BullionVault Weekly Update
Big week for central bank rates. But who cares...?
Monday, 18 March 2023
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Will They, Won't They? from Adrian Ash Director of Research, BullionVault
REMEMBER that sunny March day 4 years ago when Covid lockdowns first hit?
The price of gold fell, silver sank, global stock markets crashed, and crude oil collapsed, on its way to briefly costing less than nothing as gold, silver and eventually the stock market then surged that April.
Because in the ultimate economic collapse who needed useful stuff? |
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Cue central banks. And government.
Monetary and fiscal stimulus have never been so great outside wartime. Which is exactly what the Western powers then got 2 years later, when Russia launched its all-out invasion of Ukraine.
By then, however, the fear of deflation had flipped into the strongest consumer-price inflation for 4 decades.
So once again, the policy choice for central bankers looked simple.
Raise rates, and stop or reverse QE bond buying. That will put a lid on borrowing and spending. That will curb wage demands and price inflation by denting economic growth. Which is how tight monetary policy is supposed to work.
Trouble is, economic growth hasn't backed off...
...not in world No.1 economy the USA at least.
Nor have wage demands and pay deals backed off across the rest of the West either. But hey, at least inflation in the cost of living has slowed down!
So central banks must have got something right...
...even if the higher interest rates they imposed didn't work in the way that central banks thought they would.
And now it's time to change course again. Or so everyone says. Even though inflation hasn't yet fallen back to the central banks' target of 2.0%. And even though the central banks clearly don't know what they're doing.
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See how the blue line of US Fed interest rates used to move up before the red line rose when inflation jumped?
See how, this decade instead, the Fed didn't start hiking the cost of borrowing until core CPI inflation had pretty much peaked?
The Bank of England's chart looks worse still, because UK inflation accelerated after the central bank finally began to raise interest rates.
The European Central Bank looks even worse than that. It had gone all-out "deflation panic!" long before, cutting interest rates below zero. And then when inflation arrived, it didn't end its policy of negative interest rates...
...charging cash savers for the pleasure of lending their money to a bank...
...until the core cost of living was already surging by 4% per year.
That delay only added to the ongoing gold rush in Germany, where private investors poured into gold between 2014 and 2023 as the ECB made owning and insuring gold inside professional vaults cheaper than putting cash on deposit.
Still, that flood has now reversed...with German coin and small-bar holders rushing to take profit alongside BullionVault users and ETF shareholders...because at least the magicians gathered in Frankfurt did get round to raising rates in the end.
The Bank of Japan, in contrast, still hasn't moved. Maybe it didn't need to.
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| Japan, famously, got its financial bubble in nice and early...
...almost 2 decades before the Western banking crash of 2007-2011.
Tokyo's policymakers then got hit by a long, drawn-out post-bubble bust. Banks continued to fail. Borrowing and investment continued to shrink. Household wages and consumer prices both fell, sucking more air out of the economy.
Come the Covid Crash, this meant Japan was well ahead of the pack, already holding interest rates below zero and throwing central-bank cash into the bond market...as well as the stock market!...to try keep the price of anything and everything from ever falling again.
So when lockdowns worldwide then ended with a sudden burst of inflation thanks to supply-chain blockages and inventory shortages, that meant the Bank of Japan finally got its dream come true, over 3 decades after the Tokyo bubble had burst.
Inflation might now rise to and hold around the 2.0% target!
"The goal is finally in sight," said BoJ board member Hajime Takata to journalists late last month.
Japan's current round of annual wage deals "are of a level that even [board members] cautious about modifying monetary policy would accept a change," one insider apparently told the Nikkei newspaper late last week.
So tomorrow, in Tokyo, the Bank of Japan is expected to do something it's only done at 2 policy meetings in well over 30 years.
It's going to raise its interest rates. And it's going to raise them just in time for the rest of the world's reserve currency managers to go in the other direction. Sort of.
"The probability is increasing that we could see an interest-rate cut before the summer break," said Germany's chief central banker Joachim Nagel the week before last...
...flipping the world on its axis with a call for cheap money from the Bundesbank and flipping his publicly-stated position of only 2 weeks earlier on its head, but at least confirming that he's focused on getting a relaxing holiday this year. In fact, "It is appropriate to do two rate cuts before the summer break," reckons Nagel's ECB colleague Yannis Stournaras of the Greek central bank, even keener than Nagel to get to a sun-lounger and adding that "four moves throughout the year seem reasonable.
"We need to start cutting rates soon so that our monetary policy does not become too restrictive."
Yet at the ECB's latest meeting in late-January, there were no such whispers at all. Indeed, "There was broad consensus...that it was premature to discuss rate cuts at the present," according to the public minutes of that meeting.
"The risk of cutting policy rates too early was still seen as outweighing that of cutting rates too late."
What about the US Fed then? Wednesday brings the US central bank's March decision. Formerly nailed on to bring the start of Dollar rate cuts, it isn't now expected to deliver any changes to Fed policy. But it is also going to bring an update to the Fed's economic and inflation forecasts...
...and last time out, the Fed's "dot plots" spurred a surge towards new all-time highs in stocks, gold and Bitcoin by predicting that it would cut the cost of borrowing Dollars three times in 2024.
Will the Fed stick with that forecast from December? Not out of choice. The US economy continues to run warm if not hot. Wage growth and the jobs market remain solid if not strong. And financial conditions have in fact been getting easier, not tighter...despite the highest interest rates in 2 decades...thanks to expectations of lower rates ahead, plus the runaway stock market.
But rowing back on December's forecast for 3 rate cuts to end 2024 at 4.6% would risk the financial markets freaking out. I mean, the interest-rate market has only just got round to agreeing with the Fed, having bet in early January that rates would in fact sink below 3.7% by Christmas. And all this time, the price of gold has been rising.
As for the Bank of England, chief pooh-bah Andrew Bailey prattled on to MPs last month that he didn't need to see inflation fall back to the 2.0% target before he would cut rates from the UK's current 15-year high. Yet at the BoE's January meeting only a few weeks before, just 1 member had voted for a cut, while 6 voted for no change and 2 actually called for another rise!
So will they or won't they cut rates this week?
Who cares?
Certainly not the stock market (now nearing early March's record highs again on the MSCI World Index) nor gold or silver (now steadying close to their recent all-time and sudden multi-month peaks respectively).
Long story short, and to quote a survey of wealth managers attending a conference in London last week, the Bank of England is "ignorant of what it's actually doing".
That would seem to go true for the ECB, BoJ and US Fed too, never mind the 'big 4' as a group.
Little wonder, then, that reserve managers in emerging economies are increasingly choosing gold as a way to spread risk and cut their exposure to the 'reserve' currencies |
| Adrian Ash Director of Research, BullionVault
Key data and market events since our last Update and for the week ahead: |
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PLEASE NOTE: This content is published to inform your thinking, not lead it. It does not constitute investment advice and the information above may have already been overtaken by other events. You should not rely on any forward projections stated or implied and previous price trends are no guarantee of future movements. Any decision you make to invest may put your money at risk. If you are unable to assess this information or are unsure if precious metals are suitable for your personal circumstances, you should seek professional investment advice. Precious metals are a physical commodity not an investment within the terms and scope of the Financial Services and Markets Act 2000.
