Pound plunges after Bank of England's dovish rates signal

US interest rates: Fed cheers market with dovish outlook

17 March

The US Federal Reserve has kept interest rates on hold at between 0.25 per cent and 0.5 per cent and cheered markets with a dovish outlook on further rises this year, reports Sky News.

Although the central bank reported that the labour market is strengthening, it added that it is still waiting for inflation to reach its two per cent target. Chairman Janet Yellen expects the economy to continue to "expand at a moderate pace".

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When the Fed raised rates in December, it said it expected to do so again four times in 2016. It has now revised that forecast, saying it now expects to raise rates just twice this year.

The dovish announcement saw the dollar fall by 1.07 per cent against the pound, while US stocks inched into the green in late evening trading. The S&P 500, the benchmark Wall Street stock market, ended 0.6 per cent higher by the end of trading and is expected to open at an 11-week high later, as the combination of a benign outlook and accommodative policy buoyed sentiment.

The Fed's open market committee acknowledged weaker global markets were hampering domestic improvements. "Household spending has been increasing at a moderate rate and the housing sector has improved further; however, business fixed investment and net exports have been soft," the committee said.

"Proceeding cautiously will allow us to verify that the labour market is continue to strength given the economic risk from abroad," said Yellen.

But Steve Murphy at Capital Economics said a sharp rise in inflation means the Fed will have to start hiking "much faster than is widely appreciated".

He told the Daily Telegraph: "We expect the Fed will resume raising interest rates in June, with the fed funds target range rising to 1.00 per cent to 1.25 per cent by end-2016 and 2.25 per cent to 2.50 per cent at end-2017."

Interest rates: ECB 'can't solve all the eurozone's problems

11 March

The wild market fluctuations that greeted the European Central Bank's latest policy announcement are an indicator of just how radical its "big bazooka" was considered.

The bank reduced all three of the main eurozone interest rates it controls, including pushing the main benchmark rate below zero and dropping already negative deposit rates further to -0.4 per cent. It also ramped up its money printing by €20bn (£15.5bn) a month, extended the bond-buying programme beyond just banks and even offered long-term incentives to lenders to pass on the liquidity.

Phew.

The markets didn't know what to make of it all, initially surging three per cent and more before spiralling downwards to sizeable daily losses and then rising strongly by as much as two per cent this morning. Investors fretted over an act that has a whiff of desperation, re-evaluated future expectations in case this were a last throw of the dice - and may have ultimately decided the moves are positive.

Observers have similarly speculated on the virtues or otherwise of unprecedented central bank action, especially negative interest rates, and also mostly concur.

"[Bank president] Mario Draghi has done his best to prove the sceptics wrong, firing off not so much a bazooka as a barrage of new measures to support the eurozone economy and rescue it from deflation," says the leader in the Financial Times.

Elsewhere in the paper, Martin Sandbu argues the measures are significant in that they "beat back a fatalism that has been sapping policymakers' resolve and business confidence".

Markets and "naysayers" had become convinced policymakers' arsenals were depleted, he says. "Even incremental measures are significant when they prove that the limit, which too many people believe has been reached, does not exist."

The FT also reckons the moves were carefully executed to respond to claims of an internecine currency war and fears negative rates will hurt the banking sector. That's why, it argues, rates were not tiered - "to make it clear that interest rates could not go down indefinitely".

On the wider question of whether all this action will work and boost the eurozone economy, the jury is out - mainly, the FT concludes, because of a "regrettable" lack of structural reform from European leaders.

The Guardian's Larry Elliot agrees. "Higher government spending would help increase growth and persuade businesses and households to snap up the low-cost loans on offer. Until Europe has a more sensible approach to fiscal policy, all the pressure will fall on Draghi. But the ECB can't solve all the eurozone's problems. It can buy time but not much more."

Interest rates: ECB 'throws the kitchen sink' at deflation problem

10 March

It had been said that the markets were hoping for more stimulus from the European Central Bank this afternoon. In the event, investors would certainly not have been disappointed – but they may now be somewhat overwhelmed.

Having faced criticism for apparently signalling action and then not delivering at its December meeting, after which stocks around Europe slumped, ECB president Mario Draghi (pictured above) was not going to be caught out again.

Today, he announced the outcome of the March meeting was cutting the main benchmark interest rate below zero, lowering already negative bank deposit rates and ramping up money printing.

The ECB also released its latest inflation figures showing price rises had slumped from 0.3 per cent in January to a negative reading of 0.2 per cent last month.

The Daily Mail says the cut in the main interest rate from zero to 0.05 is "largely symbolic" and merely ensures ultra-low borrowing costs will remain. But the cuts from -0.3 to -0.4 per cent in the bank deposit rate, effectively upping the penalty on banks hoarding excess cash, is a huge push to encourage more lending.

