So China cuts rates for the first time in 2 years, Abe stakes his political reputation on aggressive stimulus in Japan, and Mario Draghi rolls out another speech to bounce the ECB into action. A little more digging, however, and it’s not quite as straightforward as the free money party of 2009 onwards. It’s easing, Jim, but not as we know it …
1. China’s rate cut
Societe Generale’s excellent China economist, Wei Yao, points out that the rate cut doesn’t actually manifest itself as a rate cut, for two reasons:
(i) Although the depo rate was cut to 2.75%, the limit that banks can charge over this was raised from 1.1 times to 1.2x. So, they went from (1.1 x 3%) to (1.2 x 2.75%), which, as you very mathematically abled readers will now, amounts to the same number!
(ii) The lending rate was also cut, but the lower bound to that rate was removed a year ago. So there was nothing to stop banks lending at lower rates anyway.
Deutsche point out that rate cuts haven’t always done much for Chinese stock markets anyway:
Having said all of that, it’s clearly a signal.. but one that chimes with policymakers’ cautious comments this year so far, such as Premier Li’s September statement that “There is already a lot of money in the pool. We cannot rely again on increasing the supply of currency to stimulate economic growth”. So how much store should we set on the Reuters sources this morning who claim that “Top leaders have changed their views”?
2. Abenomics Take 2
Blondemoney is very optimistic on the steps being taken by the Japanese authorities, which are bucking the historical trend. Previously, the BOJ hiked only after the Nikkei had fallen 40-50%; this time it’s easing after a 30% rally:
However, there is a roadbump to overcome first, and that’s the snap election itself. Japan Today reports that Abe’s support has fallen further, now at its lowest levels since he took office, at 39% (down 3 pct pts). Nearly two-thirds of voters say they don’t know why the election is being called. However, given the electoral set-up and general support for the LDP, he is still likely to win. But these kinds of headlines won’t make it easy for the market in the run up to the election.
3. ECB action ahoy!
Draghi’s speech on Friday was as clear as it could be that more needs to be done:
‘A low reading for core inflation for such a period of time indicates that it is not only temporary factors that are operative: underlying demand weakness is also playing a role’
‘The firm anchoring of inflation expectations is critical under any circumstances, as it ensures that temporary movements in inflation do not feed into wages and prices and hence become permanent. But it is even more critical in the circumstances we face today.’
‘If further monetary stimulus is needed, central banks need to by-pass the money market and intervene directly in other asset markets’
‘[QE in US and Japan] led to a significant depreciation of their respective exchange rates’
‘through these portfolio balance effects the central bank can also expect to have a strong signalling effect’
‘we are committed to recalibrate the size, pace and composition of our purchases as necessary to deliver our mandate. This is why the Governing Council has tasked ECB staff and the relevant Eurosystem committees with ensuring the timely preparation of further measures to be implemented, if needed’
Draghi is looking at this chart of 5y5y EU inflation expectations, and knows he has to turn it around:
So far, so QE. But in his conclusion, Draghi fires an arrow off into the fiscal authorities – i.e. the Eurozone politicians:
‘the aggregate fiscal stance of the euro area has to be consistent with our position in the cycle…. And as investment does not only create current demand, but also future supply – by raising growth potential – appropriate structural policies are also a key part of the policy mix. We need to create a business environment where new investment is attractive. And this in turn would also help monetary policy to reap its full effects.’
Note the three words he uses right at the end of his speech: ‘For our part, we will continue to meet our responsibility – we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us.‘ Yes, they are doing their bit. Will the politicians do theirs? Will they interfere with what the ECB need to do? This is a question mark hanging over ECB action.