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.

7/12/15: Of Monetary Activism and Growth: CB Balancesheets vs Economies Balancesheets

There is much talk around two matters relating to the monetary policy expectations:

1. The 'normalisation' course allegedly pursued by the Fed (rates rises); and
2. The justification for (1) by references to the monetary policy-repaired economy, made wholesome once again thanks to the Central Banks' activism (see recent Janet Yellen speech on the subject here)

Except, of course, the second point is... err... questionable. For all the estimates of percentage points of growth uplifts and unemployment reductions delivered by the Fed-linked economics analysts, there are two simple facts stubbornly persisting out there:

Fact 1: U.S. (and European, and Japanese, and global) growth since the end of the Great Recession has been much slower than historical records for recoveries suggest; and

Fact 2: Fact 1 comes on foot of a historically unprecedented monetary expansions, that are, by far, not over yet.

Here are two charts on the second fact:

Now, observe: as of today, Big 4 CB balancesheets expanded almost 4-fold. By the end of 2017 (per BAML), projected balancesheets are expected to rise even further, by more than 4.5-fold. Both BOJ and ECB will be leading this latter stage of monetary easing - the two economies that are by far fairing the worst throughout the crisis, despite the fact that whilst the ECB adopted a more conservative stand in the earlier stages of the crisis, BOJ raced ahead of everyone else with Abenomics arrival.

In other words, since 2012 through 2015, CB balancesheets grew by more than 50 percent. Meanwhile, what happened to growth rates and growth expectations?

Which, sort of, suggests that all this 'normalisation' of growth under the monetary policies activism is... well... imaginary?..

17/7/15: ECB Rate Decision & Monetary Conditions in the Euro Area

Yesterday, ECB left unchanged their key policy rates. Updating my central banks' policy charts,

First, current policy rates for major advanced economies:

Next: duration and magnitude of rates overshooting (target range set outside mean (pre-crisis period, Euro coverage) +/-1/2 STDEV)

We are now into 80th consecutive month of interest rates statistically outside the mean range, with magnitude of deviation of some 3.05% down on the mean. This implies mean-reversion (increase in the rates) of between 2.70-3.4%.

Meanwhile, 12 mo Euribor margin over policy rates is up to 0.119% in Jul (to-date) compared to 0.113% in June. Corporate rates for new loans (>1mln Euro and 1-5 years duration) margin over ECB rate was up at 2.28% in May compared to 2.03% in April. May was the month when direction of Euribor margin diverged from direction of corporate loans margin, implying increase in banks margins.

Overall, the above shows that pressure on rates reversion to the mean is building up, while banks margins were improving (though we only have data through May on this). Nonetheless, banks margins are down on 2012-2014 averages, implying that more of the costs of any mean reversion in policy rates under current conditions will have to be absorbed by the borrowers.

Good thing, ECB is in no rush to get ahead on rates increases, yet…

4/9/2014: ECB: Little Done. Loads More to Be Done Still...

In its latest move in attempting to combat the risk of deflation in the euro area, the ECB pushed the policy interest rate down to 0.05% from 0.15%. Here are some historical dynamics of the rates and comparative analysis of the ECB policy relative to other Central Banks:

Let's start from the historical chart:

The chart is showing the historical evolution of the rates in six advanced economies. At this stage, we have a statistical convergence between the US, Japanese and Euro area rates at the lower margin feasible.

It is worth noting that from January 1999 through September 2008, pre-crisis average for the Euro rates is 3.10 which is now 3.05 percentage points above the current rate. In the case of the US, current rates are 3.37 percentage points below the pre-crisis average. In the UK, historical pre-crisis average is 4.83% which means we are at 4.33 percentage points below the historical average.

The dynamics of deviations in the ECB rates from their historical average are shown below:

Statistically, mean reversion in rates is now well-overdue and accounting for likely overshooting we are looking at the mean reversion taking the rates above 3.25-3.5%. Total duration of periods of deviation from the mean in the last episodes (for rates both above and below the mean) is 85 months over 9 years and 11 months. Current deviation is already 70 months long and counting. Excluding the 1999 period, which is consistent with the period of early establishment of the euro policy, total length of combined deviations from the historical average is 78 months, just 8 months short of the current period duration.

The higher the hill in the above chart gets, and the deeper the blue line goes, the greater pain will be required to revert the rates to their historical mean. This pain is coming, whether we like it or not and its timing and extent will have nothing to do with the legacy debts in Ireland or with our capacity to service them. It will come on foot of the Big 4 euro states data.

Meanwhile, this will do preciously nothing for the euro area economy. Why? Because the problem in the euro area economy is not the rates on loans to banks or between banks, as illustrated by the chart below. The problem is that policy rates are not feeding through to the retail rates charged on real loans for real companies and households in the real economy:

As the above chart clearly shows, the banking rates track reasonably well the policy rate (blue line, showing 12 months euribor rate deviation from the ECB repo rate), but the real rates (retail rates charged on loans in excess of EUR1 million with 1-5 years maturity for euro area non-financial companies) are getting increasingly more expensive compared to the ECB repo rates (red line).

