• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • Government preparing to intervene in Nottingham City Council

    June 23, 2022

  • Low earners at Surrey County Council receive 7.85% pay increase

    June 23, 2022

  • UK Infrastructure Bank launches plan to deploy £22bn of investment

    June 23, 2022

  • LGA: councils facing service and job cuts due to National Living Wage increase

    June 21, 2022

  • London boroughs facing £400m extra pressure on budgets due to inflation

    June 21, 2022

  • ICAEW: ‘ARGA needs more powers over local authority financial reporting’

    June 20, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

Developed world short rates and monetary policy

0
  • by James Bevan
  • in Blogs · James Bevan
  • — 8 Dec, 2011

Current economic and financial conditions call for additional easing in most of the developed world, but with rates close to zero and in many cases priced to remain there for the next couple of years, the ability to position for more stimulation through conventional easing is more limited than usual. In the US and Japan, rates have been effectively zero for years. In the UK, rates are below 0.5% (and may remain there even as other forms of easing are pursued). There is a bit of room for more easing than discounted in Canada, as rates are priced in to bottom at 0.75%, but not much. Euroland has more pressure to ease than any other major developed economy, but interestingly, there is some tightening priced in for 2013, which looks unlikely to us. Australia is the only major developed economy with rates not close to zero.
Rates are priced in to bottom at a bit over 3%, though here too, we expect more easing than this to be ultimately required. Of course, these rates are just the rates that banks can borrow at from central banks for relatively short durations. With the recent widening of spreads, the true cost of funds for developed world banks has been increasing as has the cost of credit for other borrowers in the real economy.

Central banks have the ability to pursue other forms of easing, primarily through asset purchases. While they have begun to shift in this direction, their actions in this latest round are still modest. We estimate that the Fed’s twist program is probably the equivalent of about half the pace of asset purchases via QE2 (and much smaller than QE1). The asset purchases in Europe are much more modest in size relative to the Euroland economy (though not as a share of issuance of the individual countries they are purchasing). Japan has done relatively little and focused on short-duration instruments. Only the UK has pursued asset purchases that are larger than the previous round. These purchases are still a very indirect way to get cash into the hands of those who would spend it, so their effectiveness is limited. A more meaningful shift in that direction (particularly relative to the significant need to ease) would benefit asset prices more broadly. Outside the UK, central banks have not done so in a meaningful way in the latest round, though a shift toward additional easing is clearly taking place.

Looking at these issues in a bit more detail, in Euroland, where the interbank rate is priced in to rise about a year out, the effective interbank rate is trading around the deposit rate, which now stands at 0.50%. Prior to the crisis, the interbank rate closely tracked the higher target rate; however, the rate now largely prices off the lower bound, which is what banks earn on their excess reserves at the ECB. As liquidity remains stressed, banks are currently willing to borrow at 1.25% and lend money back to the ECB at 0.50%, for a loss, to acquire the liquidity they desire. The current upward-sloping pricing means that these strains would have to ease and the ECB would have to keep its target rate roughly where it is. We expect that the likely prolonged period of European de-leveraging will actually require more aggressive easing, keeping rates low for a prolonged period.

While central bank target rates have been lowered to close to zero and are priced in to remain there, rising spreads mean that the cost of credit to the economy has actually increased. The recent widening, while smaller than 2008, is reflective of tightening credit conditions and longer-term bank spreads have widened more than short term cash spreads.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

Share

You may also like...

  • ESG presents LGPS with investment innovation opportunities 3rd Mar, 2021
  • SCAPE plan: How to reset a discount rate 19th Jul, 2021
  • Skills in short supply for local government audit 12th Oct, 2021
  • What’s in store for the LGPS in 2022? 7th Jan, 2022

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Briefs

    • LGA: councils facing service and job cuts due to National Living Wage increase
    • London boroughs facing £400m extra pressure on budgets due to inflation
    • ICAEW: ‘ARGA needs more powers over local authority financial reporting’
    • Lambeth chief exec to join public sector consultancy
    • Councils given £15.5m funding to help implement social care reforms
  • Room151’s LGPS Roundtables

    Biodiversity
    Valuations & Risk
    LGPS Women

  • Room151’s LGPS Roundtables

    Biodiversity
    LGPS Women
    Valuations & Risk
  • Latest tweets

    Room151 3 days ago

    Conrad Hall: ‘more sophisticated’ regulation needed for local government: The chair of the CIPFA/LASAAC Code Board has questioned the sophistication of financial regulation in local government and the continuing focus of the Department for Levelling Up,… dlvr.it/SSnPBV pic.twitter.com/G5d7JCWF8c

    Room151 5 days ago

    Slough Council approves plans to restructure finance department: Slough Borough Council has approved plans to restructure its finance department to enhance capacity and capability and to address a “significant weakness” in the function. The local… dlvr.it/SSf8DG pic.twitter.com/l5lmyHmkBg

    Room151 6 days ago

    Job Alert: Various Finance Roles: lnkd.in/eRKRvhJb pic.twitter.com/KkBrjXxAYD

    Room151 6 days ago

    MRP on capital loans: a step in the right direction: David Green says the latest government proposals on Minimum Revenue Provision should be welcomed by local authorities. There are still some unintended consequences, but the suggested approach for… dlvr.it/SSZ7JK pic.twitter.com/M1W9qVgYWN

    Room151 7 days ago

    MRP U-turn welcomed but ‘unintended consequences remain’: Local authority finance directors and treasury advisers have welcomed the government’s revised Minimum Revenue Provision (MRP) proposals, while pointing out that some unintended consequences still… dlvr.it/SSWvY0 pic.twitter.com/sGglpVNFs3

    Room151 7 days ago

    Mike O’Donnell: ‘progress on LGPS asset pooling needs to go further and faster’: The CEO at the London CIV pension pool has called for progress on pooling the assets of the Local Government Pension Scheme (LGPS) to accelerate. Mike O’Donnell told… dlvr.it/SSWvWV pic.twitter.com/rE1NjbMCCq

    Room151 7 days ago

    Mike O’Donnell: ‘progress on LGPS asset pooling needs to go further and faster’:The CEO at the London CIV pension pool has called for progress on pooling the assets of the Local Government Pension Scheme (LGPS) to accelerate. @London_CIV room151.co.uk/local-governme…

    Room151 7 days ago

    JOB ALERT: Watford Borough Council & Three Rivers District Council, various roles:       Technical Accountant Career Grade: We are looking for a motivated team player to join our Finance Department. The post holder will gain experience across these… dlvr.it/SSWN8f

    Room151 7 days ago

    Inflation and the LGPS: Local government pension payments will rise significantly next year based on the inflation rate this September. William Bourne discusses whether funds should be looking for some protection by turning to[...] dlvr.it/SSVK9x pic.twitter.com/7zH9OkRo1d

    Room151 1 week ago

    JOB ALERT: South Yorkshire Pensions Authority – Independent Advisor:     Appointment of Independent Investment Advisers South Yorkshire Pensions Authority is the public body responsible for the stewardship of the £10.5bn South Yorkshire Pension Fund… dlvr.it/SSMfNF pic.twitter.com/Iw9zCUktB6

  • Register to become a Room151 user

  • Previous story How safe are bank deposits?
  • Next story Fitch puts 3 PRCM liquidity funds on rating watch negative

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares