Spend! Spend! Spend!

The weekend just passed was one which saw one of the economic dams of our time creak and then look like it had broken. This was due to the announcements coming out of Germany which as regular readers will be aware has a debt brake and had been planning for a fiscal surplus.

Under Germany’s so-called debt brake rule, Berlin is allowed to take on new debt of no more than 0.35% of economic output, unless the country is hit by a natural disaster or other emergencies. ( Reuters)

Actually the economic slow down in 2019 caused by the trade war was pulling it back towards fiscal balance and what it taking place right now would have caused a deficit anyway. But now it seems that the emergency clause above is being activated.

Germany is readying an emergency budget worth more than 150 billion euros ($160 billion) to shore up jobs and businesses at risk from the economic impact of the coronavirus outbreak, the finance minister said on Saturday.

Government sources told Reuters hundreds of billions in additional backing for the private sector would be raised, as Finance Minister Olaf Scholz said a ceiling on new government debt enshrined in the country’s constitution would be suspended due to the exceptional circumstances.

Putting that into context it is around 5% of Germany’s GDP in 2019 and I am stating the numbers like that because we have little idea of current GDP other than the fact there will be a sizeable drop. It then emerged that there was more to the package.

According to senior officials and a draft law seen by Reuters, the package will include a supplementary government budget of 156 billion euros, 100 billion euros for an economic stability fund that can take direct equity stakes in companies, and 100 billion euros in credit to public-sector development bank KfW for loans to struggling businesses.

On top of that, the stability fund will offer 400 billion euros in loan guarantees to secure corporate debt at risk of defaulting, taking the volume of the overall package to more than 750 billion euros.

As you can see we end up with intervention on a grand scale with the total being over 22% of last year’s economic output or GDP. This will lead to quite a change in the national debt dynamics which looked on their way to qualifying under the Stability and Growth Pact or Maastricht rules. This is because it was 61.2% of GDP at the end of the third quarter of last year which now looks a case of so near and so far.

Bond Market

There were times when such an audacious fiscal move would have the bond market creaking and yields rising. In fact the ten-year yield has dropped slightly this morning to -0.37%. Indeed even the thirty-year yield is at -0.01% so Germany is either being paid to borrow or is paying effectively nothing.

This is being driven by the purchases of the ECB or European Central Bank and as the Bundesbank seems not to have updated its pages then by my maths we will be seeing around 30 billion Euros per month of German purchases. Also let me remind you that the risk is not quite what you might think.

This implies that 20% of the asset purchases under the PSPP will continue to be subject to a regime of risk sharing, while 80% of the purchases will be excluded from risk sharing. ( Bundesbank)

The situation gets more complex as we note Isabel Schnabel of the ECB Governing Council put this out on social media over the weekend.

The capital key remains the benchmark for sovereign bond purchases, but flexibility is needed in order to tackle the situation appropriately.

That will be particularly welcomed by Italy as other ECB policy makers try to undo the damage created by the “bond spreads” comment of President Lagarde. Although you may note that most of the risk will be with the Bank of Italy.

Also as a German she did a bit of cheer leading for her home country.

The success of our measures hinges on what happens in fiscal policy. This is a European issue which needs a European solution. No country can be indifferent to what happens in another European country – not only because of solidarity, but also for economic reasons.

Some might think she has quite a cheek on the indifference point as that is exactly how countries like Greece described Germany. Still I also think the ECB has plenty of tools but maybe not from the same perspective.

The ECB is in the comfortable position of having a large set of tools, none of which has been used to its full extent

QE

It was only last Thursday that I was pointing out that I expected QE to go even more viral and last night it arrived at what is in geographical terms one of the more isolated countries.

The Monetary Policy Committee (MPC) has decided to implement a Large Scale Asset Purchase programme (LSAP) of New Zealand government bonds……..The Committee has decided to implement a LSAP programme of New Zealand government bonds. The programme will purchase up to $30 billion of New Zealand government bonds, across a range of maturities, in the secondary market over the next 12 months. The programme aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low.

You can almost hear the cries of “The Precious! The Precious!”

Heightened risk aversion has caused a rise in interest rates on long-term New Zealand government bonds and the cost of bank funding.

Which follows on from this last week.

“To support credit availability, the Bank has decided to delay the start date of increased capital requirements for banks by 12 months – to 1 July 2021. Should conditions warrant it next year, the Reserve Bank will consider whether further delays are necessary.”

