Here are some special articles specifically about Central Banks and what they are doing. We want to point out that we will try to reserve a "centrist" point of view in our pointing out of the articles. Again, they are designed to enlighten the readers on the current events surrounding these institutions.
*As of March 10, 2016 the ECB rate is now -0.4 (from -0.3)
April 6, 2017 from russia-insider.com
"Yuan Clearing Bank Opens in Moscow as Russia, China Dump Dollar in Bilateral Trade"
Russia and China accelerate local currency cooperation
Moscow and Beijing took another step towards de-dollarization with the announcement of the opening of a renminbi clearing bank in Russia on Wednesday.
Local currency transactions were first used in both countries' border regions. Today, more and more Chinese and Russian financial institutes and enterprises are using local currencies to invest and settle accounts, as the yuan-ruble trade platform is becoming more established and the transaction network is expanding amid deepening China-Russia economic and financial cooperation.
The yuan clearing bank in Moscow will greatly accelerate trade in local currencies:
Industrial and Commercial Bank of China (ICBC) officially started operating as a Chinese renminbi (CNY) clearing bank in Russia Wednesday, a move set to facilitate the use of the currency and cooperation in various fields between the two countries.
"Under the guidance of the governments and central banks of both countries, ICBC's Moscow branch will effectively fulfill its responsibility and obligation as a renminbi clearing bank by taking further advantage of its leading edge in renminbi businesses, providing customers with safe, high quality and convenient clearing services," said Hu Hao, ICBC's deputy governor, at the opening ceremony.
"Financial regulatory authorities of China and Russia have signed a series of major agreements, which marks a new level of financial cooperation," said Dmitry Skobelkin, deputy governor of the Central Bank of the Russian Federation.
"The launching of renminbi clearing services in Russia will further expand local settlement business and promote financial cooperation between the two countries," the official added.
With the continuous deepening of the Russia-China comprehensive strategic partnership of coordination in recent years, the two countries are now starting to enhance local currency cooperation.
At the end of 2015, the Russian central bank announced the inclusion of the renminbi in its national foreign exchange reserves, making it Russia's officially recognized reserve currency.
During Russian President Vladimir Putin's visit to China in June last year, the central banks of the two countries signed a memorandum of cooperation in starting renminbi clearing services in Russia, just three months before ICBC's Moscow branch was appointed by China's central bank as the clearing house for settling renminbi transactions there.
Written by Staff
April 5, 2017 from ft.com
"Czech Central Bank Removes Currency Cap"
The Czech National Bank has removed its upper limit on the koruna after three-and-a-half years in an extraordinary meeting, highlighting how the rise in inflation across the region is prompting change in long-standing central bank policies.
In choppy trading said to be 50 to 100 times the usually tame volumes for this time of day, the koruna climbed on the announcement, with the euro falling under CZK27 for the first time since that lower level was imposed in November 2013. At pixel time, it was at CZK26.72, having traded as low as CZK26.65. That marks a large jump for the typically sleepy koruna, but is far from disorderly, suggesting that the central bank has managed market expectations well.
In a statement, the central bank said it “did not discuss” tweaking interest rates today. But it has made it clear it is prepared to prevent an excessive rally in the currency. “The CNB stands ready to use its instruments to mitigate potential excessive exchange rate fluctuations if needed,” it said.
The central bank initially imposed the koruna limit in an effort to deflect deflation; with interest rates on the floor and no desire to cut them below zero, the central bank was left with few other options. Keeping the currency relatively weak helped to support import prices.
Still, the central bank was widely expected to remove the policy before the middle of the year – around the time that it had initially signalled. Indications that it could plump for the second quarter led some to surmise it could come this week.
Data on surging official reserves had shown that the CNB was fighting an intense battle to keep a lid on the koruna in the face of large speculative inflows. Analysts said that battle had ramped up sharply of late, with the central bank buying around €7.5bn in the last 10 days – a huge sum for a small economy.
“On Wednesday and Thursday last week, the intervention was huge,” said Petr Krpata, an analyst at bank ING. “For the whole of March, it was around €19bn. Huge.” Reserves now stand at around 60 per cent of annual gross domestic product.
