The trend is our friend
As of Tuesday, exactly 20 central banks across the world have engaged in some form of monetary policy easing be it via rate cuts or outright monetization of financial assets. The latest bank to join the furor of "pump priming" is the Israeli Central Bank. The financial community has been a slouch in coming to a realization that we are in an unprecedented cycle of monetary easing. We are rearing towards the end of February and there is no fair indication that this cycle has eclipsed.
We have spoken at large in our previous pieces that not only are central bankers scrambling to maintain some semblance of control over a chilling deflationary wind courtesy of lower oil and gas prices, we are also seeing a environment of polarization in monetary policy that beckons second thoughts. It isn't just us; ECB President, Mario Draghi himself said in his latest press conference when he announced Europe's very first QE program, that central bank are embarking of different paths - potentially signaling a bifurcated global economy.
When the major powers are concerned, the US's Fed and UK's BoE hallmarks a direction towards tightening while Europe's ECB, Japan's BoJ, Australia's RBA are outright easing. We're in a complicated affair, so sit tight.
Central Bankers never more worried
For the record, we spoke about this on 9 February:
We say this with a smirk across our face. We have documented how dire the deflationary situation has been not just in Europe but for many parts of the world, with central bank after central bank ceding to an era where global oil prices may not see $100/bbl ever again, according to the Prince of Saudi Arabia. While we will not comment on energy prices as of now, we will not spare a word on reiterating how central banking is in an unmitigated crisis right now.
Unbeknownst to many, at least 16 central banks across the globe have either eased monetary policy or taken drastic actions in the less than 40 days that have elapsed in 2015 thus far. The current count stands at 16, but we expect this to rise further. The following list is quite something to behold. Rarely do we experience such a flurry of monetary easing so early in the year. It is not inaccurate to say that central banks are indeed the most worried in a long time.
The list of countries that have either loosened their monetary policies or taken actions to bolster falling consumer prices:
- Singapore: Unexpectedly loosened FX policy
- Europe: First ever sovereign QE (EAAP)
- Switzerland: Lowered neg. rates; abandons FX floor to Euro
- Denmark: Lowered neg. rates 4 times in 3 weeks to record lows
- Canada: Unexpectedly lowered rates
- India: Unexpectedly lowered rates
- Turkey: Imposed FX controls to stem rapid depreciation; lowered rates
- Egypt: Loosened FX policy; cap on USD deposits
- Romania: Lowered rates; imposes capital buffers against CHF losses
- Peru: Lowered rates
- Albania: Lowered rates to record low
- Uzbekistan: Lowered rates
- Pakistan: Lowered rates
- Russia: Unexpectedly lowered rates from post crisis highs
- Australia: Lowered rates to record lows
- China: Lowered RRR by 0.5%
Fast forward 2 weeks and the count has risen from 16 to 20...
20 Central Banks closer to a full roundtable
Below are the updated details on the rave courtesy of Reuters:
1. Jan. 1 UZBEKISTAN
Uzbekistan's central bank cuts its refinancing rate to 9 percent from 10 percent.
2. Jan. 7/Feb. 4 ROMANIA
Romania's central bank cuts its key interest rate by a total of 50 basis points, taking it to a new record low of 2.25 percent. Most analysts polled by Reuters had expected the latest cut.
3. Jan. 15 SWITZERLAND
The Swiss National Bank stuns markets by scrapping the franc's three-year-old exchange rate cap to the euro, leading to an unprecedented surge in the currency. This de facto tightening, however, is in part offset by a cut in the interest rate on certain sight deposit account balances by 0.5 percentage points to -0.75 percent.
4. Jan. 15 INDIA
The Reserve Bank of India surprises markets with a 25 basis point cut in rates to 7.75 percent and signals it could lower them further, amid signs of cooling inflation and growth struggling to recover from its weakest levels since the 1980s.
5. Jan. 15 EGYPT
Egypt's central bank makes a surprise 50 basis point cut in its main interest rates, reducing the overnight deposit and lending rates to 8.75 and 9.75 percent, respectively.
6. Jan. 16 PERU
Peru's central bank surprises the market with a cut in its benchmark interest rate to 3.25 percent from 3.5 percent after the country posts its worst monthly economic expansion since 2009.
Jan. 20 TURKEY
Turkey's central bank lowers its main interest rate, but draws heavy criticism from government ministers who say the 50 basis point cut, five months before a parliamentary election, is not enough to support growth.
