Is There Another Path To Beat Inflation? [Podcast]

Spain might be an example we should be looking at, as their inflation has fallen below 2%. How did they achieve this compared with the UK or Australia?

Simply put they went beyond the simplistic interest rate lever, and used effective fiscal measures as well.

So today we look at lessons we can learn from Spain, and suggest there is indeed an alternative path, but one which requires a different linkage between monetary (interest rates) and fiscal (taxes and spending).

And, don’t forget, Central Banks created the inflation monster in the first place!

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Is There Another Path To Beat Inflation? [Podcast]
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The Deposit Rate Plot Thickens: With Steve Mickenbecker [Podcast]

An important discussion about the games banks are playing in relation to the setting of deposit interest rates, in the context of the RBA rate hikes. Steve Mickenbecker from Canstar and I explore the elements which are driving returns lower than they should be, and what we can do about it. Another case of the apathy tax at work!

Steve Mickenbecker is in Canstar’s Group Executive Team, bringing more than 30 years of experience in the Australian financial services industry. As a financial commentator for Canstar, Steve enjoys sharing his expertise across topics such as home loans, superannuation, insurance, mortgages, banking, credit cards, investment, budgeting, money management and more.

Go to the Walk The World Universe at https://walktheworld.com.au/

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
The Deposit Rate Plot Thickens: With Steve Mickenbecker [Podcast]
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The Low Rate Syndrome With Steve Mickenbecker

Steve is Canstar’s Group Executive, Financial Services & Chief Commentator. He and I discuss the traps created by low rates, and what households need to consider in reaction to them.

https://www.canstar.com.au/team-members/steve-mickenbecker/

Go to the Walk The World Universe at https://walktheworld.com.au/

What’s Happening To Interest Rates? – With Steve Mickenbecker [Podcast]

I caught up with Steve Mickenbecker, Group Executive, Financial Services & Chief Commentator at Canstar to discuss the latest in mortgage, cards, deposits and loans.

Note: DFA has no commercial relationship with Canstar

https://www.canstar.com.au/team-members/steve-mickenbecker/

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
What's Happening To Interest Rates? - With Steve Mickenbecker [Podcast]
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What’s Happening To Interest Rates? – With Steve Mickenbecker

I caught up with Steve Mickenbecker, Group Executive, Financial Services & Chief Commentator at Canstar to discuss the latest in mortgage, cards, deposits and loans.

Note: DFA has no commercial relationship with Canstar

https://www.canstar.com.au/team-members/steve-mickenbecker/

Adams/North: Negative Interest Rates And The Cash Ban Are Definitively Linked

Economist John Adams And Analyst Martin North look more deeply into the connection between the attempt to limit cash transactions and the imposition of negative interest rates.

Despite what the MSM are saying there is a direct connection. In fact negative interest rates cannot work as planned if cash is freely in circulation. We cite the links and describe the impact.

The deadline for submissions to stop the cash ban is 12 August 2019. Make your views know to our “elected representatives.”

Email: blackeconomy@treasury.gov.au with the subject line: Submission: Exposure Draft—Currency (Restrictions on the Use of Cash) Bill 2019

As we discussed before, the real agenda is all about negative interest rates and extreme monetary policy, as prescribed by the IMF. This represents a significant curtailment of civil liberties, and more. We have just a few more days to respond.

https://www.imf.org/en/Publications/WP/Issues/2019/04/29/Enabling-Deep-Negative-Rates-A-Guide-46598

https://www.adamseconomics.com/post/the-new-global-push-for-negative-nominal-interest-rates

http://www.treasury.gov.au/sites/default/files/2019-07/at_glance_summary_of_how_the_cash_payment_limit_will_work_0.pdf

Prolonged low interest rates could affect financial stability, central banks find

The BIS is worried by the current low interest rate environment, and in a new report by a committee chaired by Philip Lowe warn of the impact on financial stability across the financial services sector, with pressures on banks via net interest margins, and on insurers and super funds.  They warn that especially in competitive markets, risks rise in this scenario.  Low interest rates may trigger a search for yield by banks, partly in response
to declining profits, exacerbating financial vulnerabilities.

In addition, keeping rates low for longer may create the need to lift rates sharper later with the risks of rising debt costs and the broader economic shock which follows. A salutatory warning!

Interest rates have been low in the aftermath of the Global Financial Crisis, raising concerns about financial stability. In particular, the profitability and strength of financial firms may suffer in an environment of prolonged low interest rates. Additional vulnerabilities may arise if financial firms respond to “low-for-long” interest rates by increasing risk-taking.

The decade following the Great Financial Crisis (GFC) has been marked by historically low interest rates. Yields have begun to recover in some economies, but they are expected to rise only slowly and to stabilise at lower levels than before, weighed down by a combination of cyclical factors (eg lower inflation) and structural factors (eg productivity, demographics). Moreover, observers put some weight on the risk that interest rates may remain at (or fall back to) very low levels, a so-called “low-forlong”
scenario. An environment characterised by “low-for-long” interest rates may dampen the profitability and strength of financial firms and thus become a source of vulnerability for the financial system. In addition, low rates could change firms’ incentives to take risks, which could engender additional financial sector vulnerabilities.

In light of these concerns, the Committee on the Global Financial System (CGFS) mandated a Working Group co-chaired by Ulrich Bindseil (European Central Bank) and Steven B Kamin (Federal Reserve Board of Governors) to identify and provide evidence for the channels through which a “low-for-long” scenario might affect financial stability, focusing on the impact of low rates on banks and on insurance companies and private pension funds (ICPFs).

