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The Death Of The Policy Rate In The Western World

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Now that (western) Central Banks seem to be increasingly utilising their balance sheets and now Governor Carney has indicated he's shifting emphasis from the policy rate to his (somewhat sketchy so far) macroprudential tools, one is minded to pose the question:

Does this mark the 'death' of the interest rate as the de facto main policy tool for implementing monetary policy?

Or is it just a temporary suspension?

Discuss............

(I'm also thinking about the average business cycle and the fact that each day we're moving closer to the next recession - on average - with the policy rate at or close to zero. It may end up at 2-3% who knows, but it seems highly unlikely that the next recession will start with rates higher than the last recession).

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Now that (western) Central Banks seem to be increasingly utilising their balance sheets and now Governor Carney has indicated he's shifting emphasis from the policy rate to his (somewhat sketchy so far) macroprudential tools, one is minded to pose the question:

Does this mark the 'death' of the interest rate as the de facto main policy tool for implementing monetary policy?

Or is it just a temporary suspension?

Discuss............

(I'm also thinking about the average business cycle and the fact that each day we're moving closer to the next recession - on average - with the policy rate at or close to zero. It may end up at 2-3% who knows, but it seems highly unlikely that the next recession will start with rates higher than the last recession).

Well seeing how rates have gone so low that they have become useless, unless you want to put them up, and no-one does, so of course, yes.

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Now that (western) Central Banks seem to be increasingly utilising their balance sheets and now Governor Carney has indicated he's shifting emphasis from the policy rate to his (somewhat sketchy so far) macroprudential tools, one is minded to pose the question:

Does this mark the 'death' of the interest rate as the de facto main policy tool for implementing monetary policy?

Or is it just a temporary suspension?

Discuss............

(I'm also thinking about the average business cycle and the fact that each day we're moving closer to the next recession - on average - with the policy rate at or close to zero. It may end up at 2-3% who knows, but it seems highly unlikely that the next recession will start with rates higher than the last recession).

I have to say it's about time.....

The problem with using interest rates to control housing credit is that it affects so much else. For example if we ramped them up now it would cause the value of the pound to rise substantially, crucifying our already bad balance of trade.

Moreover, banks have become pretty good at neutering the effect of interest rates via teaser rate, interest only, and other buy now pay later type mortgages. A couple of UK banks have introduced teaser rate mortgages recently if I remember correctly.

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Another way of looking at it is as a power grab by central banks. Eventually the treasury will have no responsibility for the administration of the economy at all, only for agreeing departmental budgets.

I've joked before that we should elect the central bankers and let them appoint our politicians.

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I have to say it's about time.....

The problem with using interest rates to control housing credit is that it affects so much else. For example if we ramped them up now it would cause the value of the pound to rise substantially, crucifying our already bad balance of trade.

Moreover, banks have become pretty good at neutering the effect of interest rates via teaser rate, interest only, and other buy now pay later type mortgages. A couple of UK banks have introduced teaser rate mortgages recently if I remember correctly.

I've just been looking at Sterling.

Since Jan 2013

USD 2%

Yen 19%

Euro -2%

CAD 10%

AUD 17%

CHF 0%

Since Jan 2012

USD 5%

Yen 40%

Euro 0%

CAD 10%

AUD 18%

CHF 2%

Since QE started March 2009

USD 16%

Yen 20%

Euro 7%

CAD -4%

AUD -18%

CHF -11%

Since Oct 2008 (When I started checking)

USD -8%

Yen -11%

Euro -5%

CAD -8%

AUD -20%

CHF -26%

Osborne's death bubble making it easier to flee abroad?

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I've joked before that we should elect the central bankers and let them appoint our politicians.

Makes a lot more sense for an allegedly capitalist society than what we have now, doesn't it?

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I've just been looking at Sterling.

Since Jan 2013

USD 2%

Yen 19%

Euro -2%

CAD 10%

AUD 17%

CHF 0%

Since Jan 2012

USD 5%

Yen 40%

Euro 0%

CAD 10%

AUD 18%

CHF 2%

Since QE started March 2009

USD 16%

Yen 20%

Euro 7%

CAD -4%

AUD -18%

CHF -11%

Since Oct 2008 (When I started checking)

USD -8%

Yen -11%

Euro -5%

CAD -8%

AUD -20%

CHF -26%

Flesh wound.

Actually, more of a graze on the knee. Nothing to see here.

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Does this mark the 'death' of the interest rate as the de facto main policy tool for implementing monetary policy?

Yes. A degree of freedom that no longer exists.

Or is it just a temporary suspension?

In theory the recent operations are reversible. In practice they are not.

(I'm also thinking about the average business cycle and the fact that each day we're moving closer to the next recession - on average - with the policy rate at or close to zero. It may end up at 2-3% who knows, but it seems highly unlikely that the next recession will start with rates higher than the last recession).

Most likely outcome is redefinition of a recession.

What is the definition of a recession in the real world anyway?

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Another way of looking at it is as a power grab by central banks. Eventually the treasury will have no responsibility for the administration of the economy at all, only for agreeing departmental budgets.

fingers crossed

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Yes. A degree of freedom that no longer exists.

In theory the recent operations are reversible. In practice they are not.

Most likely outcome is redefinition of a recession.

What is the definition of a recession in the real world anyway?

That's a very interesting point yes.

Or at least a redefinition of GDP, which amounts to the same thing (I suspect that was your point?)

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