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"Let's Go For A Big Cut" - ECB "Consensus Forming" For Far Greater Negative Rates, Reuters Reports
Compare and contrast:
- In the US, after 7 years of ZIRP and QE, the expected December rate hike is supposed to push up inflation and confirm the economy is improving; it is naturally bullish for stocks.
- In Europe, a year and a half of NIRP and a year of QE, an imminent rate cut further into negative territory is supposed to push up inflation and confirm the economy is improving; it is naturally bullish for stocks.
Don't think about that for more than 5 seconds or a certain famous scene form the movie Scanners will ensue.
Logic aside, according to a Reuters exclusive released moments ago, "a consensus is forming at the European Central Bank to take the interest rate it charges banks to park money deeper into negative territory in December, four governing council members said, a move that could weaken the euro and push up inflation."
Odd - in the US it's the rate hike that is expected to push up inflation, while in Europe it is the opposite. Must be some chapter on the geography of practical monetary policy in Krugman/Obstfeld that we missed.
And while Draghi already hinted that either another rate cut, or more QE, or both are coming in December, Reuters reports that "some argue that a deposit rate cut should even be larger than the 0.1 percent reduction currently expected in financial markets." Must have been that S&P futs were down a whole 5 points.
"Let’s go for a big cut," one Governing Council member, who asked not to be named, said.
How big?
The ECB cut its deposit rate to -0.2 percent in September 2014 and said it could not go any lower. However, other central banks have cut further, including the Swiss and Danish central banks to -0.75 percent, showing that deeper cuts are possible.
Three of the ECB policymakers said debate is now about the size of the rate cut with some arguing that a 0.1 percent reduction, already priced in by markets, would have little impact. Two policymakers said the bank should go for a bolder move, in line with its recent tradition of delivering policy moves in excess of expectations.
"There is no bottom to the deposit rate in the near term, it could be lowered quite sharply still," he said. "There must be a bottom but it's further out."
Indeed, as Janet Yellen said when previewing the US NIRP: "rates won't go much below zero." The question is what does "much" mean.
Why the rush? "A rate cut aims to discourage banks from parking money at the central bank and start lending to generate growth. It can also weaken the currency as cash leaves the euro area in search of higher returns, boosting inflation as imports become more expensive. They are keen to exhaust the conventional and more direct monetary policy tool as they also consider amending the 60-billion-euro asset purchase program, a far more contentious issue that they have yet to agree on."
Which, of course, is quite ironic because as we showed last month, the deeper European central banks have cut rates into negative territory, the higher saving rates have jumped:
We expect the ECB to be shocked when its latest deflationary rate cut pushes even more money into deposit accounts, much to the stunned confusion of central bankers everywhere.
More from Reuters:
Another Governing Council member also argued for a bigger deposit rate cut, saying it could go from -0.20 percent to -0.50 percent or even -0.70 percent after the Danish and Swiss examples. The rate setter said that "zero lower bound", a term meaning the bottom for interest rates, either "no longer exists, or if it does it is well below zero".
The risk in the cut is a squeeze on margins in the banking sector, already under pressure, and it is not clear that banks would boost lending to avoid the punitive rate for parking money with the central bank.
Another problem is that only relatively small central banks tried deeply negative rates and the potential side effects are not understood well enough to properly model.
Further complicating the matter is the ECB's earlier communication that the deposit rate was at lower bound so a cut would break the guidance putting some pressure on the bank's credibility.
And when a cut to -0.7% fails to stimulate spending and borrowing, the ECB can just cut to -1.0%, -7.0%, or more.
Finally, as BofA noted last month, if the ECB were to cut rates in the same month as the Fed hikes, it would be the first time this has happened in over two decades, going back all the way to May 1994.
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Logic, reason, sound economics, liberty, justice and prosperity for all be damned. Just submit to the global masters and move on.
I am actually okay with the Immobilienblase. As opposed to dumping money into bonds, equities & and mystery financial instruments -- all of which will disappear when this next round of stuff goes *boom* the buildings will still be around.
Blow that bubble bigger baby!
Significantly negative rates will only cause super bubbles, they will still crash, just from a higher level.
The buildings will be around but nobody to buy them for fantasy-land valuations
Sure. Of course not. They'll be revised down materially, which is good for those of us holding PM's & cash.
NIRP is going to blow up the banking system...these central planners are like cartoon characters playing with matches in the dark in a dynamite shack.
More desperation by the banksters. Debt saturation is a bitch.
Eventually main street's problems hit the central banksters and Wall Street.
QE, negative rates and lies are finite.
The recovery BS will turn into a need for more government bailouts.
They can encourage banks to lend, but they cannot force you to borrow. 7 years and they are out of demand side stimulus tools. Something HAS to crash soon. It's the only way they can go back to their toolbox. This cycle must end so the next can begin. They know it, they just don't want to be seen as bring the cause of it.
Behind the scenes I bet a lot of the finance types hate Bernanke almost as much as we do. If he raised rates around 2012 and "declared victory" everything wouldn't have got so overheated and we'd be headed for a the same recession we are now, but with much more policy room at the FED and a less insanely inflated world credit bubble. The courage to act my ass...
"They cannot force you to borrow"...
Me? No. But just look at students, let's say in the Netherlands, which will be forced to borrow once they pick up a study. And in the near future people will be forced to get a new car by only signing their names under a contract...
Greater the debt, greater the desperation and greater the need for NIRP to postpone the inevitable.
NIRP is coming to the land of the free soon enough
Won't work. As you can see, it's not working. That's why their trying more of it.
Eventually it blows up the banksters.
I see local bank branches starting to close due to the lack of business. That's encouraging.
Way too many bank locations.
"Slow down guys, Abe's not ready for the next round"
The problem with international anti-limbo is when there isn't enough room under the stick for your windpipe.
Money on deposit at a central bank clearly has some accounting value that outweighs the interest. Trying to figure out what it is would probably make my head explode.
The convenience of digital theft rather than a home invasion?
Sick bastards........really haven't got a clue what the hell they are doing. Keep on pumping, Queen Draghi, you can do it, but beware: The ballon will pop, sooner or later. In your face.
rates may go down but when you're in the red on your visa, you'll still pay 12.6%
and loans still have a high interest rate.
They first froze wages 8 years ago and since then, out of the blue of course.... growth slowed down...
weird stuff...
people make a 100 euro's and only spend 100 euro's...
weird indeed...
A world without interest rates.Must be based on old Jewish and Muslim Law.Never did like all the banking crooks.Should outlaw credit cards as well.Who wants interest on anything anyways?Its crooked.
NEGATIVE Interest Rates mean the Depositor pays from his Capital
POMO everywhere
Why not simply give each of the "Syrians" coming to Germany from Nigeria and Tunisia and Afghanistan and €10,000 to go with the free train travel and health care they are getting ? There are plans to build them apartments and no doubt free VW Blue Motion nitrous oxide dispensers to drive around in.
"We expect the ECB to be shocked when its latest deflationary rate cut pushes even more money into deposit accounts, much to the stunned confusion of central bankers everywhere."
When people don't have money to spend, they are not going to spend it, just because someone wants them to.
The ECB should try living in the real world, instead of that ivory tower fantasy land they occupy.
"Two policymakers said the bank should go for a bolder move, in line with its recent tradition of delivering policy moves in excess of expectations."
Go for a bolder move and fail sooner.
All out REVOLT is the ONLY answer left.
It is Time.