Mr Krpata says he thinks the central bank made “a mistake” in committing to holding the floor beyond the first quarter with inflation running above the target level, “but it did the next best thing in exiting as soon as possible afterwards”. He thinks the central bank would allow the euro to fall to around CZK25 from here and adds that many investors seem to be underestimating the pace of potential interest-rate rises from here.
Analysts and investors are now keeping a close eye on the debt market for signs of how hedge funds get out of their bets on the koruna. “The interesting thing now is how the huge speculative positioning is unwound,” said Paul McNamara, an emerging-markets investment director at GAM in London.
Funds have piled into Czech debt in anticipation of the move, but the debt has now dropped substantially. Yields on the country’s two-year debt have climbed by over 0.2 percentage points today, but they still remain in negative territory, at -0.232 per cent. (Yields rise when prices fall.)
Nomura advised its clients to sell the euro with a target of CZK26.15, noting that “it may be a pain trade today, but eventually we should get there.” If that level breaks, the next stop is CZK25.50, it adds. A survey of its clients (see the chart below) shows that investors expect the koruna to climb for now, and back down a little in the coming days.
By: Katie Martin
April 3, 2017 from ft.com
"Central banks cut euro exposure and favour sterling long-term"
Central banks are dumping euros amid concerns over political instability, weak growth and the European Central Bank’s negative interest rate policy — and favour sterling as a long-term, stable alternative.
Despite uncertainty over Brexit — formally triggered last week by prime minister Theresa May — central bankers from around the world see the UK as a safer prospect for their reserve investments than the eurozone, a new poll reveals.
According to a survey published Monday of reserve managers at 80 central banks, who together are responsible for investments worth almost €6trn, the stability of the monetary union is their greatest fear for 2017.
The results — compiled by trade publication Central Banking Publications and the bank HSBC earlier this year — show some respondents have cut their entire exposure to the euro, while others have reduced their holdings of investments denominated in euros to the bare minimum.
More than two-thirds of the 80 central banks had changed their portfolio allocation, while roughly that same amount had changed the duration of their investments.
Developing and emerging-market central banks, some of which are among the world’s biggest reserves holders, were more likely than those from advanced economies to have shifted out of the euro.
The UK’s decision to quit the EU has not affected the popularity of sterling as an investment currency so far, with 71 per cent of respondents saying the attractiveness of the pound was undimmed in the longer term.
While central bankers said they would become more cautious about investing in the pound over the next few years, the survey showed many believe Brexit could provide an opportunity for them to diversify their portfolios further into the future.
Almost 80 per cent of respondents said the election of Donald Trump had not changed their overall view on the US dollar.
Just over a third of the respondents, around half of which were from emerging market central banks, said their concerns over the European single-currency area were based on growing political instability in Europe, which has seen anti-EU parties across the continent secure a larger share of the popular vote in recent years.
The ECB’s negative interest rate policy — intended to spur growth across the eurozone — was identified as another key driver of divestment. The policy, in place since the summer of 2014, has triggered complaints from private banks across Europe, who say it has eaten into their profits. The deposit rate in the eurozone is now minus 0.4 per cent — meaning that lenders in effect pay a levy of that amount on their reserves parked at central banks.
Written by Claire Jones
February 1, 2017 from Philosophy of Metrics by JC Collins
The Trump mandate on “America First” is being misconstrued as an isolationist policy but is in fact the cover for integrating America into the emerging multilateral. This is difficult to see for most because it is hard to reconcile the idea of an isolationist mandate with that of a multilateral mandate. It appears to most that America is dumping the globalist script when in fact the script is in fact the same only the characters and events have changed. The theme remains the same.
This is one of the main reasons why the media is in fact pushing this isolationist script. It prevents Americans from accurately deciphering the shift towards the multilateral. The opposition to the Federal Reserve and the establishment was built up through alternative media to the point where the masses are now clamoring for the changes which in fact were always required in order to make the multilateral transition.
The most obvious point is a changing role for the Federal Reserve. In a multilateral world it will no longer be required to serve the function as an international central bank providing access to a reserve asset. The Fed will be transformed to focus on domestic concerns while the international mandates begin to transition to an institution like the International Monetary Fund and the SDR asset.
