Category Archives: policy rates

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…