The message on this 4th of July from Central Banks is “we will keep doing what hasn’t worked and what won’t ever work” until it does work.
Case Number One
In central bank case number one Draghi Says ECB Rate to Stay Low for ‘Extended Period’
President Mario Draghi said the European Central Bank expects to keep interest rates low for an “extended period” as he tries to restrain market borrowing costs, in a new departure for an institution averse to setting policy in advance.
“The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time,” Draghi said at a press conference in Frankfurt. “What the Governing Council did today was to inject a downward bias in interest rates for the foreseeable future. Our exit is very distant.”
The ECB chose words over deeds after an “extensive discussion” about cutting interest rates, and the support for the new language was unanimous, according to Draghi. He said the bank kept an open mind on whether to cut the deposit rate below zero.
“The Governing Council had all options on the table this month and will keep them there in case things worsen again,” said Christian Schulz, senior economist at Berenberg Bank in London. “This time, they decided against another rate cut and decided to stage a mini revolution by introducing forward guidance instead.”
Historically, Draghi and predecessor Jean-Claude Trichet have said that the ECB “never precommits” to any future monetary policy.
Draghi said the reason for taking what he called an “unprecedented” step was the ECB’s expectation that the subdued outlook for inflation will extend into the medium-term amid broad-based weakness in the 17-nation euro-area economy.
Case Number Two
In central bank case number two Pound Slumps Most Since 2011 as BOE Signals Rates to Stay Low.
The pound plunged the most in almost two years against the dollar after the Bank of England signaled it will keep interest rates at a record low for longer than investors had expected.
Gilts rose and short-sterling futures jumped, indicating traders were reducing bets on higher borrowing costs. Led by new Governor Mark Carney, the central bank kept its bond-buying target at 375 billion pounds ($565 billion) and issued a statement afterwards, signaling a move toward the foward-guidance tool he favors.
Today’s decision was the first by the central bank since Carney became governor on July 1. The nine-member Monetary Policy Committee also left the U.K.’s main interest rate at a record-low 0.5 percent.
Former Bank of Canada Governor Carney is the first foreigner to run the 319-year-old U.K. central bank. The Bank of England typically doesn’t release statements after leaving policy unchanged. The decision to do so today reflects comments Carney made earlier this year to use communication, including forward guidance, as one of his policy tools.
Communication Only Tool Left
For starters none of this should be a surprise to anyone, so it’s rather amusing to see S&P; futures up 15 points on the news.
Carney did exactly what he said he would do as head of the Bank of England, even before he took the job. Yet, without doing anything (or even saying anything), the central banks got the reaction they wanted, at least from the stock market.
What About Lending?
Will Bank of England and ECB statements stimulate lending? After all, that’s the real goal of the central banks.
Let’s answer the question with more questions: Why will it? What structural problems have been solved anywhere?
And please note (mock is a better word) reliance on communication as an alleged central bank “tool”.
This is akin to calling a child’s toy plastic hammer a “tool” to help build a bridge. However, communication is all they have because with interest rates at 0.5% in Europe and 0.25% in the US there is almost no room to cut rates.
Here’s the final question of the day: With crude already above $100 a barrel, what will happen to the price of oil if central banks achieve a modicum of growth?
Mike “Mish” Shedlock