In the 2015 post on the Fed I referenced something called the Centennial Monetary Commission which was tasked with defining changes to the Federal Reserve’s roles and responsibilities. This study has now been completed and the recommendations are being made. Some of these recommendations were reviewed in the 2015 post, which is included below.
Of course this will all be sold to the people as what is good for America as the “mismanaged Fed” is straightened out. The mainstream media will play its function as opposition to the Trump administration by rounding out the cognitive dissonance and getting the masses to accept all the changes that are coming.
When it’s all said and done, the new Trump America with renegotiated trade deals, new financial arrangements with international institutions such as the United Nations, and a decreased role for the USD in the world, will be aligned with a new multilateral world. From the moment Trump announced his candidacy I said he would sell this to the American people, and he is, and will continue to do so.
Expect the Trump against the Federal Reserve script to increase in pace and intensity in the coming weeks as major changes are made. I keep saying it’s only a matter of time until the term SDR comes out of Trump’s mouth. It will be sold as what is good for America. Something like Nixon saying America will not be held hostage by international interests when he ended the gold window in 1971. More from the 2015 post:
Sometimes the complexity and level of artisan skill required to engineer the multilateral monetary framework is staggering. The socioeconomic and geopolitical shifting which takes place behind the closed doors of think tanks and international institutions would make for intriguing spy-like novels on par with the tales of John le Carré.
Such stories would be reminiscent of the old movie the House of Rothschild where skullduggery and manipulation were used to increase the sovereign debt of European nations. The leaders and Kings of Europe refused to borrow money from Mayer Rothschild and in turn Napoleon conveniently escaped from exile on the Island of Elba in February of 1815 and began to wage war upon Europe again.
The allies formed the Seventh Coalition to fight against Napoleon and quickly diminished their reserves and loan capacities before finally turning to Mayer Rothschild for additional funding to continue the fight. Once the Rothschild loan was secured Napoleon was defeated at the Battle of Waterloo and the tide of history was changed forever.
The Federal Reserve should be looked upon as the Napoleon of the 20th Century. It was used to fund the growth of the military industrial complex and expand the central banking system all around the world. And like Napoleon, the Federal Reserve performed its function as strategized and will now be modified to fit within the larger macro multilateral framework which it helped create.
The evolution of the Federal Reserve is complicated and would require almost a book length discourse to fully grasp the details and policies which have grown and shaped monetary and fiscal policy both within the United Stated, and throughout the world.
This evolution took a leap forward in March of 1951 when the Fed gained broader independence from the US Treasury, executive branch, and Congress. The Federal Reserve Treasury Accord ended the pressure on the Fed to peg long-term interest rates and minimize accountability to the US Congress.
This evolution of strategy and mandate allowed for the Fed to become the central bank of the world and indirectly set international monetary policy for other countries. Not to mention expand funding for the military industrial complex and leverage both physical and economic influence on foreign countries.
With that being said, the US Congress still has a duty to exercise oversight and can adjust or modernize the Federal Reserve Act when it is appropriate to do so. What exactly would entail appropriate causation can be extremely suggestive of external influence and special interests within the larger international banking community, such as experienced by the leaders of Europe when confronted with the threat of Napoleon.
The Fed is now operating in a vacuum and its mandates are no longer aligned with the domestic interests of the United States. This inevitable discourse between domestic fiscal responsibility and the waning foreign responsibility to those central banks holding vast amounts of USD denominated securities is creating a situation which will need to be addressed sooner rather than later. The inability of the Fed to raise interest rates is based primarily on the negative effect such a move will have on foreign countries. This lack of movement on policy normalization by the Fed could very well act as the catalyst for Federal Reserve reform.
In a recent speech to Congress, Paul H. Kupiec of the American Enterprise Institute stated that it is the responsibility of Congress to re-examine the mandates, powers, and responsibilities of the Federal Reserve. An appropriate revision of Fed legislation would be enacted based on that re-examination.
