The last three weeks have seen central banks do what one would probably
simply describe as “amazing” stuff as follows;
§ the Sweden Cut Rates
to minus 0.5% from minus 0.35% – in its battle to revive inflation and keep the
krona from appreciating. How this works is that lowering the rate to larger
negatives is intended to impose a charge on banks when they make their deposits
with the central bank. This charge will encourage them to lend thus stimulating
the economy and then pushing inflation higher. This doesn’t worry the central
bankers because Swedish banks are well leveraged and highly profitable for the
charge to be too much of a disincentive in their business.
In terms of the currency, krona, the Swedish central
bank, the Riksbank is seeking to control the exchange rate in lowering interest
rates as well. How this happens is that negative rates will discourage foreign
investors from holding krona and pushing the krona value down which in turn
pushes import prices up which gives inflation a further kick.
§ the People’s Bank of
China (PBOC) did a series of eye-popping liquidity injections in that same
period;
o starting with a $1.5
billion injection,
o then another Yuan
Devaluation and a $54 billion injection,
o then another $49
billion injection,
China’s PBOC is
releasing extra cash to ensure China’s cash machines are continually oiled.
This is a way to ease monetary policy without using the traditional toolkits
like interest-rate cuts. By continuing to devalue, China is hoping to encourage
investment as they seek acceptance into the international monetary system. A
lower yuan means more foreign demand for yuan, boosted export demand due to the
devalued prices. Hopefully then a devalued currency will gain the favour of
outsiders and economists as China seeks to push on to join the basket of
Special Drawing Rights currencies.
§ the ECB cut rates and
added more Quantitative Easing (money-printing). The ECB has also sent rates
further into the negative territory (-0.4% now from -0.3%) with the hope that it
would stimulate bank lending and QE raised to 80 billion Euros from 60 billion a
month to provide a boost in liquidity and prevent deflation. Things are not
looking so great for the ECB as inflation is moving nowhere as desired and the
uncertainties in the world economy are still with us.
§ Norway cut rates to
0.5%. Norway being a big oil producer continues to hurt from the low oil
prices.
§ the Reserve Bank of
New Zealand cut rates in a shock move that economists didn’t seem to
expect. The NZ dollar fell 1% from the announcement but the main reasons to
cite for the reserve bank wanting to maintain the lowest interest rate at 2.25%
is weak China demand and global growth uncertainties.
§ the US FED cut the
number of interest rate hikes for 2016. The sentiment from Janet Yellen the Fed
Chis is that the pace at which the FED will hike rates will slow down in 2016.
Expectations for growth and inflation have been cut and eyes are on the rate at
which the US economy will travel for the remaining year.
Reference: Stig and Preston updates for pointers.