This reminds me of one of my themes from back in the day that bank capital requirement changes were delayed almost hoping for something to turn up. Albeit of course they had no idea a pandemic would occur.

Let us move on noting for reference purposes that the ten-year All Black yield is 1.46%.

The US

There are some extraordinary numbers on the way here according to CNBC.

Administration statements over the past few days point to something of the order of $2 trillion in economic juice. By contrast, then-President Barack Obama ushered an $831 billion package through during the financial crisis.

Indeed they just keep coming.

That type of fiscal burden comes as the government already has chalked up $624.5 billion in red ink through just the first five months of the fiscal year, which started in October. That spending pace extrapolated through the full fiscal year would lead to a $1.5 trillion deficit, and that’s aside from any of the spending to combat the corona virus.

At the moment we know something is coming but not the exact size as debate is ongoing in Congress but we can set some benchmarks.

A $2 trillion deficit, which seems conservative given the current scenario, would push deficit to GDP to 9.4%. A $3 trillion shortfall, which seems like not much of a stretch, would take the level to 14%.

Comment

The headline today for those unaware was from Viv Nicholson back in the day after her husband had won the pools. But we see something of a torrent of fiscal action on its way oiled by an extraordinary amount of sovereign bond buying by central banks. For example the Bank of England will buy an extra £5.1 billion today in addition to its ongoing replacement of its holdings of a matured bond.

On the other side of the coin is the scale of the economic contraction ahead. Below are the numbers for the German IFO which we can compare with the fiscal response above albeit that I suggest we treat them as a broad brush.

“If the economy comes to a standstill for two months, costs can range from 255 to 495 billion euros, depending on the scenario. Economic output then shrinks by 7.2 to 11.2 percentage points a year, ”says Fuest. In the best scenario, it is assumed that economic output will drop to 59.6 percent for two months, recover to 79.8 percent in the third month and finally reach 100 percent again in the fourth month. “With three months of partial closure, the costs already reach 354 to 729 billion euros, which is a 10.0 to 20.6 percentage point loss in growth,” says Fuest.

Podcast

 

 

The Reserve Banks of India and New Zealand press the panic button

This morning brings to mind the famous poem from Rudyard Kipling.

Oh, East is East, and West is West, and never the twain shall meet,
Till Earth and Sky stand presently at God’s great Judgment seat;
But there is neither East nor West, Border, nor Breed, nor Birth,
When two strong men stand face to face, though they come from the ends of the earth!

Whilst we in the west like to think we are still in charge of events the economic axis of the world is plainly shifting eastwards. This has today shifted towards central bank policy because the western ones have fired so much of their ammunition and now find that events are running ahead of them. Whereas if we head east we see a barrage of action.

India

Regular readers will know I have been following closely the moves of the Reserve Bank of India this year. Indeed those who follow me will know I challenged Bloomberg a couple of months ago when (breathtakingly) they put it as a central bank unlikely to cut interest-rates. Whereas here is this morning’s RBI statement.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to:

  • reduce the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75 per cent to 5.40 per cent with immediate effect.
  • The MPC also decided to maintain the accommodative stance of monetary policy.

There are various issues here beyond this being yet another RBI interest-rate cut which is the fourth this year. Then we note that it was of 0.35%! How on earth did they get to that? Some plainly wanted 0.5% but could not get it and compromised. Thus we are very near to one of the central bank group think insanities of our time which is that a 0.1% change in interest-rates is significant, as they have plainly added 0.1% to the usual 0.25%. Then as we have followed this we see that the vote for easing was unanimous ( albeit with disagreement over the size of the cut), which is a change. In the previous moves we have seen dissent to the interest-rate cuts whereas now not only is this latest cut voted for we get a hint of more from “maintain the accommodative stance.”

We have to wait to the bottom of the statement to get to an explanation of the reasoning.

The MPC notes that inflation is currently projected to remain within the target over a 12-month ahead horizon. Since the last policy, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish.

I think they mean policy meeting. But as we mull this we note that it seems to come from an alternative reality to their GDP forecasts. Also if you are poor you are likely to be rather less keen on an inflation rise as this is happening.

 First, the uptick in food inflation may be sustained by price pressures in vegetables and pulses as more recent data suggest.

New Zealand

Even earlier today the Reserve Bank of New Zealand advanced with all the aggression of an All Black number 8.

