12/1/17: NIRP: Central Banks Monetary Easing Fireworks

Major central banks of the advanced economies have ended 2016 on another bang of fireworks of NIRP (Negative Interest Rates Policies).

Across the six major advanced economies (G6), namely the U.S., the UK, Euro area, Japan, Canada and Australia, average policy rates ended 2016 at 0.46 percent, just 0.04 percentage points up on November 2016 and 0.13 basis points down on December 2015. For G3 economies (U.S., Euro area and Japan, December 2016 average policy rate was at 0.18 percent, identical to 0.18 percent reading for December 2015.

For ECB, current rates environment is historically unprecedented. Based on the data from January 1999, current episode of low interest rates is now into 100th month in duration (measured as the number of months the rates have deviated from their historical mean) and the scale of downward deviation from the historical ‘norms’ is now at 4.29 percentage points, up on 4.24 percentage points in December 2015.

Since January 2016, the euribor rate for 12 month lending contracts in the euro interbank markets has been running below the ECB rate, the longest period of negative spread between interbank rates and policy rates on record.

Currently, mean-reversion (to pre-2008 crisis mean rates) for the euro area implies an uplift in policy rates of some 3.1 percentage points, implying a euribor rate at around 3.6-3.7 percent. Which would imply euro area average corporate borrowing rates at around 4.8-5.1 percent compared to current average rates of around 1.4 percent.