Subject: Negative Rates : Chisel in the Toolbox or Spanner in the Works ...

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                                                                                                   Saturday 6th February 2021
Hi Friend,
Negative Rates : Chisel In the Tool Box ...
Or Spanner In The Works ...
At the MPC meeting this month, Bank Rate was maintained at 0.1%. It was agreed the Bank of England should continue with the existing program of UK government bond purchases, financed by the issuance of central bank reserves.

No more talk of QE, the target for the stock of purchases is currently set at £875 billion. The Chancellor's £1 trillion pound bank note is in reach. Monetary financing of the fiscal deficit, is set to continue.

The Bank upgraded the expected out turn for 2020 slightly with an estimated drop in GDP of 10% from a previous 11%. Forecasts for the current year were downgraded, as a result of the lock down in the first quarter. The Bank now expects a progressive recovery from the second quarter onward. Growth in the year as a whole, is expected to be 5% this year and over 7% in 2022.

The unemployment rate is expected to peak at around 6.5% this year before falling to current levels by the end of the following year. Inflation is expected to move to the 2% target by the end of the year, pushing slightly above target range in 2022.

No surprises in the forecasts. No surprises either in the decision on monetary policy. Ten year gilt rates moved higher. Sterling moved closer to our mid term target of $1.40. Markets were slightly confused by the messaging on negative rates. The economy is set to recover rapidly, inflation is set to rise. The next move for interest rates, is more likely to be up but not for some time yet.

This appeared to be  strange time, to instruct the banking sector, "to commence preparations in order to be ready to implement a negative bank rate at any point after six months." The MPC stressed the requests should not be interpreted as a signal the setting of negative rates was imminent or indeed in prospect at any time.

Enquiries by the PRA had revealed the Banking sector was ill prepared for the implementation of negative rates. High street lenders were not in a position to handle negative rates. Computer systems were not designed to accommodate reverse rate lending. It would take six months to implement the changes required.

The Governor's chisel in the tool box was a spanner in the works, without a transition period. Lenders should make the move now, to ensure, they will have the infrastructure to implement the changes, if and when required. 

It was a well argued decision. The request could be misconstrued, as a signal the setting of a negative bank rate was in prospect or even imminent. This was a signal the Committee did not wish to send. It was not warranted by the "current conjuncture" and the "economic outlook", the minutes of the meeting explained.

Six months to make the changes. In six months it will become apparent the downward move will be irrelevant. "Let's do it anyway" appeared to be the decision. Overall it was concluded" it would be appropriate to start the preparations to provide the capability to do so if necessary in the future", even though at the moment it would appear, it would not be necessary at all.

This week, it was revealed a large cannabis plant was discovered near the Bank of England. The discovery followed a tip off about "a strong smell of cannabis" wafting over Threadneedle Street ... just saying ...
Foreign Policy Takes Shape ...
Calmly and with measured tone, the Joe Biden Foreign Policy takes shape. A freeze on troop withdrawals from Germany, a halt to support for military operations in Yemen. Strong words for President Putin. Strong words for President XI.

"The days of the US rolling over in the face of Russian aggression are over". US warships have been dispatched to the Black Sea.

Aircraft Carriers in the South China Sea, destroyers pass through the Straits of Taiwan. Uncle Sam is making overtures to Japan and South Korea to support China's containment in the East.

Foreign policy chiefs are laying down the markers for future policy plans. The hope is a framework is created to handle future policy disputes. Yang Jiechi, China's foreign policy chief, urged the US to work with Beijing to create a non-confrontational relationship.

"The two nations should respect each others' core interests. Taiwan is the most important and sensitive issue to China. Washington should not interfere with China's domestic affairs in Tibet, Xinjiang and Hong Kong" he said.

US Secretary of State Antony Blinken warned the US would work with allies and partners to hold China accountable for threats to regional stability. The US will continue to stand up for human rights and democratic values, around the world.

Tensions between China and the US are unlikely to ease quickly. President Biden described China as the "Most serious competitor" to the United States, promising to push back on China's attack on human rights, intellectual property and global governance. Biden has still not spoken to President Xi since taking office. He referred to Xi as a "thug" during his election campaign.

The good news Biden has conceded, Taiwan will not become a focus of contention for the two super powers. The "One China" policy will continue. The State Departments are talking on the phone. There is hope for rapprochement yet ...

That's all for this week, stay safe, hands, face and space ...

John
© 2021 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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