8. Jan. 21 CANADA
The Bank of Canada shocks markets by cutting interest rates to 0.75 percent from 1 percent, where it had been since September 2010, ending the longest period of unchanged rates in Canada since 1950.
9. Jan. 22 EUROPEAN CENTRAL BANK
The ECB launches a government bond-buying programme which will pump over a trillion euros into a sagging economy starting in March and running through to September next year, and perhaps beyond.
10. Jan. 24 PAKISTAN
Pakistan's central bank cuts its key discount rate to 8.5 percent from 9.5 percent, citing lower inflationary pressure due to falling global oil prices. Central Bank Governor Ashraf Wathra says the new rate will be in place for two months, until the next central bank meeting to discuss further policy.
11. Jan. 28 SINGAPORE
The Monetary Authority of Singapore unexpectedly eases policy, saying in an unscheduled policy statement that it will reduce the slope of its policy band for the Singapore dollar because the inflation outlook has "shifted significantly" since its last review in October 2014.
12. Jan. 28 ALBANIA
Albania's central bank cuts its benchmark interest rate to a record low 2 percent. This follows three rate cuts last year, the most recent in November.
13. Jan. 30 RUSSIA
Russia's central bank unexpectedly cuts its one-week minimum auction repo rate by two percentage points to 15 percent, a little over a month after raising it by 6.5 points to 17 percent, as fears of recession mount following the fall in global oil prices and Western sanctions over the Ukraine crisis.
14. Feb. 3 AUSTRALIA
The Reserve Bank of Australia cuts its cash rate to an all-time low of 2.25 percent, seeking to spur a sluggish economy while keeping downward pressure on the local dollar.
15. Feb. 4 CHINA
China's central bank makes a system-wide cut to bank reserve requirements -- its first in more than two years -- to unleash a flood of liquidity to fight off economic slowdown and looming deflation.
16. Jan. 19/22/29/Feb. 5 DENMARK
The Danish central bank cuts interest rates a remarkable four times in less than three weeks, and intervenes regularly in the currency market to keep the crown within the narrow range of its peg to the euro.
17. Feb. 13 SWEDEN
Sweden's central bank cut its key repo rate to -0.1 percent from zero where it had been since October, and said it would buy 10 billion Swedish crowns worth of bonds
18. Feb. 17 INDONESIA
Indonesia’s central bank unexpectedly cut its main interest rate for the first time in three years
19. Feb. 18 BOTSWANA
The Bank of Botswana reduced its benchmark interest rate for the first time in more than a year to help support the economy as inflation pressures ease.
The rate was cut by 1 percentage point to 6.5 percent, the first adjustment since Oct. 2013, the central bank said in an e-mailed statement on Wednesday.
20. Feb. 23 ISRAEL
The Bank of Israel reduced its interest rate by 0.15 percentage points, to 0.10 percent in order to stimulate a return of the inflation rate to within the price stability target of 1–3 percent a year over the next twelve months, and to support growth while maintaining financial stability.
What does this mean?
Without straying too far into this particular rabbit hole, a global cycle of looser monetary policy largely implies concerns over economic growth and inflationary pressures (realized and future expectations). We already know low oil prices have had a major role in this anathema, but what is often not talked about might be that growth expectations are slumping, and hard.
We will let our readers judge for themselves if growth is on an upwards or downwards trend in another short note which we will publish later on. However, without commenting much, we will go out on a limb by saying we feel the many economies will start stagnating absent monetary stimuli. Central bankers have realized this and have therefore acted on it. There is little to lie about, and even less to cover up; the face speak for themselves. We said in our last note on Daily Grail that US macro data has disappointed broadly relative to expectations since December last year, and that the FOMC might be tripping over rather unknowingly. We sense something amiss, but more on this topic in a separate piece.
The implications, if the Fed blinks by admitting it has guided expectations too hawkishly too quickly, that will be the final nail in the coffin. In our minds, the only major sticking point preventing capital from rushing into so called "hedges" against monetary inflation remains the Fed's guidance to hike rates in 2H15. This is an important note.
Gold, the classic example of the market's choice of demonstrating mass hysteria, has been etched firmly in a down trend when denominated in Dollars. However, once we price the yellow metal in other currencies the likes of the Yen, Euro, Ruble, Aussie Dollar et al, the various price action varies. We have been bearish gold for most of the past 2 years and have indeed profited from its downside.
We are now reevaluating our bias towards the precious metals (Gold & Silver) in light of the aforementioned monetary easing blitz. A detailed analysis will be done in another edition, but we shall leave readers with this rather loose knot for now. Food for thought.