Bank of England by Diego Delso (CC BY-SA 4.0)

Image by Diego Delso (CC BY-SA 4.0)

The big UK news today seems to be that the Bank of England has decided to maintain interest rates at 0.75%. But what are the US Federal Reserve Bank and the European Central Bank up to?

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The nine members of the Bank of England's Monetary Policy Committee (MPC) have voted unanimously to keep the bank rate at 0.75% and maintain the quantitative easing (QE) stock of corporate bonds and gilts.

It has also downgraded growth forecasts for later this year and said that there is a 33% probability of economic contraction as we go into 2020. Or to put it another way, a 67% chance we won't.

And the Guardian says:

"Britain has a one in three chance of plunging into recession as uncertainty over Brexit drags down the economy, the Bank of England has warned."

Now, you could be forgiven for going along with this narrative that this is all due to Brexit and therefore isolated to the UK economy.

But you only have to take a look across the pond at what the US Fed is doing and take a look at the position the Eurozone's ECB has taken to see that there is a much wider perspective.

While our monetary policy people are happy to maintain the status quo, the US Fed yesterday cut its rate for the first time since 2008 by 0.25% to a range of between 2% and 2.25%, because of global economic concerns and weak inflation.

It has also indicated that it may be amenable to more rate cuts in the future.

But President Donald Trump is not happy about this, he wants the rates cut further to get the US economy moving faster, in fact he thinks the Fed and its Chairman, Jerome Powell, are holding the US back.

Using his preferred method of communication, Trump sent out a couple of Tweets saying:

"What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world.

"As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn't have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!"

And remember that the European Central Bank (ECB) has an interest rate of zero for refinancing and a deposit rate of minus 0.4%, that means it charges banks for money to be deposited with the ECB! The Eurozone Central Bank has maintained a negative deposit interest rate since June 2014.

When times get difficult and returns are hard to find, banks put their money into Central Bank coffers to earn at least a paltry amount of interest or keep it safe with zero return.

But the ECB wants them to lend the money to fight deflation and boost the economy, not hoard it – hence the negative deposit rate.

And this is what Investopedia says about negative interest rates and the ECB:

"Negative interest rates are a drastic measure that shows that policymakers are afraid that Europe is at risk of falling into a deflationary spiral."

And:

"By charging European banks to hold reserves at the central bank, they hope to encourage banks to lend more.

"In theory, banks would rather lend money to borrowers and earn at least some interest as opposed to being charged to hold their money at a central bank."

And Trading Economics reported on the 25th of July that the forward guidance from the ECB was that rates would 'remain "at their present or lower levels" at least through the first half of 2020' and also that the ECB is 'already making preparations for more quantitative easing as it "tasked the relevant Eurosystem Committees with examining options".'

The ECB and Fed positions do show the Bank of England decision today in a different light to the Remain biassed Brexit doom and gloom take on it, don't you think?

Sources:

https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2019/august-2019

https://www.theguardian.com/business/2019/aug/01/bank-of-england-warns-1-in-3-chance–brexit-recession-interest-rates

https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm

https://news.sky.com/story/us-interest-rates-cut-for-first-time-in-11-years-11774215

https://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp

https://tradingeconomics.com/euro-area/interest-rate

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