Sun, 28th May 2017

Anirudh Sethi Report


Archives of “Discount rate” Tag

BOJ on edge after Trump claims devaluation

While Bank of Japan officials see no grounds for Donald Trump’s accusation of currency devaluation, they still worry that the bank’s unique measure to control long-term rates could become the next target as the president continues his rhetorical battles.

“I have no idea what he is saying,” said one baffled BOJ official after learning about the criticism Trump leveled against the central bank. 

 Bond investors seem similarly perturbed. Yields on 10-year Japanese government bonds temporarily rose 0.025 percentage point Thursday, hitting 0.115% — the highest since the BOJ announcement of negative interest rates Jan. 29, 2016. The climb also reflects market anxiety over whether the central bank will continue buying up JGBs at the current pace.

BOJ Gov. Haruhiko Kuroda refuted Trump’s accusation in the Diet on Wednesday, saying Japan’s monetary policy is designed to defeat persistent deflation and not to keep the yen weak. “We discuss monetary policy every time Group of 20 finance ministers and central bankers meet,” he said. “It is understood among other central banks that [Japan] is pursuing monetary easing for price stability.”

In fact, U.S. monetary policy is chiefly responsible for the yen’s depreciation against the dollar. The Federal Reserve in 2015 switched to a tightening mode after keeping interest rates near zero for years, judging quantitative easing to have worked its expansionary magic on the economy. The gap between American and Japanese rates is now the widest it has been in around seven years, encouraging heavier buying of the dollar — the higher-yielding currency — than the yen.

9 Regional Feds Ask For Rate-Hike – Same As Prior To Last December’s Hike

While the probability of a November rate-hike has collapsed to just 8.5% (as Dec holda round 65%) it appears regional Federal Reserves have a very different perspective of when Janet should hike. Nine of the Fed’s 12 regional banks sought a quarter-point increase in the discount rate in September, up from eight in August, based on minutes of their board meetings published by Fed. This is the same number as right before the December hike in 2015.

As Bloomberg reports, The Atlanta Fed joined the calls for an increase in the discount rate, pushing the number of regional banks asking for a hike to its highest since December 2015. That month was the last time the Fed raised the federal funds rate, a separate interest rate that is its primary policy tool. Discount rate votes can be viewed as a signal of whether a bank’s president favors a change in the main rate.

Atlanta joined banks seeking a 1.25% rate. Other banks supporting the hike were Boston, Cleveland, Dallas, Kansas City, Philadelphia, Richmond, St. Louis and San Francisco: minutes

  • Strengthening economy, labor markets seen as fostering gradual return to 2% inflation: minutes

Chicago, Minneapolis, New York wanted no change

  • Economic outlook, below-target inflation seen as supporting need to maintain accommodative policy: minutes

Directors generally said economic activity was expanding at a moderate pace, though reports varied “somewhat” across sectors and regions

Mario Draghi stirs debate on who gains from QE

Mario Draghi said little is known about the varying impacts of the European Central Bank’s extraordinary monetary policy measures on different pockets of the population, hitting back at criticism that central bank stimulus benefits only the rich.

“Little is known to date of the distributional consequences of the unconventional tools we have used, either in respect of their impact or over the medium term”, said the ECB chiefin a speech.

His comments come after former UK chancellor George Osborne said yesterday that the Bank of England’s move to cut rates and buy bonds after the financial crisis “makes the rich richer and makes life difficult for ordinary savers”.

Mr Draghi however said the absence of any action from the world’s central banks would have hurt “the most vulnerable in our society who are disproportionately affected by unemployment”.

He also reiterated his well-worn plea for governments to step up their fiscal support for monetary policy.

Deutsche Bank Explains Why Central Banks Are Stuck

We have spent a lot of time talking about the unintended consequences of accommodative global central banking policies.  Skyrocketing pension liabilities and the numerous corresponding reach for yield/duration trades, which have resulted in several of their own off-shooting market bubbles (in fact we just wrote about how one of the bubbles is bursting just yesterday “P2P Meltdown Continues: LoanDepot’s CDO Collapses Just 10 Months After Issuance”), is just one of the many unintended consequences. 

But, as Deutsche Bank’s European equity strategist, Sebastian Raedler, points out today, even if central banks wanted to steepen the yield curve they likely can’t.  Raedler disputes the common explanation that low bond yields are due to discretionary central bank policies and argues instead that the recent fall in bond yields has been due to sustained weak global growth.  This suggests low bond yields are not principally due to discretionary central bank policies (which could be reversed at will), but to the weakened global growth picture, to which central banks have only responded by making policy more accommodative.  Of course, if Raedler is correct, the question then becomes why continue with accommodative policies if they’re not driving incremental economic growth but clearly creating detrimental asset bubbles?

Raedler argues that global bond yields have fallen with central banking target rates but both have really just followed slowing global economic growth.


Norway keeps interest rates on hold in Sept

Norway has kept its interest rates changed this month, remaining the only major Nordic central bank not to move into negative interest rate territory.

The Norges Bank opted to keep its main deposit rate on hold at 0.5 per cent, in line with analyst forecasts ahead of the decision. It comes despite the central bank saying earlier in the summer that it would likely reduce interest rates barring any major economic shock.

“Our current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead,” said central bank governor Øystein Olsen.

In a statement on Thursday, the central bank said despite inflation running higher in recent months, “there are signs that growth in the Norwegian economy is picking up at a slightly faster pace than projected in June”.

Policymakers added that the next move would likely be down rather than up, leaving the door open to sub-zero rates:

Raghuram Rajan Wants Panel That Decides Interest Rates Set Up Before He Leaves

India should quickly put in place a monetary policy committee (MPC) to institutionalise decision-making on interest rates and keep the focus on controlling inflation, outgoing Reserve Bank of India Governor Raghuram Rajan said on Monday.

 The RBI governor wants to see a committee established before his three-year term ends in September.

The government has yet to appoint a replacement for Rajan, a former International Monetary Fund chief economist whose appointment in 2013 had boosted investor confidence in India’s management of its economy.

 The RBI and the government agreed last year to form a policy-making panel, and New Delhi has been expected to announce the final composition of the committee sometime this year.

“I think this creates an institution which many other countries have adopted, which India was slow to adopt, but which will stabilize expectations about inflation in the future,” Rajan told a conference attended by central bankers and regulators in Indonesia.

 “It is important that this framework is in place. I’m working very hard to get this in place before I leave.”

ECB Keeps Rates Unchanged

As widely expected from the formulaic statement issued by the ECB ahead of Draghi’s press conference, the central bank announced moments ago that it kept all three of its interest rates unchanged as follows:

  • ECB keeps main refinancing rate unchanged at 0.00%.
  • Leaves deposit facility rate unchanged at -0.40%
  • Keeps marginal lending rate unchanged at 0.25%

The ECB’s full statement also confirms that “the monthly asset purchases of €80 billion are intended to run until the end of March 2017 or beyond if necessary and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim” 

At today’s meeting the Governing Council of the ECB decided that 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%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

Regarding non-standard monetary policy measures, the Governing Council confirms that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

Now attention turns to Draghi in 45 minutes where his press conference is expected to give some additional color on how the central bank will address the issue of rapidly disappearing collateral.