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