The central bank's asset purchase programme was increased from €60bn to €80bn a month – and for the first time, it will buy bonds issued by non-financial companies. This programme, referred to as "quantitative easing", involves the ECB creating money to buy already-issued debt, effectively boosting liquidity for companies to inject into the economy.

Analysts were universally shocked by the scale of the action Draghi unveiled.

"This has all the hallmarks of the ECB having thrown the kitchen sink at the problem," Aberdeen Asset Management's Patrick O’Donnell told the Financial Times.

"We were one of the most bullish on the street and he's managed to beat our expectations," agreed Neville Hill from Credit Suisse.

But the ECB's action came amid warnings of the ill-effects of negative interest rates, which Morgan Stanley has called a "dangerous experiment". Critics fear that as the rates cannot be passed on to consumers, they hit banking sector profits, fuel a "beggar-thy-neighbour" currency war and could even entrench a low-wage, low-growth, low-rate paradigm.

"Mario Draghi will be now be watching to see if the ECB's actions have any effect on economic growth," the BBC's Kamal Ahmed writes. "Once you have fired the bazooka, you had better hope it has the desired effect."

Negative interest rates will foster low-growth future, warns Carney

26 February

Negative interest rates will only help to perpetuate a world of lower rates and slower growth and are a signal that central bank monetary policy options are now severely limited, Mark Carney has said.

Earlier this week, the Bank of England's governor outlined his opposition to moving UK interest rates below zero even if the economic situation deteriorated, expressing concern at the knock-on effect for the profitability of banks and, especially, building societies.

He took this further in comments ahead of a G20 meeting in Beijing today, arguing that negative rates, as introduced by the likes of the European Central Bank and Bank of Japan, exacerbate the problems they were conceived to alleviate. Going below zero will do little to boost demand and the key aim of the policy is instead harmfully competitive currency devaluation, he suggested.

Negative rates, which effectively mean banks are charged to hoard cash with the central bank, are designed to encourage more lending to boost the economy.

But there are risks that convention prevents the rates being passed on to customers, hitting bank margins, and some argue their main aim is to drive money overseas and deflate a currency, which would be a boon to exports. In this reading, the move below zero in so many countries is actually the beginning of a global currency war.

Deriding this "beggar thy neighbour" approach, Carney warned this "export of excess saving and transfer of demand weakness elsewhere is ultimately a zero-sum game", notes Reuters. There is "no such thing as a free lunch" and the outcome could be the global economy "becoming trapped in a low-growth, low-inflation, low-interest rate equilibrium", he added.

Carney's overriding argument, says CNBC, was that central bankers can only do so much to stimulate economies. Policy interventions such as lower rates and asset purchases were designed to "buy time" for certain sectors or for governments to enact reforms, not as a long-term solution.

"This underperformance [in global growth] is a reminder that demand stimulus on its own can do little to counteract long-term forces of demographic change and productivity growth… [and] the innovation and ambition of global monetary policy has not been matched by structural measures. In most advanced economies, difficult structural reforms have been deferred."

Why negative interest rates won't happen here

24 February

Negative interest rates are being introduced by a number of central banks but are unlikely to be considered in the UK, no matter what happens in the economy.

That's according to Bank of England governor Mark Carney, one of the most influential of the nine members of the rate-setting Monetary Policy Committee who typically corrals the majority vote of the internal bank panellists.

Carneuy made the comments during a session in front of the Treasury select committee, after he was asked directly whether he would consider setting rates below zero, and said he has "absolutely no intention, no interest in doing that". Instead, reports the Financial Times, he cited other policy tools at the committee's disposal, such as cutting rates from their current 0.5 per cent to zero, additional quantitative easing, including purchase of a wider "variety" of assets, and changing its target horizon of two years to return inflation to two per cent.

Explaining his opposition to the issue, Carney pointed to the impact it would be likely to have on lenders' profits. A common criticism of negative rates is that the cost of leaving deposits at the central bank is borne by other banks and building societies, which are compelled by convention not to charge their own savers. Reference rates that dictate the interest margins on mortgages and other loans would also fall.

"We take very seriously the potentially counter-productive impact on the building society sector and the financial sector more broadly," Carney said, according to The Guardian. Deputy governor Minouche Shafik added she was sceptical savings would be passed on to consumers, pointing to evidence in Switzerland that saw institutional lending rates fall but consumer rates rise.

Negative interest rates have been imposed in Switzerland, Sweden, Denmark, Japan and, most notably, by the European Central Bank, which may even extend the policy at its next meeting. The idea is that to avoid charges on hefty deposits, banks will lend to businesses and consumers at competitive rates, thus stimulating growth.

In as much as rates also discourage international inflows, they also have the effect of depreciating the value of the currency, helping to make exports more competitive. This is thought to be the primary reason for the rate cuts in Sweden and Denmark – and some analysts have said the spate of cuts below zero amounts to effectively a global "currency war".

Generally, Carney reiterated his view that rates were more likely to rise than fall as data continue to show the underlying economy performing well.