Thailand, Singapore and Australia show we are still heading for lower interest-rates

by Shaun Richards

Today has opened with something that has become rather familiar in the credit crunch era. So familiar in fact it is the 736th version of this,as the Bank of Thailand joined the party.

The Committee voted unanimously to cut the policy rate by 0.25 percentage point from 1.25 to 1.00 percent effective immediately.

Actually they gave thrown something of what in baseball is called a curve ball at the end of last week when they released this.

In December2018, the Thai economy continued to expand from the previous month. Private
consumption indicators suggested expansion in all spending categories, albeit at a slower pace due partly
to the high base effect. Manufacturing production and private investment indicators suggested continued
expansion. The number of foreign tourists continued to increase. Nonetheless, the value of merchandise
exports and public spending contracted, particularly in capital expenditure.

We find central banks regularly doing this where rate cuts come with explanations that things are going well! As an aside there may be a hint in there that the Japanese manufacturers who relocated to Thailand may be doing okay. However this morning the Bank of Thailand gave a rather different picture and emphasis.

In deliberating their policy decision, the Committee assessed that the Thai economy would
expand at a much lower rate in 2020 than the previous forecast and much further below its
potential due to the coronavirus outbreak, the delayed enactment of the Annual Budget
Expenditure Act, and the drought.

If we pick our way through this we see that the Corona Virus is having an impact.

Tourist figures were expected to grow at a
much lower rate than the previous forecast.

This adds to the ongoing drought which added to the issues in the Pacific economy we have looked at before. Indeed this bit smacks of a bit of panic.

Financial stability became more vulnerable due to the prospect of economic slowdown. In this situation, there was an urgent need to coordinate monetary and fiscal measures.

It feels that inflation will now be below target both this year and next which is interesting if we note what the target is.

The MPC and the Minister of Finance have mutually reviewed the appropriate inflation target and hence agreed to propose headline inflation within the range of 1-3 percent as the new monetary policy target.

Let me give them some credit here because they have trimmed their target as they can see we are in a lower inflation world.

These changes include (1) technological advancements, which reduce costs of production and boost supply of goods and services; (2) an expansion of e-commerce, which foster greater price competition, thereby reducing entrepreneurs’ pricing power; and (3) the aging society, which will contribute to the decline in overall demand for goods and services going forward, since the elderly, which normally receive lower income after retirement, constitute a larger share of the entire population.

Other central banks could and in my opinion should follow this lead. The only caveat I would have is to point 3 where there will be an impact from health care inflation which tends to be higher than average.

Singapore

Here they decided on different tactics and the emphasis is mine.

Singapore, 5 February 2020… In response to media queries, the Monetary Authority of Singapore (MAS) said that its monetary policy stance remains unchanged. However, there is sufficient room within the policy band to accommodate an easing of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) in line with the weakening of economic conditions as a result of the outbreak of the 2019 novel coronavirus (2019-nCoV) in China and other countries, including Singapore.

As you can see they would like a lower exchange-rate although the catch with that is someone else’s has to rise hence the use of the phrase “beggar thy neighbour” to describe such policies.

Foreign Exchange Swaps

These were features of the credit crunch era as central banks made sure they could get their equivalent of cold hard cash if they needed it. Except in contrast to official statements we see that this emergency measure seems not to have faded away. From November.

Singapore, 29 November 2019…The Monetary Authority of Singapore (MAS) today announced the renewal of the Bilateral Local Currency Swap Arrangement with the Bank of Japan (BOJ) for another three years.

 

2     The agreement was established in November 2016 to enable the two central banks to exchange local currencies with each other of up to SGD 15 billion or JPY 1.1 trillion.

So the MAS has concerns about getting hold of Yen presumably fearing a situation where the Japanese repatriate their large foreign investments.

In the same month there was a renewal of the deal with Indonesia which started conventionally.

A local currency bilateral swap agreement that allows for the exchange of local currencies between the two central banks of up to SGD 9.5 billion or IDR 100 trillion (about USD 7 billion equivalent);

But had quite a chaser?

A bilateral repo agreement of USD 3 billion that allows for repurchase transactions between the two central banks to obtain USD cash using G3 Government Bonds [1] as collateral.

Have we seen any examples of US Dollar shortages? But if we move from being tongue in cheek back to serious there is quite a definition of what I will call super prime collateral here so let me spell it out.

US Treasuries, Japanese Government Bonds and German Government Bonds.

Actually that begs loads of question but let me for now stay with today’s interest-rate theme by pointing out this is one of the reasons why so much of the German government bond market is at negative yields. The benchmark ten year is at -0.4% because foreign demand for high quality capital is added to what has been net negative supply with the ECB buying whilst Germany is running a surplus.

Australia

The Reserve Bank of Australia ( RBA ) did not act yesterday mostly due to this.

With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting.

Having cut to 0.75% last year it had made its move, or perhaps not all of it.

The Board will continue to monitor developments carefully, including in the labour market. It remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Comment

Perhaps the most revealing statement came from the RBA.

Due to both global and domestic factors, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.

Let us look at the global factors.

The outlook for the global economy remains reasonable. There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected to be a little stronger this year and next than it was last year

So not really that one but there is the domestic issue.

The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years.

So if they were the Beatles they would be singing this.

I have to admit it’s getting better (Better)
It’s getting better
Since you’ve been mine

Except that we apparently need low interest-rates for years ahead. So I think we can be pretty sure that the road ahead should they actually think things will slow down will involve even more interest-rate cuts. For all the talk of things like r* the reality is that we are still in a scenario where interest-rates are singing along with Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fallin