Kupiec goes on to discuss how the overall structure and strategy of the Fed would need to be addressed within a reasonable time frame. The Centennial Monetary Commission is scheduled to complete a report by December, 2016, on changes to Fed policies and mandates. Kupiec suggests that this time table be shortened while stating that the monetary mandate of the Federal Reserve must be more specific and less open to interpretation.
The interesting thing about Paul H. Kupiec is that he has previously worked on banking and financial market policy for the International Monetary Fund (IMF), Federal Reserve Board itself, the Federal Deposit Insurance Corporation (FDIC), and the Bank for International Settlements.
The BIS is considered the apex of the central banking system which the US funded military industrial complex helped establish around the world. As such, it is the BIS which set the international mandates on monetary reform and multilateral macroprudential policy.
A BIS and IMF affiliated economist and policy maker testifying before Congress on reforming the Federal Reserve Act is tantamount to Mayer Rothschild cutting off military funding to Napoleon during the Battle for Waterloo after the leadership of Europe had been consolidated under his loan mandates and terms.
The interesting part is that the suggestions on reforms to the Federal Reserve Act are strategically similar to what many Americans have been conditioned to demand of the Fed. The engineering of an opposition to the Federal Reserve has been extremely effective. Whether it’s Ron Paul or the Alex Jones network, opposition to the Federal Reserve has been directed and focused on a few key points.
These points were itemized by Paul H. Kupiec, formerly of the IMF and Bank for International Settlements, in his testimony before Congress on July 22, 2015. The points of interests regarding the Federal Reserve Reform Act of 2015 are as follows:
- Requirement for Policy Rules of the Federal Open Market Committee – This point would give the General Accounting Office (GAO) the opportunity to validate FOMC policies and improve the transparency of the Fed process.
- FOMC Membership – This would put an end to favored voting rights within the FOMC as such rights are less important today now that the Fed has completed its initial mandate.
- Stress Test Transparency and Disclosure of Supervisory Correspondence – This would force the Fed to disclose stress test models used to determine and set specific monetary policies and mandates.
- Cost-Benefit Analysis and Review of New Regulations – The Fed has been exempt from regulations that require it to perform cost/benefit analysis of new regulations. This would change under the defined reforms.
- Notification of Intent to Engage in International Standard Setting Bodies – Congress and the public must be made aware of international standard meetings in which the Fed participates, as well as the material implications for the US. (Do not let this reform mislead you into thinking that American sovereignty will be protected. As long as the Congress set has oversight, this reform will ensure that the Fed implements the multilateral mandates as designed. A new cheques and balances maintained by the leveraged politicians.)
- Federal Reserve Special Lending Powers – This reform will prevent the Fed from legally lending to a distressed and potentially insolvent financial firm. This was a big issue during the last financial crisis.
- GAO Audits – Ensures and validates that the FOMC’s policy directive is consistent with the directive policy rule reported to Congress. Most will recall the Ron Paul push to audit the Fed. As long as the Congress is controlled and leveraged by international banking interests, the GAO audits will serve the purpose of the multilateral mandates.
This short list of Federal Reserve policy reforms accurately reflect the Cultural and Socioeconomic Interception (CSI) engineering which has taken place through the alternative media and Tea Party propaganda. (Reference post The First False Flags for a definition of CSI) The fact that these reforms are being promoted and testified before Congress by someone affiliated with the Bank for International Settlements, representing the international banking interests, should give all Americans pause.
Those who have been leading us down the garden path of liberty and conspiracy have failed to both recognize and educate the disorganized masses on the actual methodology of the multilateral transmutation of the international monetary system. Reducing the power and influence of the Federal Reserve fits exactly into the mandates of the multilateral.
The same can be said of the political platform of Donald Trump. The “Make America Great Again” pledge and mantra is the condensed talking point which is based on the depreciation of the dollar. This multilateral depreciation will reduce the cost of US manufactured goods and increase exports. This means higher GDP, reduced debt-to-GDP ratio, and more jobs for Americans.
The multilateral mandates are being sold to Americans through alternative media and establishment opposition. The analysis presented here on POM has been attacked and/or ignored by so many sites which promise the truth. Yet, readers and followers of those sites and personalities have been left more confused and less informed about everything that is taking place internationally.
