Gold: 17 Central Banks Slash Rates—And The Year Is Only Getting Started
By one count, 17 global central banks have slashed monetary policy rates in 2015. Global interest rates are going lower and they are going negative.
Global central banks are panicking in their efforts to fight low economic growth levels and the threat of deflation and interest rates are sliding like dominoes across a game table.
The rate cuts are intended to spur economic activity and drive inflation levels higher by boosting bank lending. BNP Paribas currently projects the CPI level for the advanced economies of the world at 0.6% for 2015. That is barely scraping the barrel on the positive side, with G-7 CPI inflation forecast at 0.5% this year.
But, if everybody is slashing rates and driving the value of their currencies lower to spur export activity how effective can this strategy be? It is like when everyone rushes to one side of the boat —it simply tips over.
The Fed is one of the few central banks fighting the tide this year.
The U.S. Federal Reserve is still expected to begin hiking interest rates from its zero-bound level this year. But, how far can the Fed actually raise rates in a global environment of slow growth and deflationary concerns?
The economic questions become a vicious cycle of the chicken or the egg. Growth is low, companies are running razor thin profit-margins, they don’t provide wage increases to their employees, their employees don't spend, economic growth remains sluggish. How does the cycle end?
Central banks are doing their part by offering cheap money all around. However, some economists warn this is an experiment that could destabilize the financial system. Could negative interest rates cause savers to change their banking habits and no longer keep assets in a bank? In theory, that could detract from overall liquidity in the financial system. Let's take a look at where some key rates are now.
Central Bank Official Rates
Euro zone 0.05%
UK 0.5%
Sweden -0.1% —more rate cuts forecast ahead
Denmark -0.75% —more rate cuts forecast ahead
Norway 1.25% —more rate cuts forecast ahead
Switzerland -1.25% to -0.25% —more rate cuts forecast ahead
US 0 to 0.25% —rate hike forecast this year
Canada 0.75%
Japan 0 to 0.10%
Australia 2.25% —more rate cuts forecast ahead
China 2.75% —more rate cuts forecast ahead
South Korea 2.00% —more rate cuts forecast ahead
Thailand 2.00% —more rate cuts forecast ahead
Source and forecasts: BNP Paribas
What could this all mean for gold?
"We see a risk that the current status quo among central banks may at some stage change:
After initial rate hikes there may be a case for the Fed to slow the pace of policy normalization against the backdrop of aggressive easing by central banks in World ex-US. Alternatively, central banks globally may start coordinating monetary policy. In our view, either of these would potentially limit the upside to USD, which in turn may be bullish gold. Acknowledging that the macroeconomic set-up has been somewhat different, we note that a coordination of central bank activity in the wake of the Plaza Accord in 1985 led to a sharply decline of USD which in turn pushed gold prices up sharply," according to a BofA Merrill Lynch Global Research report.Central banks are navigating through uncharted waters. Currency devaluation underscores the safe-haven value of gold as a wealth preservation vehicle. And, the year is only getting started.
By Kira Brecht |
