Spain.

The issue of France’s debt gets skipped by the FT but below is the Governor of the Bank of France writing to the President of the Republic.

Domestic fiscal policy has been deployed massively, and in
France is close to its limits with public debt set to reach 120% of GDP at the end of 2020 – a twofold increase in only twenty years.

It is hard not to have a wry smile at that. Firstly because that is the level which the Euro area identified as a crisis one for Greece so another one bites the dust to quote Queen. Also France has only ever paid lip service to this although it has applied it to others.

While the EU’s fiscal rules — requiring governments to keep deficits below 3 per cent of GDP and overall debt under 60 per cent of GDP — have been suspended since the pandemic hit, they are likely to be reactivated in some form once the crisis is over, piling pressure on governments to deleverage. ( FT)


The ECB has been performing the one role it can in the crisis which the FT describes below.

So far investors have not added to the clamour — the cost of new debt remains low as the ECB buys most of the extra bonds sold, so many countries are able to borrow for up to 10 years at yields of close to or below zero.

The large scale purchases mean that the 2-year yield is -0.72% and and 10-year -0.34%. Even if France borrows for 30 years it only has to pay 0.35% at the moment. This means that we have to correct the Governor of the Bank of France as it is nowhere near “close to its limits ” as it costs very little and a fair bit actually gives a return. Of course any rise in yields would change things rather quickly which is part of my “To Infinity! And Beyond!” theme as how can the ECB ever get off the QE horse?

Rather than targeting inflation its role now is to finance government spending as cheaply as it thinks it can get away with.

Moving to the real economy it can do much less as after all things were struggling pre pandemic. That is the real issue looking ahead. As economies regain ground some of the debt to GDP panic will go as the flow in the equation improves. But the stock of debt may yet return to be an issue as for example it will block any rise in bond yields for some time yet so we may well see more of this.

Globally, negative-yielding debt climbed to
$17.5 trillion, on a par with all-time highs. This pushed investors into riskier assets as
they searched for yield, which broadened the range of low- or negative-yielding
assets. ( Bank for International Settlements )

What could go wrong?