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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Beware, hard Brexiteers - Ruth Davidson is coming for you

The Scottish Conservative leader is well-positioned to fight. 

Wanted: Charismatic leader with working-class roots and a populist touch who can take on the Brexiteers, including some in the government, and do so convincingly.

Enter Ruth Davidson. 

While many Tory MPs quietly share her opposition to a hard Brexit, those who dare to be loud tend to be backbenchers like Anna Soubry and Nicky Morgan. 

By contrast, the Scottish Conservative leader already has huge credibility for rebuilding her party north of the border. Her appearances in the last days of the EU referendum campaign made her a star in the south as well. And she has no qualms about making a joke at Boris Johnson’s expense

Speaking at the Institute of Directors on Monday, Davidson said Brexiteers like Nigel Farage should stop “needling” European leaders.

“I say to the Ukip politicians, when they chuckle and bray about the result in June, grow up,” she declared. “Let us show a bit more respect for these European neighbours and allies.”

Davidson is particularly concerned that Brexiteers underestimate the deeply emotional and political response of other EU nations. 

The negotiations will be 27 to 1, she pointed out: “I would suggest that macho, beer swilling, posturing at the golf club bar isn’t going to get us anywhere.”

At a time when free trade is increasingly a dirty word, Davidson is also striking in her defence of the single market. As a child, she recalls, every plate of food on the table was there because her father, a self-made businessman, had "made stuff and sold it abroad". 

She attacked the Daily Mail for its front cover branding the judges who ruled against the government’s bid to trigger Article 50 “enemies of the people”. 

When the headline was published, Theresa May and Cabinet ministers stressed the freedom of the press. By contrast, Davidson, a former journalist, said that to undermine “the guardians of our democracy” in this way was “an utter disgrace”. 

Davidson might have chosen Ukip and the Daily Mail to skewer, but her attacks could apply to certain Brexiteers in her party as well. 

When The Staggers enquired whether this included the Italy-baiting Foreign Secretary Johnson, she launched a somewhat muted defence.

Saying she was “surprised by the way Boris has taken to the job”, she added: “To be honest, when you have got such a big thing happening and when you have a team in place that has been doing the preparatory work, it doesn’t make sense to reshuffle the benches."

Nevertheless, despite her outsider role, the team matters to Davidson. Part of her electoral success in Scotland is down the way she has capitalised on the anti-independence feeling after the Scottish referendum. If the UK heads for a hard Brexit, she too will have to fend off accusations that her party is the party of division. 

Indeed, for all her jibes at the Brexiteers, Davidson has a serious message. Since the EU referendum, she is “beginning to see embryos of where Scotland has gone post-referendum”. And, she warned: “I do not think we want that division.”

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.