Rates movements where back on the table last week with the Bank of England and the Reserve Bank of New Zealand talking tough on negative rates.
The thing is the talk is almost a “will they won’t they” form of communication and if we re honest it is nothing short of shambolic.
The RBNZ has been privately relaying to local and international private banks the costs, charges and possible fund outflow it expects on moving to negative rates thus the expectation was it would move to this policy setting in the very near future.
Then at its release, it appears to have completely backtrack on this view stating cash rates are at their ‘lows’, that it expects solid growth in 2021 and that further policy intervention is not required. This completely blow up NZD positioning.
The Bank of England has been threating negative rates since the COVID crisis hit in March, before its chief economist (and several board members) came out and back tracked on the idea stating the country didn’t need it and that the path back to recovery was intact.
However, the statement and the minutes from the August meeting has changed all that.
The summary put out this line:
“the Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating the spare capacity and achieving the 2% inflation target.”
So that just brings the BoE in line with the Federal Reserve and the pretty much every other central bank around the world.
But then the market caught wind of the last paragraph in the minutes which shows the board is openly discussing negative rates again:
“The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular, in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations in 2020 Q4.”
So, who is going to be the next central bank to take on negative rates? Not sure, but the trading in the NZD and the GBP reflect that the market is now looking to price that risk in. But it is also clear the market is cognisant of the fact one or both could renege.
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