2014-11-22

PBOC Reasons for Cutting Interest Rates Versus Reality of Deflation

According to one PBOC insider, the goal of the interest rate cut was to reduce social financing costs (TSF) and business financing costs. Others call this move another micro-stimulus effort, part of the ongoing attempt to support growth without resorting to another round of self-destructive monetary easing.

Google translation rip from the article (linked below):
"The focus of the interest rate adjustment is to play a leading role in the benchmark interest rate, targeted to guide market interest rates and social financing costs down, promote real interest rates gradually return to a reasonable level." The central bank official said.

This is central bank speak for "we are chasing the market." In De-mystifying RBA Setting of Interest Rates, Steve Keen showed how the RBA followed the market's adjustment of interest rates.
The graph shows an almost 100% cor­re­la­tion between the cash rate and the 90-day bank bill rates. How­ever the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. The data also shows that the RBA will gen­er­ally increase rates once the 90-day bank bill rate gets 50 basis points or more above the RBA cash rate. The actions on the down­side are not as tight, with decreases in cash rates occur­ring when the bank bill rate is any­where from 0 to 100 basis points below the 90-day bank bill rate. How­ever as a rule of thumb the RBA tends to decrease the cash rate when the 90-day bank bill rate is 50+ basis points lower than the cash rate.
The graph is currently down at the site. Here's EWI showing a similar pattern at the Federal Reserve: Here's How to Know When the Fed Might Raise Interest Rates. Here is an article from the Federal Reserve San Francisco Branch: Given the relatively small size of the federal funds market, why are all short-term rates tied to the federal funds rate? The article doesn't make the argument that central banks chase rates, but the chart on the page does:
Notice the Fed is following the market at turning points.

Other central bankers are the same. The ZIRP (zero-interest rate policy) of central bankers is not so much about driving down nominal rates as support to push up asset prices, thus depressing real interest rates. Central banks are keeping real interest rates low by inflating asset prices. In the absence of central bank support, asset prices would collapse. Even though interest rates would be at zero or even negative, the real interest rates would be very high. Thus stories like this one from September: Germany Sells 2-Year Debt at Negative Yield should not be seen as the central bank "winning" so much as failing. When rates go fully negative, deflation is ripping through the economy. If you are set to lose 20% holding corporate bonds, a 10% loss in treasuries is an attractive option, considering there is simply not enough physical cash to go around.

Taking all of this into account, consider the PBOC insider's statement about the central bank wanting to push total social financing costs down. Now look at this chart of WMP interest rates in China, as measured by 金牛理财.

iFeng: 央行降息有三大现实考量 (Three reasons for PBOC rate cut)

1 comment:

  1. June 2012
    https://www.socionomics.net/2014/03/article-social-mood-is-the-real-governor-of-the-federal-reserve/

    ReplyDelete