Global Interest Rates Now on Hold

Gerry Brady February 18, 2019 9 No Comments

The Australian Reserve Bank (our central bank) has indicated clearly that interest rates are now on hold and may even be heading lower. The Deputy Governor, Guy Debelle, stated on 6th December …. “it is the level of interest rates that matters and they can still move lower”. He also said “QE is a policy option in Australia, should it be required”. (QE is Quantitative Easing — where the central bank buys assets to stimulate bank lending).

These two statements show that he is inclined towards steady or lower interest rates for 2019. Since then, the central bank has also encouraged Australia’s commercial banks to make more loans available to borrowers.

Last week, the European Central Bank (ECB) left their official interest rate settings on hold and stated their intention to maintain their balance sheet asset holdings at current levels. They said that this stance would continue until the end of the Northern Hemisphere Summer, maybe much longer. Their Press Release says it all — total capitulation. They are, again, doing “whatever it takes” to rescue the deteriorating economic situation in Europe.

ECB Press Release —

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

Regarding non-standard monetary policy measures, the Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The head of the ECB, Mario Draghi said — “At this point in time, we’re just assessing the situation”. He said the meeting assessed “where we are, why are we here, and how long will the slowdown last.”

The ECB kept its short-term benchmark rate at zero %. It also left the rate on deposits left overnight by commercial banks at the central bank at minus 0.4 %, a penalty aimed at pushing banks to make more loans. The ECB said it will maintain the 2.6 Trillion-Euro (US $2.95 trillion) holdings of government and corporate bonds that it bought over the last four years.

In the US, the Federal Reserve (America’s central bank) raised their official interest rates by 0.25% in early December but have since indicated that they are now in a “wait and see” mode. No one expects them to proceed rapidly with any further interest rate rises in 2019. Officially, they are committed to 4 such rises but this seems very unlikely as the global economic slowdown becomes more obvious.

And in China, the Peoples Bank of China (China’s central bank) has recently pushed a very significant amount of cash into the banking sector to stimulate loan formation and allowed Chinese commecial banks to issue Perpetual Bonds. All of this amounts to very significant “stimulation” of the Chinese economy. Chinese government bonds are now rising in price (meaning lower long term interest rates) on secondary bond markets while the stock market in Shanghai is also rising since the beginning of 2019.

It looks like China is setting out to rescue the global economy yet again after very poor economic growth figures have been released in Europe. The only question remaining is this — will it be enough?

The Shanghai Stock Market Composite Index over last 6 months

China AMC Bond ETF VanEck Vectors American Stock Exchange — over 6 months

CYB — Wisdom Tree Chinese Yuan Strategy Fund NYSE over last 6 months

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