QE, zero rates, and a Chinese surprise

It's central bank mania!

It's central bank day, and for once all three reporting banks – the Bank of England, European Central Bank and Bank of China, which for the second month in a row announced its decision after the Bank of England – have done something interesting.

The Bank of England announced, as expected, that it would be increasing its quantitative easing program by a further £50bn. In the accompanying statement, it struck a sombre note:

UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed. Business indicators point to a continuation of that weakness in the near term, both at home and abroad. In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here. The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent.

The new round of asset purchases will also have been encouraged by the consistently falling inflation. Textbook QE raises inflation, and although the economy isn't behaving according to many textbooks these days, the Bank will still have wanted to wait until it was within spitting distance of its mandate before acting.

Minutes later, however, the Bank of China stole some of the shine, by cutting its interest rates for a second month running. It lowered its benchmark interest rate by 0.25 per cent, and also lowered its one-year lending rate by 0.31 per cent.

Business Insider's Sam Ro sums up why that matters:

China's growth rate has been decelerating lately, which had some economists concerned that its economy would land hard. In a hard landing, the unemployment rate picks up and the economy risks sinking all the way into recession. China is the second largest economy in the world. And for most economies, China is also the main source of growth.

Falling interest rates could mean that the Chinese central bank is starting to get edgy.

Finally, an hour ago the ECB announced its monthly move on interest rates. And they went for some unconventional monetary policy! Admittedly, not as unconventional as paying for people's holidays: they lowered the deposit rate to zero per cent (as well as cutting its main refinancing rate to 0.75 per cent and the emergency funds rate to 1.50 per cent). If you park your money with the central bank, they won't give you a penny cent.

Alphaville's Izabella Kaminska explains the reasoning:

A positive deposit rate was the last thing anchoring money market rates to zero — or vague profitability. This is because banks could arbitrage the difference between the rates they received at the ECB and the rates money market funds were able to invest at.

By cutting the deposit rate, the ECB is killing this arbitrage. There will not be any profit associated with taking money from non-banks and parking it at the ECB for a small profit. Non-banks won’t even be able to get zero. This will leave real-rates exposed to further deterioration. The ECB, of course, is hoping that non-banks will choose to channel that money into risky assets instead…

With the deposit rate where it is, the ECB has well and truly reached the zero bound. The only way down now would be to ban money. Their call, it seems.

Mario Draghi, the head of the ECB. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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BHS is Theresa May’s big chance to reform capitalism – she’d better take it

Almost everyone is disgusted by the tale of BHS. 

Back in 2013, Theresa May gave a speech that might yet prove significant. In it, she declared: “Believing in free markets doesn’t mean we believe that anything goes.”

Capitalism wasn’t perfect, she continued: 

“Where it’s manifestly failing, where it’s losing public support, where it’s not helping to provide opportunity for all, we have to reform it.”

Three years on and just days into her premiership, May has the chance to be a reformist, thanks to one hell of an example of failing capitalism – BHS. 

The report from the Work and Pensions select committee was damning. Philip Green, the business tycoon, bought BHS and took more out than he put in. In a difficult environment, and without new investment, it began to bleed money. Green’s prize became a liability, and by 2014 he was desperate to get rid of it. He found a willing buyer, Paul Sutton, but the buyer had previously been convicted of fraud. So he sold it to Sutton’s former driver instead, for a quid. Yes, you read that right. He sold it to a crook’s driver for a quid.

This might all sound like a ludicrous but entertaining deal, if it wasn’t for the thousands of hapless BHS workers involved. One year later, the business collapsed, along with their job prospects. Not only that, but Green’s lack of attention to the pension fund meant their dreams of a comfortable retirement were now in jeopardy. 

The report called BHS “the unacceptable face of capitalism”. It concluded: 

"The truth is that a large proportion of those who have got rich or richer off the back of BHS are to blame. Sir Philip Green, Dominic Chappell and their respective directors, advisers and hangers-on are all culpable. 

“The tragedy is that those who have lost out are the ordinary employees and pensioners.”

May appears to agree. Her spokeswoman told journalists the PM would “look carefully” at policies to tackle “corporate irresponsibility”. 

She should take the opportunity.

Attempts to reshape capitalism are almost always blunted in practice. Corporations can make threats of their own. Think of Google’s sweetheart tax deals, banks’ excessive pay. Each time politicians tried to clamp down, there were threats of moving overseas. If the economy weakens in response to Brexit, the power to call the shots should tip more towards these companies. 

But this time, there will be few defenders of the BHS approach.

Firstly, the report's revelations about corporate governance damage many well-known brands, which are tarnished by association. Financial services firms will be just as keen as the public to avoid another BHS. Simon Walker, director general of the Institute of Directors, said that the circumstances of the collapse of BHS were “a blight on the reputation of British business”.

Secondly, the pensions issue will not go away. Neglected by Green until it was too late, the £571m hole in the BHS pension finances is extreme. But Tom McPhail from pensions firm Hargreaves Lansdown has warned there are thousands of other defined benefit schemes struggling with deficits. In the light of BHS, May has an opportunity to take an otherwise dusty issue – protections for workplace pensions - and place it top of the agenda. 

Thirdly, the BHS scandal is wreathed in the kind of opaque company structures loathed by voters on the left and right alike. The report found the Green family used private, offshore companies to direct the flow of money away from BHS, which made it in turn hard to investigate. The report stated: “These arrangements were designed to reduce tax bills. They have also had the effect of reducing levels of corporate transparency.”

BHS may have failed as a company, but its demise has succeeded in uniting the left and right. Trade unionists want more protection for workers; City boys are worried about their reputation; patriots mourn the death of a proud British company. May has a mandate to clean up capitalism - she should seize it.