Monetary Policy

Understanding the Point of the ECB's Actions

The euro is paring the recovery that began in the middle of the ECB's press conference yesterday. The market reaction was one intuitively expected to broad easing of interest rates and credit conditions. 

The market reversed, and violently so, only after Draghi seemed to rule out further interest rate cuts.  Many investors took this to mean the ECB had gone all in and that monetary policy had reached the end.   We do not expect this interpretation to be sustained. 

Seeking and Getting Approvals, Draghi and the ECB Move Ahead

Draghi delivered.  He managed to get approval for everything.  Rate cuts, acceleration of purchases, including corporate bonds to the purchase program and new long-term repos were announced.   The knee-jerk reaction was favorable.  The euro fell over 1% and peripheral European bonds rallied. 

Wrap Up: Fed and RBA Central Bank Minutes

The RBA minutes were not what I would call a riveting read. It almost verbatim confirms what was announced in the statement of monetary policy.

Last month’s the unemployment rate dropped (although January’s monthly figures show a surprise bump, for some reasons I will discuss further below) and the labour market is looking OK; housing price growth has slowed in Sydney and Melbourne easing concerns about a bubble, and inflation remains subdued. Essentially, no need to cut rates right now, but there seems to be some wiggle room if a cut is needed in coming months.

From Negative Rates to Positive Growth?

The Bank of Japan (BoJ) started quantitative and qualitative monetary easing (QQE) in 2013, committing to achieve 2 percent inflation in two years. Since then, almost three years have passed. However, the target has not been achieved, and it is uncertain when it will be. This is why the BoJ has taken the bold step into the realm of negative interest rates.

So, why did the inflation rate fail to rise as initially expected?

Outnumbered by Unorthodox Monetary Policies

In response to the global crisis, central banks have adopted unorthodox policies.  They expanded their balance sheets and broken the zero bound of interest rates.  Many investors have been critical of the central bank action on principle, but what has changed recently is that market developments have provided fodder for the ineffectiveness in practice.

What if Paying Someone to Borrow Money Doesn't Work?

This winter has been relatively mild in Japan, but at least in financial markets, it is sub-zero. Governor Haruhiko Kuroda of the Bank of Japan (BoJ) announced on 29 January that the BoJ would apply a negative interest rate of minus 0.1 percent to deposits that financial institutions hold at the Bank, starting from 16 February.

When did Negative Interest Rates become a Thing?

In many ways, the world has turned upside down.  It is not just central banks that have set policy rates below zero, but the entire German curve out through eight years have negative yields.  Japan, which has the largest debt burden relative to GDP, has negative yields out through nine years.  The Swiss curve is negative through 15 years.  

RBA: We May, or May Not, Cut Rates

The Reserve Bank of Australia left the benchmark cash rate at 2.0% on Tuesday, summarising the thinking as follows:

“At today’s meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.

Are Japan's Negative Rates Different?

The Bank of Japan surprised investors last week by introducing negative interest rates.  At the World Economic Forum in Davos a couple weeks ago, BOJ Governor Kuroda appeared to deny that such a move was under consideration.  The market's focus, like ours, was on the pace by which it was expanding its balance sheet (JPY80 trillion a year).  The FAQ format may be the most effective way to explain what the BOJ did, why and the implications for investors.

What did the Bank of Japan do? 

The BOJ Goes Negative (Rates) on Excess Reserves

The Bank of Japan surprised the market.  It did not expand its asset purchase plan, which was the focus of many market participants, including ourselves.  Instead, following a rash of disappointing data, the BOJ introduced negative interest rates on some excess reserves and vowed to do more if necessary.