Long-time readers of POM have been provided a front row seat on the transition from a unipolar USD dominated world to a multilateral SDR denominated world. The fact that so much of the information presented here is trending accurately is a testament to the validity of the analysis.
Who would have thought that the Bank for International Settlements and the Tea Party, Ron Paul, and the Alex Jones network would all want the same thing? Truth is definitely stranger than fiction, and conspiracy theory is not the conspiracy we thought it was at all. – JC
March 10, 2016 from Marketwatch by William Watts
European Central Bank President Mario Draghi and his policy-making compatriots delivered a bigger-than-expected stimulus plan Thursday, but also signaled that policy makers aren’t likely to further cut interest rates—sending a mixed signal to investors.
Markets were initially jolted after the ECB not only cut key interest rates and expanded the size and scope of the bank’s quantitative-easing program, but also announced a new round of cheap (in fact, the ECB could pay banks to take the money), long-term loans for eurozone banks—all part of a bid to reflate an economy that’s flirting dangerously with deflation.
Financial markets reacted favorably—at least at first. European banks soared and the euro tumbled. European stocks SXXP, -1.66% in general and U.S. stock-index futures also legged higher, while European government bond yields, particularly on the periphery, dived.
But the euro soon turned around, rather violently, shooting higher versus the dollar about halfway through Draghi’s news conference. European stocks ended lower and Wall Street also headed south, tracking a drop in oil prices. Here’s what Germany’s DAX DAX, -0.59% did, closing down 2.3% to 9,498.15
That’s not the sort of move you expect from stock investors in the wake of a huge stimulus announcement. So what to make of it all? Here are 6 key takeaways:
Get banks lending
The most interesting wrinkle was the ECB’s decision to launch four rounds of what are known as targeted longer-term refinancing operations, or TLTROs. That’s a mouthful, but essentially these are long-term loans (in this case with a maturity of four years) to banks that are specifically aimed at jump starting lending activity.
The larger a bank’s outstanding loan book, the bigger the loans. Initially, banks will borrow at 0%, but that will drop into negative territory—as low as minus 0.4%— the more the bank lends.
“In other words, the ECB could pay banks to borrow. This is very credit-positive,” said Jennifer Lee, senior economist at BMO Capital Markets in Toronto.
Increasing lending activity is crucial to spurring and, most important to the ECB, reflating the eurozone economy.
The ECB significantly expanded its bond-buying program. The decision to ramp up the size of its monthly purchases to €80 billion ($89.1 billion) from €60 billion wasn’t a huge surprise. Less widely anticipated was the ECB’s decision to expand the eligible assets to include investment-grade, euro-denominated corporate bonds from outside the financial sector.
“This is an extremely aggressive signal, since it shows that the ECB is willing to take on potentially significant credit risk in order to fulfill its mandate to raise inflation to its target,” said Bill Adams, senior international economist at PNC Financial Services Group.
The ECB cut its benchmark lending rate to zero from a paltry 0.05% and, in a more closely watched move, lowered its deposit rate to minus 0.4% from minus 0.3%. The cut in the deposit rate was smaller than some economists had penciled in, but disappointment was partly offset by the refi rate cut and a lowering of the marginal lending rate to 0.25%. The negative deposit rate means banks pay the ECB to park funds overnight at the central bank.
Negative interest rates in Europe and Japan have confounded economists and investors. While designed to fight disinflationary pressures by discouraging money hoarding, many fear negative rates are counterproductive in that they can damage bank profitability and undercut lending activity.
The ECB’s decision to offset TLTROs at potentially negative rates is viewed as an attempt to address that issue:
No more cuts?
Draghi specifically pushed back against talk the ECB and other global central banks are running out of tools, telling reporters that ECB policy makers have shown “that we are not short of ammunition.”
But Draghi also said the ECB doesn’t anticipate a need to cut rates further. While that may sound like typical central-banker-speak after delivering a new round of stimulus, market participants appeared to take it as a signal that rates are near the lower bound, contributing to a sharp reversal by the euro EURUSD, +1.8275% and a selloff in European government bonds, sending yields higher.
