The Bank of England is considering following its peers in Japan and in the eurozone and set sub-zero interest rates. Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the impact on the economy, or lack thereof, and how it may impact markets. They also touch on Brexit and other topics.
Yohay Elam: The pound has been under pressure after Andrew Bailey, Governor of the Bank of England, said that the topic is "under active review" and that he changed his mind on it during the pandemic
Yohay Elam: UK gilts are sliding as well
Yohay Elam: Lowering interest rates is adverse for currencies, and also going below zero seems to have a negative effect
Valeria Bednarik: And yet, central bankers don't have many other options, but to keep on easing monetary conditions to keep the economies afloat
Valeria Bednarik: The question is whether negative interest rate worth it. So far, those countries applying them, haven't seen a relevant positive effect. Maybe good to aid banks and financial institutions, but I don't see it reaching consumers
Yohay Elam: The eurozone has negative rates for several years
Yohay Elam: For me, the biggest advantage is to lower the exchange rate
Yohay Elam: Or keep it down
Yohay Elam: And that helps the eurozone and Japan – export-oriented economies
Yohay Elam: But it punishes banks
Valeria Bednarik: Yups agreed
Yohay Elam: In this crisis, I think that Quantitative Easing is more efficient
Yohay Elam: It basically makes it easier for governments to spend
Valeria Bednarik: Also agreed. The UK is not an export-oriented economy. I was checking a bit, exports are 30% of the total GDP while tourism is roughly 10% of it. So, what would negative rates do there? And in the middle of Brexit and mounting tensions with the EU
Yohay Elam: I wonder how they would reason it
Yohay Elam: Maybe to push inflation higher?
Valeria Bednarik: Umm hardly likely
Valeria Bednarik: Not that Japanese inflation has got much help from negative rates
Yohay Elam: Indeed
Yohay Elam: With Japan's experience and the one next door in the eurozone, I find it hard to understand the logic
Yohay Elam: But it moves the pound, at least a bit
Valeria Bednarik: That makes two of us
Valeria Bednarik: Maybe Bailey is trying to show that he can make decisions? The poor guy got in the seat in the middle of not one, but two crises...
Valeria Bednarik: Pandemic and Brexit
Yohay Elam: Yeah
Yohay Elam: He cut rates to the lowest level ever in the bank's 300+ year history on his fourth day at the job
Valeria Bednarik: Exactly
Valeria Bednarik: Tough hand right after getting in
Yohay Elam: Undoubtedly... Carney did not move rates for three years
Valeria Bednarik: Carney was in a wait-and-see stance waiting for Brexit's closure... which never happened
Yohay Elam: Well, now it has happened, at least formally on January 31, then came the pandemic, and now future-relation talks are back in focus
Yohay Elam: That period expires at year-end
Yohay Elam: Unless they extend it in the next two weeks or so
Yohay Elam: Or reach a deal, which seems unlikely
Yohay Elam: Refreshing to see some impact from Brexit and not from the disease
Yohay Elam: Do you think Brexit will have a growing impact?
Yohay Elam: On the pound
Valeria Bednarik: For sure, yes. The UK has already announced a post-Brexit tariffs plan. It would ease or simplify levies from other countries, and for me, is a pressure toll on EU's negotiators, as some stuff such as cars, and food, coming from the Union will become more expensive in the UK.
Valeria Bednarik: So, whether they reach a deal or not, it would have an impact on both economies. Hence, Brexit-related headlines will start taking their toll on Pound, Moreover considering how battered economies are
Yohay Elam: Indeed, that tariff plan puts pressure
Joseph Trevisani: I think negative rates at least in the US are a dead letter...
Joseph Trevisani: As you say, QE can deliver the same goods without the headline rate
Joseph Trevisani: And there is little evidence that negative rates are effective
Joseph Trevisani: Japan is the permanent example and the EU is becoming one
Joseph Trevisani: The exchange rate impact is minimal, largely because all CBs are so aligned
Valeria Bednarik: Well, US policymakers had made it clear that for now, negative rates are out of the table
Joseph Trevisani: The US is at 0%-0.25% and the EU at -0.1% not much to choose
Yohay Elam: So why did Bailey change his mind?
Yohay Elam: He said the pandemic caused it
Yohay Elam: I'm waiting for a full explanation...
Joseph Trevisani: Yes, I think Val is right... reducing rates is what central bankers do
Valeria Bednarik: Would be great, yes if we have a clear explanation on why he changed his mind. Maybe he foresees a much worse picture than the one we can see?
Joseph Trevisani: It is really, in various forms, their only tool. Sometimes the hardest thing is not to do anything in the public clamor for actions
Joseph Trevisani: Ha, not to be flippant... but the pandemic did it. Is that a bit like the dog and homework?
Valeria Bednarik: LOL could be in part
Joseph Trevisani: The bankers and government officials are caught... their actions in shutting down the economy. They have created a situation that they do not have to tools to correct
Joseph Trevisani: What is going to happen to tax revenues?
Joseph Trevisani: Yes, unfortunately...
Joseph Trevisani: More debt... and more debt?
Joseph Trevisani: The only solution is to unleash Keynes 'animal spirits'
Yohay Elam: In the UK, the BOE is willing to fund the government and the government is ready to spend
Yohay Elam: They recently expanded the furlough scheme
Joseph Trevisani: Market is a bit better than expected...
Yohay Elam: So more QE seems an easier policy tool
Joseph Trevisani: Yes, but the problem is the supply side... We need the demand side
Valeria Bednarik: Agreed. Demand is going to remain depressed at least throughout this year
Joseph Trevisani: I went into the city NYC yesterday... very eerie to see the empty streets and shuttered stores
Joseph Trevisani: How to bring that back?