The Official Cash Rate (OCR) is reduced to 1.0 percent. The Monetary Policy Committee agreed that a lower OCR is necessary to continue to meet its employment and inflation objectives.

In itself a 1% interest-rate is no shock but the size of the move moves me towards my whiff of panic headline so let me give their explanation from the RBNZ.

The members debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now. The Committee noted both options were consistent with the forward path in the projections. The Committee reached a consensus to cut the OCR by 50 basis points to 1.0 percent. They agreed that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives.

How could both options be consistent with the forward path? After all they then call it a “larger monetary stimulus” in a clear contradiction.

We do see something familiar as there is a section which is the sort of thing that used to be used as an explanation for interest-rate rises.

Employment is around its maximum sustainable level…….Recent data recording improved employment and wage growth is welcome.

In fact things can only get better.

In New Zealand, low interest rates and increased government spending will support a pick-up in demand over the coming year. Business investment is expected to rise given low interest rates and some ongoing capacity constraints.

This is all a little curious as we see that they are plainly afraid of something. Perhaps it is house price falls.

The outlook for household spending was discussed with regard to the assumed dampening impact of soft house price inflation. Some members noted lower mortgage rates could contribute to a stronger pick-up in house price inflation,

You may note that “some members” are pretty explicitly calling for more house price inflation.

What central bankers never seem to acknowledge is their role in the formation of this.

The Committee noted that low business confidence had dampened business investment in 2018 and had remained weak in mid-2019.

What I mean is the psychological impact of low and indeed ever lower interest-rates on confidence. As we discuss so often the credit crunch changed economic reality and like generals central banks are open to the criticism that they are fighting the last war rather than the current one. An example is below.

The members noted that estimates of the neutral level of interest rates have continued to decline and this was consistent with generally lower interest rates over time.

I find the Kiwi move particularly significant as it is geographically about as isolated as you can get and yet it cannot escape the black hole sucking us all lower. For example like so many central banks it is worried that it is losing what influence it had.

The Committee agreed to continue to monitor and assess the impacts of monetary policy, including the transmission through to retail interest rates.

Bank of Thailand

And there there were three as the Bank of Thailand had the genesis of an idea.

I will follow you will you follow me

Although this time not everyone was onboard.

The Committee voted 5 to 2 to cut the policy rate by 0.25 percentage point from 1.75 to 1.50 percent, effective immediately. Two members voted to maintain the policy rate at 1.75 percent.

The driver here is the slow down in trade in the Pacific which we looked at last week.

In deliberating their policy decision, the Committee assessed that the Thai economy would expand at a lower rate than previously assessed due to a contraction in merchandise exports, which started to affect domestic demand.

Also it was only Monday I pointed out that nobody wants a strong currency these days.

With regard to exchange rates, the Committee expressed
concerns over the baht appreciation against trading partner currencies, which might affect the
economy to a larger degree amid intensifying trade tensions.

Comment

We have found that just like water interest-rates head downhill these days. There have been somewhere around 750 interest-rate cuts and of course we expect more. The three today will be followed by others as we note that the balance has shifted eastwards. This is for two main reasons. The trade slow down is hitting the Pacific region harder than elsewhere and because they can. Mostly they have higher interest-rates ( for now anyway) so there is some scope to cut.

Of course if the interest-rate cuts were really a game changer then we would not be where we are would we?

The Investing Channel

 

 

The trend towards ever lower interest-rates continues but what about bond yields?

A clear feature of the credit crunch world has been lower interest-rates and lower bond yields. This has come in two phases where the first was badged usually as an emergency response to the credit crunches initial impact. However as I warned back then central banks had no real exit plan from such measures and we then found that the emergency had apparently got worse as so many central banks cuts again. So if you like we went from ZIRP ( Zero Interest-Rate Policy) to NIRP ( N is Negative) . Along the way it is easy to forget now that the ECB did in fact raise interest-rates twice but the Euro area crisis saw it cut them to -0.4% and to deployed over a trillion Euros of QE bond buying so far. In the UK Bank of England Governor Mark Carney also retreated with his tail between his legs after a couple of years or so of Forward Guidance about higher interest-rates which turned out to be anything but as he later cut them to 0.25%!

Reserve Bank of New Zealand

Yesterday evening the Kiwis again joined the party.

The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 1.75 percent.

