Thailand, Singapore and Australia show we are still heading for lower interest-rates

Today has opened with something that has become rather familiar in the credit crunch era. So familiar in fact it is the 736th version of this,as the Bank of Thailand joined the party.

The Committee voted unanimously to cut the policy rate by 0.25 percentage point from 1.25 to 1.00 percent effective immediately.

Actually they gave thrown something of what in baseball is called a curve ball at the end of last week when they released this.

In December2018, the Thai economy continued to expand from the previous month. Private
consumption indicators suggested expansion in all spending categories, albeit at a slower pace due partly
to the high base effect. Manufacturing production and private investment indicators suggested continued
expansion. The number of foreign tourists continued to increase. Nonetheless, the value of merchandise
exports and public spending contracted, particularly in capital expenditure.

We find central banks regularly doing this where rate cuts come with explanations that things are going well! As an aside there may be a hint in there that the Japanese manufacturers who relocated to Thailand may be doing okay. However this morning the Bank of Thailand gave a rather different picture and emphasis.

In deliberating their policy decision, the Committee assessed that the Thai economy would
expand at a much lower rate in 2020 than the previous forecast and much further below its
potential due to the coronavirus outbreak, the delayed enactment of the Annual Budget
Expenditure Act, and the drought.

If we pick our way through this we see that the Corona Virus is having an impact.

Tourist figures were expected to grow at a
much lower rate than the previous forecast.

This adds to the ongoing drought which added to the issues in the Pacific economy we have looked at before. Indeed this bit smacks of a bit of panic.

Financial stability became more vulnerable due to the prospect of economic slowdown. In this situation, there was an urgent need to coordinate monetary and fiscal measures.

It feels that inflation will now be below target both this year and next which is interesting if we note what the target is.

The MPC and the Minister of Finance have mutually reviewed the appropriate inflation target and hence agreed to propose headline inflation within the range of 1-3 percent as the new monetary policy target.

Let me give them some credit here because they have trimmed their target as they can see we are in a lower inflation world.

These changes include (1) technological advancements, which reduce costs of production and boost supply of goods and services; (2) an expansion of e-commerce, which foster greater price competition, thereby reducing entrepreneurs’ pricing power; and (3) the aging society, which will contribute to the decline in overall demand for goods and services going forward, since the elderly, which normally receive lower income after retirement, constitute a larger share of the entire population.

Other central banks could and in my opinion should follow this lead. The only caveat I would have is to point 3 where there will be an impact from health care inflation which tends to be higher than average.

Singapore

Here they decided on different tactics and the emphasis is mine.

Singapore, 5 February 2020… In response to media queries, the Monetary Authority of Singapore (MAS) said that its monetary policy stance remains unchanged. However, there is sufficient room within the policy band to accommodate an easing of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) in line with the weakening of economic conditions as a result of the outbreak of the 2019 novel coronavirus (2019-nCoV) in China and other countries, including Singapore.

As you can see they would like a lower exchange-rate although the catch with that is someone else’s has to rise hence the use of the phrase “beggar thy neighbour” to describe such policies.

Foreign Exchange Swaps

These were features of the credit crunch era as central banks made sure they could get their equivalent of cold hard cash if they needed it. Except in contrast to official statements we see that this emergency measure seems not to have faded away. From November.

Singapore, 29 November 2019…The Monetary Authority of Singapore (MAS) today announced the renewal of the Bilateral Local Currency Swap Arrangement with the Bank of Japan (BOJ) for another three years.

 

2     The agreement was established in November 2016 to enable the two central banks to exchange local currencies with each other of up to SGD 15 billion or JPY 1.1 trillion.

So the MAS has concerns about getting hold of Yen presumably fearing a situation where the Japanese repatriate their large foreign investments.

In the same month there was a renewal of the deal with Indonesia which started conventionally.

A local currency bilateral swap agreement that allows for the exchange of local currencies between the two central banks of up to SGD 9.5 billion or IDR 100 trillion (about USD 7 billion equivalent);

But had quite a chaser?

A bilateral repo agreement of USD 3 billion that allows for repurchase transactions between the two central banks to obtain USD cash using G3 Government Bonds [1] as collateral.

Have we seen any examples of US Dollar shortages? But if we move from being tongue in cheek back to serious there is quite a definition of what I will call super prime collateral here so let me spell it out.

US Treasuries, Japanese Government Bonds and German Government Bonds.

Actually that begs loads of question but let me for now stay with today’s interest-rate theme by pointing out this is one of the reasons why so much of the German government bond market is at negative yields. The benchmark ten year is at -0.4% because foreign demand for high quality capital is added to what has been net negative supply with the ECB buying whilst Germany is running a surplus.

Australia

The Reserve Bank of Australia ( RBA ) did not act yesterday mostly due to this.

With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting.

Having cut to 0.75% last year it had made its move, or perhaps not all of it.

The Board will continue to monitor developments carefully, including in the labour market. It remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Comment

Perhaps the most revealing statement came from the RBA.

Due to both global and domestic factors, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.

Let us look at the global factors.

The outlook for the global economy remains reasonable. There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected to be a little stronger this year and next than it was last year

So not really that one but there is the domestic issue.

The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years.

So if they were the Beatles they would be singing this.

I have to admit it’s getting better (Better)
It’s getting better
Since you’ve been mine

Except that we apparently need low interest-rates for years ahead. So I think we can be pretty sure that the road ahead should they actually think things will slow down will involve even more interest-rate cuts. For all the talk of things like r* the reality is that we are still in a scenario where interest-rates are singing along with Alicia Keys.

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

 

 

 

 

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