Yohay Elam: Central banks have become more and more powerful, but they cannot solve health issues
Yohay Elam: Negative rates don't produce a vaccine...
Yohay Elam: QE can indirectly help
Joseph Trevisani: Nor in many ways can they solve economic problems...
Yohay Elam: The British government is throwing money at every intent
Valeria Bednarik: Like every other economy. Not a shocker
Joseph Trevisani: We have come to view CBs as all-powerful... The gnomic Greenspan cultivated his omniscience
Joseph Trevisani: But in reality, they are quite limited in their abilities...
Joseph Trevisani: To effect economic change
Yohay Elam: They affect financial markets
Yohay Elam: Bailey's negative rates talk weighed on the pound
Joseph Trevisani: Yes, that is true...
Joseph Trevisani: But at some point, financial markets must intersect with economic reality
Joseph Trevisani: I do not see what possible good negative rates can do for the UK?
Yohay Elam: Me neither
Joseph Trevisani: As you say, Japan and the EU are glaring...
Joseph Trevisani: I have written this piece probably 10 times in the last few years I think in the harm negative rates to business planning
Joseph Trevisani: They do more harm than good.
Joseph Trevisani: Exactly... I was tempted to put it all in caps
Valeria Bednarik: Agreed on that
Valeria Bednarik: So again, what was Bailey thinking on when he announced he "changed his mind a bit" about negative rates?
Yohay Elam: Here in Spain, most mortgages are linked to the Euribor, which is on the rise in recent months and is nearing the positive ground. That is a failure of negative rates...
Joseph Trevisani: We have come to view experts are all-knowing, and what are central bankers but financial experts...
Joseph Trevisani: The pressure to act and to conform is very powerful
Yohay Elam: I also see another dive coming, but I've been waiting for a few weeks and it hasn't happened. I guess all that Fed stimulus is beating reality, at least for stocks markets, and at least for several tech stocks that are leading the way
Joseph Trevisani: There was no hint in the jobless numbers of a return to employment
Joseph Trevisani: So I hope the weekly numbers start to show improvement... It would not take much for the markets to run, and this time I think the currencies are ahead of equities.
Joseph Trevisani: With the USD risk premium eroding
Joseph Trevisani: EUR/USD heading to 1.1000 and USD/CAD sitting on the 1.3900 support
Joseph Trevisani: I think the USD/CAD goes lower. The old market line, gaps will be filled and the run higher from March 6 to March 12-16 is essentially one large gap
Joseph Trevisani: Including the actual gap from March 6 to March 9
Joseph Trevisani: Another point against CB negative rates. Record-low mortgage rates did not prevent an 18% fall in existing home, though in this case, not a very strong point. April was not exactly a good month for home shopping
Joseph Trevisani: Interestingly, the demand for summer rentals where we are is very very high
Joseph Trevisani: The earliest states to reopen, Georgia, and never completely shut Florida has 3 and 4 weeks in if the continuing claims figures do not start to reflect returning employment in the next few weeks
Yohay Elam: It was impossible to visit an apartment until recently
Yohay Elam: So the market was frozen here for a while
Joseph Trevisani: Markets will have to do a reassessment about the economic future and it will not be positive
Yohay Elam: I assume that homes with more light and outdoor space will see prices rise
Yohay Elam: Negative rates are unlikely to lower borrowing costs much further
Yohay Elam: Not here, not in America, and not in the UK
Joseph Trevisani: Perhaps some humility on the part of the policymaker is warranted...
Joseph Trevisani: What is needed is for people to start up their lives and some exhortations from on high to do that
Joseph Trevisani: Or from on low, depending on your view
Joseph Trevisani: But in fact, only the populace and revive the economy, wherever it is
Joseph Trevisani: Can revive
Yohay Elam: Indeed, a lot depends on confidence
Valeria Bednarik: Anyway! back to Pound. Bailey's words are clearly set to have a negative impact on sterling, regardless of the effect they may have or not, in the economy
Valeria Bednarik: Stuck Brexit talks add to the gloomy picture for the currency.
Joseph Trevisani: Perhaps that is the intent. Sterling vs the euro
Valeria Bednarik: And given that we know that, at least for now, the US won't go into negative rates, seems the GBP/USD pair is heading south
Joseph Trevisani: A negotiating tactic
Joseph Trevisani: Since the EU sells more to the UK, could that be the purpose? China did the same devaluing the Yuan during the trade talks
Yohay Elam: A challenge of 1.20?
Valeria Bednarik: Yeah
Joseph Trevisani: It was rather blatant, then Beijing is not known for subtlety
Joseph Trevisani: EUR/GBP considerably higher recently
Joseph Trevisani: Though nowhere near its peaks
Yohay Elam: Indeed
Joseph Trevisani: One last word...
Joseph Trevisani: So far it seems despite the nastiness between Washington and Beijing over the virus, the trade deal is being implemented...
Joseph Trevisani: But look at the USD/CNY
Joseph Trevisani: That speaks disquiet
Yohay Elam: Lots of disquiet, Hong Kong, US bills promoted by both parties, heightened rhetoric
Yohay Elam: But the trade deal is being implemented
Yohay Elam: Weird world...
Joseph Trevisani: Yes, HK especially where China seems to be taking advantage of the world's distractions to crack down...
Joseph Trevisani: Much as the US and China may be at odds they both need the trade deal, even more now...
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