I have a theory that the RBNZ regularly cuts interest-rates when the All Blacks lose at rugby union and on that subject congratulations to Ireland on finally breaking their duck. Moving back to interest-rates that makes 40 central banks ( h/t @moved_average ) who have eased policy in 2016 so far which poses a question over 8 years into the credit crunch don’t you think? Central banks used to raise interest-rates when they claimed a recovery was developing.

Also we can learn a fair bit about the modern central bank from looking at the explanatory statement from the RBNZ.

Significant surplus capacity exists across the global economy despite improved economic indicators in some countries.

Perhaps only the Governor can tell us whether that psychobabble is good or bad! Anyway central banks used to cut interest-rates if the economy is either weak now or expected to be so let’s take a look.

GDP grew by 3.6 percent in the year to the June 2016 quarter, and near-term indicators suggest this pace of growth is likely to continue. Annual GDP growth is forecast to average around 3.8 percent over the next year. This strength has been a feature of the Bank’s projections for some time……….. As GDP is forecast to grow at a faster rate than the economy’s productive capacity, the output gap is projected to rise, contributing to inflationary pressure.

Oh well perhaps not. Also there is another (space) oddity if we look at a cut in interest-rates.

The combination of high population growth, low mortgage rates, and a shortage of housing in Auckland has continued to exert upward pressure on house prices…….Outside of Auckland and Canterbury, house price inflation reached a 10-year high in July, but has fallen slightly since.

Ah yes so a cut in interest-rates will help? Oh hang on as we observe this.

Mortgage rates remain around record lows

If we look at the chart we see that it is no surprise that house price inflation has slowed in Auckland because it want over 25% per annum. For some reason ( perhaps someone familiar with NZ can explain) Canterbury saw over 25% around 3 years ago. However the rest of New Zealand has seen a rise to around 10% per annum. Many would call this quite a boom and a central bank would raise interest-rates. Of course these days we are promised policies from long enough in the past that most will have forgotten they were failures back then.

This follows the announcement of further tightening of loan-to-value ratio restrictions in July 2016.

Also with the New Zealand economy growing so strongly it is hard ot avoid the feeling of beggar thy neighbour about this.

A decline in the exchange rate is needed.

The inflation argument is not so strong even for those who believe that 2% is better than 0%. Added to house prices we see this.

Annual inflation is expected to rise from the December quarter,

One area that is awkward for the central bank is this.

 On an annual basis, the net inflow of working-age migrants rose to a new peak of around 60,000 in September

Of course establishment s everywhere tell us how fantastic this will be for economic growth which makes the rate cut even odder. But we see that it will have ch-ch-changes on New Zealand that elsewhere have contributed to not quite the nirvana promised. It is hard as a Londoner not to have a wry smile at this because both socially and in business you meet so many Kiwis some who are here for a while and some end up staying. It is however of course an urban myth that they all live in one camper van in Kensington! But if the mainstream media finally gets something right in 2016 New Zealand may be about to see a flow of American immigration as well.

The RBNZ does not give us GDP per head which would be interesting to see. We do however get something that as far as I know is unique in the central banking world.

We assume that over the medium term the price of whole milk powder will tend towards USD 3,000 per tonne, and that the Dubai oil price will continue to gradually increase to around USD 60 per barrel.

Firstly you get the wholesale milk price as you note it is provided before the crude oil price!

A Challenge to the central bankers

The RBNZ kindly gave us the central bankers view of what happens next.

Policy rates are at record lows across
most advanced economies and are expected to remain stimulatory over coming years. In 2016, quantitative easing by central banks has been at its highest level since the global financial crisis. The degree of unconventional monetary policy is unlikely to increase further.

Of course Forward Guidance from central bankers has been anything but that! Also whilst they may well continue to reduce official interest-rates it looks to me as if there will be trouble elsewhere. This is because inflation looks set to rise and its impact on real or inflation adjusted bond yields. There was an element of this in the rise in the US 30 year bond yield that I pointed out yesterday after Donald Trump was elected.

Putting it another way the chart of inflation expectations below is revealing. However take care as these things are very broad brush as in useful for trends but very inaccurate in my opinion.

That starts to make current bond yields look a bit thin doesn’t it?