Even with Thursday’s expansion, the ECB’s asset-buying plan is still smaller than those undertaken by the Federal Reserve and Bank of England, said Jonathan Loynes, chief European economist at Capital Economics, in a note. “Accordingly, we suspect that the ECB’s work is still not done.”
Low for a long, long time
Not surprising, ECB staff economists lowered their forecasts for both growth and inflation. Of particular note, in their first projection for 2018, they pegged annual inflation at just 1.6%—still well below the ECB’s target of near but just below 2%.
Draghi emphasized that rates are going to remain low for a very long time, but insisted that the eurozone economy isn’t in the grips of deflation. While the inflation rate fell to minus 0.2% in February and is likely to remain negative in coming months due to falling oil prices, it is expected to turn positive by year-end.
Nonetheless, a 1.6% inflation projection for 2018 was viewed as quite dovish.
Central bankers can’t save the world by themselves
Draghi has often emphasized that the ECB, despite his “whatever-it-takes” rhetoric, can’t do all of the heavy lifting. Draghi on Thursday amplified his call for a more aggressive fiscal response, specifically calling for increased infrastructure spending and other measures aimed at boosting productivity.
With the effectiveness of monetary policy “clearly diminishing,” Draghi “threw down the gauntlet to fiscal policy makers today, arguing for infrastructure spending while lowering the ECB’s own growth forecasts,” said Alasdair Cavalla, economist at the Center for Economics and Business Research, a London-based forecasting and analysis firm.
January 29, 2016 from Marketwatch by Joseph Adinolfi
The Bank of Japan is the latest central bank to move its deposit rate into negative territory
became the latest central bank to move its deposit rate into negative territory.
By doing so, the BOJ thrust the theme of monetary-policy divergence—which market strategists pointed to as the main driver behind the dollar’s aggressive rally between the summer of 2014 and early 2015—back into the spotlight.
Negative interest rates are an ultramodern phenomenon; the product of a global financial system still struggling to reinvigorate economic growth in the wake of the global financial crisis.
The era of negative interest rates began in July 2012 when the Denmark National Bank set its deposit rate below zero to protect its economy from an influx of hot money as the eurozone debt crisis escalated.
In June 2014, the European Central Bank became the first major central bank to adopt negative rates when it cut the interest rate on its deposit lending facility below zero. A second cut followed a few months later—then, in December 2015, the ECB cut it again to its current level (minus 0.3%). The Swiss National Bank first set its deposit rate below zero in December 2014. Sweden’s Riksbank cut its deposit rate below zero in February 2015.
At the European Central Bank’s January meeting, ECB President Mario Draghi hinted that the central bank might further loosen monetary policy at its March meeting.
Drag’s monetary-policy intentions aren’t precisely clear, but it wouldn’t be a bad wager to guess that more rate cuts may follow soon, if not other modes of stimulus.
January 29, 2016 from Marketwatch by William Watts
Bank of Japan’s negative rate decision is a mark of ‘desperation’
Move marks ‘capitulation’ over effectiveness of QE: economist
A global stock market rally inspired by the Bank of Japan’s decision to lower a key interest rate below zero was belied by anxiety over how much ammunition the world’s central banks have left to fight off deflation.
“This is an interesting move that looks a lot more like desperation or novelty than it looks like a program meant to make a real difference,” said Robert Brusca, chief economist at FAO Economics.
This is an interesting move that looks a lot more like desperation or novelty than it looks like a program meant to make a real difference.”
Robert Brusca, chief economist at FAO Economics
While the Bank of Japan move is seen as a baby step—only a small proportion of deposits will be affected—it marks a significant shift. The Japanese central bank joins the European Central Bank and the Swiss National Bank, as well as Sweden and Denmark, in going down the negative-rate path. Read: This map shows all the central banks with negative interest rates.
‘Feed on the symbolism’
Kit Juckes, global macro strategist at Société Générale, underlined the moment in a note to clients:
“First of all, forget the details, feed on the symbolism. Germany, Switzerland and Japan, the three great current account powers of the post-Bretton Woods era, whose surpluses have financed the frivolity of baby boomer Anglo-Saxons, are being told in no uncertain terms to stop saving.”
