I have a question for you: Would you ever pay someone for the privilege of being able to lend to them? Yes, you read that correctly. I’m going to guess that you’d say no. In a normally functioning financial system, the borrowers pay the lenders interest, not the other way around.
Well, as you know, the global financial markets are anything but normal right now. In the past few days, both the European Central Bank (ECB) and the Bank of Japan (BOJ) have demonstrated the lengths they’re willing to go to shore up their respective economies. This has major implications for the U.S. economy and stock market, so let’s review all that has happened.
Europe’s Floundering Banks Force the ECB’s Hand
Last week, the ECB voted to slash all three of its interest rates in an attempt to boost the European economy. The central bank cut is deposit rate to -0.4%, its main refinancing rate to 0% and its marginal lending rate to 0.3%. The ECB also boosted its monthly quantitative easing by increasing its monthly bond buying program to 80 billion euros, up from 60 billion euros. It also expanded the type of bonds that can be bought, so its quantitative easing now encompasses more securities.
Essentially, the ECB threw in the “kitchen sink” and eased a lot more than economists were expecting. This was obviously a desperate move to shore up the European banking system and bad loans at French, German and Italian banks.
Japan’s Mounting Debt Weighs on the BOJ
Today, the BOJ announced that it is maintaining its current negative rate policy, so the reserves deposit rate remained -0.1%. In doing this, Japan has joined the ranks of Switzerland and the European Union, both of which have negative rate policies. For money reserve funds (MRF), the BOJ’s rates remained at zero. The central bank also reiterated its goal to raise the country’s monetary base by 80 trillion yen per year.
As I mentioned in a previous blog, Japan is the world’s most heavily indebted country. In fact, it’s actually borrowed so heavily in recent years its debt load is an extraordinary 230% of its Gross Domestic Product. To put this number in perspective, even Greece—with all its economic woes—has a debt-to-GDP ratio of “only” 177%. So between Japan’s slowing economic growth, and its mounting debt burden, the BOJ may be compelled to maintain its negative rate policy for some time.
Why This All Matters
For those of us in the United States, it can be all too easy to keep our focus on the U.S. stock market and the American economy. However, what the ECB and the BOJ do has an outsized impact on monetary policy within U.S. borders. Tomorrow afternoon, around 2:00 PM EST, the Federal Open Market Committee (FOMC) will release its official interest rate decision for March. I recommend you mark your calendars, because this event typically moves the stock market.
My prediction is that the Fed will stand pat and not raise interest rates for a second time this year. With interest rates worldwide steadily declining, an interest rate hike in the United States would widen the “deflationary black hole” that has been wreaking havoc on the financial markets. So there is pressure on the Fed to not raise rates further.
In any event, I will post tomorrow’s blog immediately following the rate announcement, so please check back in shortly after 2:00 PM EST for the complete details.