Comment

Today I have been looking at two opposite forces as the central banking army continues its advance but faces more potential guerilla style opposition. We do not yet know how much inflation will pick-up overall but we do know that unless the oil price falls heavily it will do so. We also know that in some areas we are seeing hints of commodity prices rising again as for example Dr.Copper has been on the move. in response bond yields are rising today and as summer has moved into autumn we have been seeing this overall. For example the ten-year bund yield in Germany is now 0.28% as I type this. This is simultaneously giddy heights compared to recently as well as still very low!

So a clash is coming as I believe that central banks such as the ECB are happy for yields to rise now so they can act again later and claim success. The problem is two-fold. If it is so good why do we always need more and secondly how does this work with rising inflation trends?

 

The house price bubbles of 2015 continue to rage

One of the features of the era of extraordinary monetary policy and Quantitative Easing in which we now live is that there is considerable doubt about the results. Regular readers will know that I have been amongst the doubters or in Dune terms heretics on this issue since 2010. The latest theoretical move is that is reduces the velocity of money in a brake on itself. However one clear feature of the era has been the boom in asset prices with many equity markets rising but also house prices getting an upwards push too. It is the latter that I intend to look at today with the theme song of West Ham United playing in the back ground.

I’m forever blowing bubbles
Pretty bubbles in the air
They fly so high, nearly reach the sky
Then like my dreams they fade and die

Perhaps some central bankers might like it as a ringtone.

New Zealand

If we go south and skip the land down under we can in a nod to the upcoming Rugby World Cup take a look at New Zealand and Auckland in particular. From the Reserve Bank of New Zealand or RBNZ.

At present, house price inflation is much higher in Auckland than in the rest of the country, reflecting stronger population pressures and constrained housing supply (figure 4.10).House price inflation is beginning to increase in some other areas, such as Hamilton and Tauranga.

The chart mentioned shows that annual house price inflation in Auckland is at 25%. Interestingly considering what is going on in other parts of the world there has been considerable migration and the RBNZ blames that for the price rises conveniently skipping over this bit.

Since the beginning of the year, two-year fixed mortgage rates have declined by more than 1 percentage point, with 0.7 percentage points of this fall occurring since the June Statement.

Why are they falling? Well another part of last night’s statement gave us a clue.

The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.75 percent

There has been a series of interest-rate cuts from the RBNZ in 2015 and in a warning for both the US Federal Reserve and the Bank of England they follow rises in 2014. Officially the cavalry is on its way.

Policy measures announced in Budget 2015 and restrictions on high loan-to-value ratio lending to investors in Auckland are expected to help dampen demand for existing houses.

However in reality I think that the outlook for first time buyers in Auckland will be all black for a while yet as macroprudential policies were abandoned in the past and that abandonment was not due to their success!

You could say that the Kiwis in Auckland went a long way to create a mirror image of the house price boom and bubble of London.

Sweden

The Riksbank in Sweden has become a familiar theme on here as it mimics Agent Smith from the Matrix series of films crying “More! More!”. In specific terms that represents an interest-rate of -0.35% and an ever-increasing volume of Quantitative Easing as I discussed back on the 4th of August. This has spilled over into the housing market. From Sweden Statistics.

Increasing prices were reported in 21 out of 21 counties between the two last three-month periods….Real estate prices for one- or two-dwelling buildings increased by 4 percent during the last three-month period June – August 2015, compared to the previous period March – May 2015.

That is motoring by anybody standards and in Fleetwood Mac terms is “everywhere” with some more bubbilicious than others.

The largest increase was in Gotland County at 11 percent, followed by Västernorrland at 8 percent.

If we step back for a little more perspective we see this.

Prices increased by almost 10 percent on an annual basis during the last three-month period June – August 2015, compared to the same period last year…..Increasing prices were reported in all counties on a yearly basis.

For those of you wondering what this means in actual prices.

The average price for one- or two-dwelling buildings during the period June – August 2015 was more than SEK 2.5 million.

Actually it is 2,566,000 Swedish Krona.

Again macroprudential policy is in play so that the authorities can claim that they are “doing something”. However as we note that on the same standards as the UK the Swedish consumer inflation is 0.6%, so house prices are increasing at a rate some 9.4% higher than that.

The UK

The UK housing market turned just after the Bank of England pushed the accelerator with its Funding for (Mortgage) Lending Scheme in July 2012. Today the Halifax building society data suggests that the boom is ongoing.

House prices in the latest three months (June-August) were 3.0% higher than in the preceding three months.