The latest cut in rates is not going to do anything to the above story. And the ECB, so far, has found no means for breaking the financial markets blockage that prevents the policy rate to feed through to the retail rates. Nor, incidentally, has the ECB discovered any means so far to break the cycle of fragmentation in the credit system - the situation where by credit rates for non-financial companies and households diverge between different countries of the euro area.

Two real and actual problems: not cured. One imaginary problem - of official policy not being absurdly accommodative enough - is now addressed. Little done. Loads to be done still... and the future interest rates hikes super gun is loaded, primed and the fuse lit already...

2/5/2013: ECB's message: "don't let the bed bugs bite..."

In light of today's 'historic' decision by the ECB to lower its refinancing rate to 0.50% from 0.75%, let's just not get too excited, folks.

Consider the historical perspective:

1) ECB rates are low. By ECB-own standards. But they are not low by pretty much anyone else's standards, save for countries, like Canada and Australia, which didn't really have a Great Recession. At least not yet.

2) ECB rates are low today, but they will be higher one day:

And when they do get to those averages, oh… the bond markets valuations are going to fly out of the window (leaving big black holes in banks balance sheets and pension funds assets ledgers), while equities are going to also suffer risk-repricing away from current dizzying expectations. Meanwhile, mortgages and credit costs will rise and rise faster than the ECB rates for 2 reasons: (a) legacy margins rebuilding that is not even started yet, and (b) see 'black hole' on the bonds valuations side. So when we do start heading toward that green dashed line (and above, as ECB averages are above that green line), things are going to go South fast.

3) And the ramp up back to the mean will have to be sustained and drastic:

We are clearly in an unconventional period when it comes to mean reversion. In all previous episodes, mean reversion took at most 40 months of deviation from the mean to deliver on (red lines). This time around we are already into month 53 and counting. The longer the duration of deviation, the greater the imbalance built up as the blue line above clearly shows.

Based on average overshooting of the mean in each reversion episode, we are currently 1.79 percentage points away from the mean target and are likely to see additional 1.71 percentage points overshooting of the target on adjustment, which means that the direction we are heading toward, if previous history of ECB rates were to be our guide (very imperfect, I must add) is 0.5%+1.79%+1.71%=4.0%

Close your eyes and imagine your mortgage bill with:
1) ECB rate at 4.0% and
2) Bank margin on ECB rate of x2 at least of pre-crisis levels.

Now, good luck sleeping.

But, hey, for now, there's more room for ECB to 'ease'…

And yet… things are already bad enough… ECB is running policy at massively above the G3 average rates and there is no real relief to the euro area economy in sight.

So what is really going on? My quick comment for Express today:

"ECB's 25 bps cut in the refinancing rate is the central bank's de facto admission of the limitations to its ability to have a meaningful impact on the ground, in the real economy. Let's start from the diagnosis. With previous rate cuts failing to stimulate credit flows and private sector investment, it is now painfully obvious that the euro area economy is suffering from a structural crisis, not a cyclical or a liquidity crisis.  going into today's rates decision the ECB had really just three choices: 1) Do nothing and keep pressure on the Euro area governments to introduce and implement real structural reforms, 2) Do marginally little to sustain some outward expression of monetary activism, and 3) Do something big to attempt unfreezing both demand and supply of credit. The latter would have entailed a cut in the refinancing rate of 70 basis points and setting up an LTRO- like 3- to 5- years programme for lending against collaterilised business and household loans. It would have been risky, but it would have stood a chance of possibly shifting increasing significantly new credit creation. even more dramatic would have been a programme for indefinite financing of the weaker banks - a super-LTRO - set against explicit targets for their writing down of some SMEs and household loans.

That, in the end, ECB has opted for the second option of providing token expressions of accommodative monetary policy using largely weak tools, speaks volumes about the ECB's inherent legal dilemma. The ECB is facing the problem of a structural crisis in the economy, while being armed with a mandate that forces it to explicitly ignore the real economy. Thus, as the result of the crisis, the ECB has consistently traded-down the reputational curve by continuously deploying 'extraordinary' measures of ever-increasing complexity, which are having little real impact in the private economy. ECB's most-lauded OMT, for example, has had zero positive effect outside the Government bonds markets. In short, much of what ECB is doing is providing backstop insurance for the crisis amplification, but little actual means for dealing with the crisis itself.

As the result, ECB's monetary policy decisions of late can be best viewed in the prism of the EUR foreign exchange rates and European stockmarkets valuations. Liquidity supply into the financial channels that are trapped outside the real economy so far have meant firming up of the euro and increased speculative inflows into European equities that stand contrasted with both the fortunes of the euro area economies and the realities of the European companies earnings. Today's decision simply reinforces this trend. yet, as the recent years have shown, the divergence between financial markets valuations and the real economic activity is the sign of systemic malfunctioning in the monetary, fiscal and economic environments. This is exactly the road down which we are traveling, guided by the ECB Governing Council."

And my tongue-in-cheek top of the line conclusion? "ECB's Council throws a wet napkin at Euro area's economic Chernobyl and rests for lunch… breathless from exhaustion..."

So for all of us in the eurozone, tune in at 00:59:
http://www.anyclip.com/movies/despicable-me/beddie-bye/#!quotes/