‘Germany, Switzerland and Japan, the three great current account powers of the post-Bretton Woods era, whose surpluses have financed the frivolity of baby boomer Anglo-Saxons, are being told in no uncertain terms to stop saving.’
Kit Juckes, global macro strategist at Société Générale
Whether the strategy works or not is less important than what the decision says about global disinflationary forces, he said, which have forced the central banks to “set off on this path…following a trail of breadcrumbs as they head for the gingerbread house.”
The move comes as the Bank of Japan struggles to keep the country’s economy from slipping back into deflation.
The Japanese yen USDJPY, +0.00% which had strengthened in recent weeks, retreated sharply. Japanese stocks NIK, +2.80% jumped and global equities, including U.S. stocks rallied SPX, +2.48% helping to blunt somewhat a brutal January performance. See: Stocks end sharply higher, but post worst January since 2009.
U.S. stocks and the dollar were boosted by expectations the Bank of Japan move will make it difficult for the Federal Reserve to follow through with more rate increases this year.
Some economists argue that negative interest rates, which stand as low as minus 1.1% in Sweden and minus 0.75% in Switzerland, appear to be having a positive impact. Former Federal Reserve Chairman Ben Bernanke told MarketWatch in January that negative rates should be part of the central bank’s toolbox if the need were to arise in a serious downturn.
Economists Gabriel Stein and Ben May of Oxford Economics argue that negative rates have so far been a “qualified success.”
Where they’ve been implemented, the policy has “probably reduced bank borrowing rates and long-term bond yields,” they said in a note, though they acknowledged it is hard to untangle the effects of negative rates from quantitative easing and other unconventional policy measures.
But others worry that the move underlines a degree of desperation and a sense that the asset purchases at the heart of global quantitative-easing strategies are running up against some important limits.
‘Rock and a hard place’
In the case of the Bank of Japan, the move shows that policy makers realize that a further expansion of its program of 80 trillion yen ($666 billion) a year in government bond purchases would be difficult to execute given the need for banks and other institutions to hold on to some Japanese government bonds for collateral and asset-liability matching purposes, wrote Grant Lewis and Chris Scicluna, economists at Daiwa Capital Markets.
“So, the BOJ seems to have found itself between a rock and a hard place—up its target for JGB purchases and risk missing it, or introduce negative rates, threatening the achievement of even its current JGB purchase program,” they said, in a note.
Instead, the bank is trying to steer the middle ground by introducing a negative interest rate on a small proportion of reserves—”that isn’t really a negative rate at all,” they said, noting that the negative 0.1% rate will apply only to the subsequent increase in banks’ current account balances, ensuring that on average, more than two-thirds of reserves will continue to earn 0.1% interest while a sizable remainder earn 0% over the coming year.
But the Daiwa economists and others expect the Bank of Japan to remain under pressure to ease further. And when push comes to shove, the bank will be likely to push rates further into negative territory rather than ramp up asset purchases.
“Ultimately, negative interest rates from a veteran of monetary expansion such as the BOJ mark a capitulation about the effectiveness of QE alone as an inflation-targeting tool in world of lingering growth-debt imbalances and commodity price wars,” said Lena Komileva, economist at G-plus Economics, in emailed comments.
‘Ultimately, negative interest rates from a veteran of monetary expansion such as the BOJ mark a capitulation about the effectiveness of QE alone as an inflation-targeting tool in world of lingering growth-debt imbalances and commodity price wars.’
Lena Komileva, economist at G-plus Economics
The move, meanwhile, weighed on Japanese government bond yields. Maturities out to eight years are now in negative territory, making for a “dangerous set of circumstances,” said Carl Weinberg, chief economist at High Frequency Economics.
Banks will presumably move their deposit rates below zero in response, which will leave life insurers, pension funds and even individuals with no incentive to sell Japanese government bonds to the Bank of Japan, he said, in a note.
The central bank “is approaching a situation where it cannot stop buying bonds—to do so would defund a government that has no other major buyers of its paper other than the BOJ—and where it cannot find enough bonds to buy, other than all the new issuance of the government,” Weinberg wrote. “This is a predicament. We do not know how it ends.”