Now a report by the Committee on the Global Financial System finds that low market interest rates for a long time could have implications for financial stability as well as for the health of individual financial institutions. Philip Lowe, Chair, Committee on the Global Financial System and Governor, Reserve Bank of Australia said:

“The adjustment of financial firms to a low interest rate environment warrants further investigation, especially when low rates are associated with a generalised overvaluation of risky assets. I hope that this reports provides both a sound rationale for ongoing monitoring efforts and a useful starting point for future analysis”.

Financial stability implications of a prolonged period of low interest rates identifies channels through which a “low-for-long” interest rate scenario might affect the health of banks, insurance companies and private pension funds.

For banks, based on econometric evidence, simulation models, and reviews of past stress tests, the Working Group found considerable evidence that low interest rates and shallower yield curves depress net interest margins (NIMs). This effect was more pronounced for banks facing constraints on their ability to reduce deposit rates, for example, because of very low interest rates or strong competitive pressures. low rates might reduce resilience by lowering profitability, and thus the ability of banks to replenish capital after a negative shock, and by encouraging risk-taking. These effects can be expected to be particularly relevant for banks operating in jurisdictions where nominal deposit rates are constrained by the effective lower bound, leading to compressed net interest margins. For banks in emerging market economies (EMEs), such adverse effects might materialise not only as a result of low domestic interest rates but also as a consequence of “spillovers” from low interest rates in advanced economies (AEs), which can encourage capital inflows into EMEs, excessive local credit expansion, and heightened competitive pressures for EME banks.

Lower for longer would be harder on insurers and pension funds than on banks. Even though the CGFS analysis did not show that measures of firms’ financial soundness dropped significantly, prolonged low rates could still involve material risks to financial stability. In particular, a “snapback”, involving an unexpected sudden increase in market rates from currently low levels, could affect banks’ solvency and create liquidity issues for insurers and pension funds.

“A key takeaway is that, while a low-for-long scenario presents considerable solvency risk for insurance companies and pension funds and limited risk for banks, a snapback would alter the balance of vulnerabilities,”

Chair Philip Lowe, said.

“The first line of defence against these risks should be to continue to build resilience in the financial system by encouraging adequate capital, liquidity and risk management. But the report also underscores the need to monitor institutions’ exposures in a comprehensive way, including through stress tests.”

The CGFS is a central bank forum for the monitoring and analysis of broad financial system issues. It supports central banks in the fulfilment of their responsibilities for monetary and financial stability by contributing appropriate policy recommendations.

The Next Move In Interest Rates Will Be Most Likely Up Not Down – RBA

RBA Governor Philip Lowe discussed “Regional Variation in a National Economy” today in an address to the Australia-Israel Chamber of Commerce (WA). It is worth reading, not least because of the regional variations he highlights. However, the section on monetary policy piqued my interest.

In particular, that the next cash rate move is likely to be up. Recently a number of pundits have started to say there will be a cut. Perhaps not!

The Reserve Bank’s responsibility is to set monetary policy for Australia as a whole. We seek to do that in a way that keeps the national economy on an even keel, and inflation low and stable. No matter where one lives in Australia, we all benefit from this stability and from being part of a national economy. This is so, even if, at times, in some areas, people might wish for a different level of interest rates from that appropriate for the national economy. In setting that national rate, I can assure you we pay close attention to what is happening right across the country.

As you are aware, the Reserve Bank Board has held the cash rate steady at 1½ per cent since August 2016. This has helped support the underlying improvement in the economy that I spoke about earlier.

In thinking about the future, there are four broad points that I would like to make.

The first is that we expect a further pick-up in the Australian economy. Increased investment and hiring, as well as a lift in exports, should see stronger GDP growth this year and next. The better labour market should lead to a pick-up in wages growth. Inflation is also expected to gradually pick up. So, we are making progress.

There are, though, some uncertainties around this outlook, with the main ones lying in the international arena. A serious escalation of trade tensions would put the health of the global economy at risk and damage the Australian economy. We also have a lot riding on the Chinese authorities successfully managing the build-up of risk in their financial system. Domestically, the high level of household debt remains a source of vulnerability, although the risks in this area are no longer building, following the strengthening of lending standards.

The second point is that it is more likely that the next move in the cash rate will be up, not down, reflecting the improvement in the economy. The last increase in the cash rate was more than seven years ago, so an increase will come as a shock to some people. But it is worth remembering that the most likely scenario in which interest rates are increasing is one in which the economy is strengthening and income growth is also picking up.

The third point is that the further progress in lowering unemployment and having inflation return to the midpoint of the target zone is expected to be only gradual. It is still some time before we are likely to be at conventional estimates of full employment. And, given the structural forces also at work, we expect the pick-up in wages growth and inflation to be only gradual.

The fourth and final point is that, because the progress is expected to be only gradual, the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy. While some other central banks are raising their policy rates, we need to keep in mind that their economic circumstances are different and that they have had lower policy rates than us over the past decade, in some cases at zero or even below. A continuation of the current stance of monetary policy in Australia will help our economy adjust and should see further progress in reducing unemployment and having inflation return to target.

COBA and the Future Of Banking

I had the opportunity to participate in the Customer Owned Banking Association conference yesterday.  I hold the view the these smaller, but more customer aligned financial services organisation are Australia’s best kept secret.  In fact, often they offer better rates, and a distinctive set of cultural values. But they need to drive a different path to the majors, when the economics of their businesses are stressed.

The current environment with the more than 20 inquiries including the Royal Commission and the higher funding costs as represented by the 20 basis point spread growth in the A$ Bill/OIS raises a whole set of questions. Plus the FED is predicting a further 8 rate hikes in the USA over the next couple of years, taking the US rate well above 3%! That will impact here.

I made a video blog of my visit to Sydney, and included extracts from a live radio interview I did for 6PR on interest rates, and my comments from a panel discussion regarding the future of banking.