That is not far off that of Sweden! So let us look at the annual numbers.

Prices in the three months to August were 9.0% higher than in the same three months a year earlier.

These rise came with a fair degree of bombast.

The underlying pace of house price growth is strong. The shortage of secondhand properties for sale on the market is resulting in upward pressure on house prices. At the same time, economic recovery, real earnings growth and very low mortgage rates are supporting housing demand. Strengthening demand and highly constrained supply are likely to mean that house price growth continues to be robust in the short-term.

The average price according to the Halifax was £204,674. Or in Swedish terms some 2.64 million Krona which seems a rather similar number doesn’t it? Of course there are plenty of caveats in such a comparison but it is intriguing.

In terms of comparing to earnings then the Halifax calculates that the average house price to earnings ratio has risen to 5.26. That is in spite of the fact that the earnings figure of male full-time employees is upwardly biased compared to the overall population.

There are various surveys on the UK housing market each with their own flaws but I note that the Halifax data has received some backing form the Royal Institute of Chartered Surveyors this morning.

The RICS price indicator reached a 15-month high in August, with a net balance of 53% more respondents reporting price-rises, and firm-growth being seen across all areas of the UK.

Further analysis, using Office for National Statistics’ data as the comparator, indicates that prices now look likely to rise in the region of 6% over the course of 2015, compared with 3% predicted at the beginning of the year.

Also one area where conditions have been icy cold seems to be on the move a bit like the football team.

The strongest price growth is forecast in Northern Ireland, where prices are now anticipated to rise by 11% throughout 2015.

A Space Oddity

I have not forgotten that just down the road from the area that uses the face of David Bowie for its currency ( the £10 note)  something unusual may be happening. It was only yesterday that I reported troubles at the mega development in Nine Elms which we wait to see is prescient or a special case.

Another way of looking at London as a special case can be found here. From the London Evening Standard.

Deloitte is to introduce a bargaining tool to attract young talent to join the company — help to move into the former athletes’ village in east London.

Comment

One area where central banking toolkits are not “maxxed out” is in their ability to raise house prices as today’s data from 3 parts of the world indicates. We see past moves from the Bank of England still having an effect and current ones from the Riksbank of Sweden. We also see the RBNZ rushing to catch up on the lower interest-rate party on the other side of the globe.

However whilst central bankers love to trumpet wealth effects their trumpeting is of nowhere near the skill of whoever transformed the song Cheerleader. But the lyrics do apply to central banking attitudes to house prices.

Oh, I think that I’ve found myself a cheerleader
She is always right there when I need her
Oh, I think that I’ve found myself a cheerleader
She is always right there when I need her.

The problem is that the “wealth effects” trumpeted by central bankers look awfully like inflation to first time buyers as we see another front in the war of the generations.

What are savers supposed to do in a world of continual interest-rate cuts?

Early this morning saw yet another official interest-rate cut from a central bank. If we skip to a world down under we saw this from the Reserve Bank of Australia.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.25 per cent, effective 4 February 2015.

So even Australia which has benefited from the resources based boom has joined the club which reduces interest-rates to all-time lows. I doubt it will be their last move in what is also a familiar theme and trend of these times. Also I note that it is not just short-term official interest rates which have gone down.

Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns reaching new all-time lows over recent months……. overall financing costs for creditworthy borrowers remain remarkably low.

This morning the ten-year bond yield in Australia has fallen to a record low of 2.36% as a bass line is added to the drumbeat. One of the issues here is that it is as we have discussed before become something of a South China Territories but even this has only protected it from the cold winds of interest-rate cuts for a period.

What about Canada?

In what is looking like something of a post colonial theme it was only yesterday that I was discussing the recent interest-rate cut in Canada.

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent.

In another development the interest-rate which comes from a low-level of only 1% was in spite of the fact that the official forecast was for growth.

The oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada in recent quarters.

So even a relatively strong economy-so far anyway- only had an interest-rate peak of 1%?

Sweden

A new tactic in the interest-rate elimination wars came from the Riksbank of Sweden last year.

The Board is cutting the repo rate by 0.25 percentage points to zero per cent, and making a significant downward revision to the repo-rate path.

So we saw the Riksbank literally begin a Zero Interest-Rate Policy or ZIRP as its rate was cut to 0% but take a look at the rationale!

