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posted on 26 April 2016

Central Bank Casino: Bank Of Japan, Federal Reserve, Real Estate And Mortgage Rates

by Michael Haltman

This week both the Bank of Japan and the Federal Reserve will be meeting to chart the future course of interest rates.


In the U.S. where prior to the recent small interest rate hike ZIRP or zero interest rate policy had been in place, speculation over whether the Fed will raise or stand pat going forward has been running rampant through the global financial markets.

Mohamed El-Erian, well respected on all things interest rate related, said today that this weeks Fed meeting will set the stage for a June rate hike...

'Mohamed El-Erian, the chief economic adviser at Allianz SE , said on Monday he expects this week's Federal Reserve policy-setting meeting to set the stage for a June interest rate hike.

El-Erian told Reuters: "Fed officials may even be tempted to hike as early this week though this remains a lower probability event." The Federal Open Market Committee is due to meet Tuesday and Wednesday and then next on June 14-15.' (Source)

The reality is, however, that the spate of stimulus since the financial crisis has not accomplished the Fed's dual-mandate which is full employment and inflation at a predetermined target rate. Some might argue that with the unemployment rate hovering around 5% that the employment target indeed has been reached but, if one were to look under the hood of the statistics, that's not necessarily true.

But what ZIRP has accomplished may not necessarily be a positive for investors who have been forced to search high and wide for yield...

'Bond investors are taking bigger risks than ever before.

Yields on $7.8 trillion of government bonds have been driven below zero by worries over global growth, meaning money managers looking for income are pouring into debt with maturities of as long as 100 years. Central banks' policy is exacerbating matters, as the unprecedented debt purchases to spur their economies have soaked up supply and left would-be buyers with few options.

While demand has shown few signs of abating, investors are setting themselves up for damaging losses if average yields rise even a little from their rock-bottom levels. Based on a metric called duration, a half-percentage point increase would result in a loss of about $1.6 trillion in the global bond market, according to calculations based on data compiled by Bank of America Corp.' (Source)

From U.S. ZIRP To Japan's NIRP!

Moving from the U.S. monetary policy of ZIRP, the Bank of Japan (BOJ) which meets this Thursday has had the policy in place of NIRP, or negative interest rate policy!

Bogged down with an underperforming economy and recessionary pressures for quite some time the Bank of Japan has embarked on a program of negative interest rates or, in essence, of investors paying to have their money held in what are considered to be safe havens.

So what will the BOJ do this week? The world could see a trifecta of moves as explained here...

'Earlier this year, the BoJ followed the lead of the European Central Bank (ECB) and went negative - cutting its headline interest rate to minus 0.1 per cent. As the BoJ gears up for a crucial monetary policy meeting later this week, analysts suggest it could be about to fire all its guns at once with not one but three policy shifts:

  1. Lower interest rates - The BoJ is tipped to cut rates to at least minus 0.2 per cent by half of economists polled by Bloomberg.

  2. More QE - Japan's central bank is currently pumping 80 trillion yen (£490bn) a year into the economy through its bond-buying programme. In a meeting earlier this year, some BoJ officials considered increasing that to "100 trillion yen or more".

  3. Pay to borrow - The BoJ could go into negative territory in the interest rates it offers banks to borrow from it. At the moment, banks can borrow free (at a rate of zero per cent interest) from the BoJ. But the so-called Simulated Bank Lending Facility could be cut to minus 0.1 per cent - effectively paying banks to borrow.' (Source)

So will the central banks decisions later this week be a net positive for the global economy?

And in reality can these central banks actually raise rates for fear of the cascading impact that such a move would have?

And finally for economies that are dependent on a strong and vibrant real estate sectors will the moves be a net positive or negative?

Stay tuned!

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