In Sweden, economic activity is continuing to improve, primarily driven by good growth in household consumption and housing investment……….. The labour market will continue to strengthen in the years ahead and there will be a clear fall in unemployment.

You are permitted an Eh? At this point. Some improving economic activity combined with an improving labour market makes a case for an interest-rate cut? It used to be the foundations for an interest-rate rise as savers feel a chill in their bones at the implications of this.

New Zealand

If we continual the post colonial link we see that there was a case for another interest-rate rise in New Zealand.

Annual economic growth in New Zealand is above 3 percent, supported by rising construction activity and household incomes. The housing market is showing signs of picking up, particularly in Auckland.

But it did not happen partly because of all the interest-rate cuts elsewhere and fears of a currency appreciation. This of course begs the question of when an interest-rate rise can be made these days?

Negative interest-rates

These are increasing prevalent especially around the Euro area as linked economies try not to be affected by its travails and groundwash. I have analysed the way that the Swiss National Bank planned to cut to -0.25% and ended up cutting to-0.75% as the former proved insufficient. Next came Denmark’s Nationalbanken which learned nothing from Switzerland and ended up pretty much copy-catting it as it did this.

Effective from 30 January 2015, Danmarks Nationalbank’s interest rate on certificates of deposit is reduced by 0.15 percentage point to -0.50 per cent

At the same time we have seen the development and spread of negative bond yields which has been driven at least partly by negative official rates. Banks have been trying to avoid the negative rates at the central bank and so they have bought short-dated bonds instead which has often pushed yields negative there too. Danish and Swiss yields are negative quite a long way up their yield curves which leaves a saver with fewer and fewer alternatives.

Also so far I have not pointed out that the European Central Bank went over to the dark side a while ago and has an official interest-rate of -0.2%. It also now has a litany of countries with negative bond yields and some of these are no longer so short-term as in Germany even the five-year maturity is negative.

What about the UK?

We do not have negative interest-rates but we have had an “emergency” Base Rate of 0.5% for what feels like “forever,ever,ever” as Taylor Swift put it but is in fact since 2008. What we have had is downwards pressure on savings rates from the policies of the Bank of England as it has operated several implicit bank bailout policies. Whilst the largest policy was the £375 billion of QE (Quantitative Easing) it was the Funding for Lending Scheme which provided banks with cheap funding reducing their reliance on savers to provide them with liquidity and cash. So from the summer of 2012 even more downwards pressure was applied to savings rates as we are reminded of the words of the hapless Bank of England Deputy Governor Charlie Bean. From Channel 4.

I think it needs to be said that savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.

In a move that makes him now seem a right Charlie he offered hope for the future and please remember this was September 2010!

It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels but there will be times in the future as there have been times in the past when they will be doing very well out of the fact that interest rates are at a relatively high level and I think that’s something that savers should bear in mind.

Savers may well be wondering when the next roundabout is?! By contrast Mr.Bean did not have to dip into his pension which rose and rose to an index-linked £119,200 per annum.

What about UK savings rates?

Swanlow Park have produced some annual averages which sing along to Alicia Keys.

I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

I keep on
Fallin’

In 2008 they calculated the average rate as 5.09%, these following the Base Rate cuts and we saw around 2.8% in 2010-12. But following the Funding for (Mortgage) Lending Scheme we saw 1.75% in 2013 and 1.48% in 2014 as the new push from the Bank of England impacted on savers one more time. Indeed savers might quite reasonably think that this from Status Quo applies.

Again again again again, again again again again

Or of course there is.

Down down deeper and down
Down down deeper and down
Get down deeper and down

Comment

There are several issues to consider here of which the first is simple fairness. How long  in a democracy can one-sided policies continue which benefit borrowers at the expense of savers? However there is an economic impact too which is that such Keynesian style policies have a time limit i.e they change things for a period and by the time that is up then the situation is supposed to be different as in better. The catch is that at best we are now singing along with Muse.

Time is running out

Actually it is my opinion that it ran out some time ago and central banks are going back to the same play-book because they combine desperation with a lack of imagination. But whilst some (US Federal Reserve and the Bank of England) tease us with talk of interest-rate rises none have actually arrived and I note that the ECB tried it and now has negative interest-rates. So savers continue to be in the chill of what feels like a nuclear winter as I wonder if it will be followed by even more fall-out? After all the current disinflationary trends allow central bankers to talk of rising real interest-rates for a while at least.