Category: Economoney

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Euro zone inflation steady at 2.4%

Euro Zone Inflation

Inflation rates in the euro area remained constant at 2.4% in April 2024, and the economy experienced growth in the first quarter, as indicated by preliminary figures released on Tuesday.

Headline inflation at 2.4% aligned with economists’ forecasts, while monthly inflation registered at 0.6%. Core inflation, which excludes energy, food, alcohol, and tobacco, fell to 2.7% from March’s 2.9%.

Energy prices’ year-on-year decline softened to -0.6% from -1.8% in March. Meanwhile, the gross domestic product increased by 0.3% in the first quarter, slightly exceeding economists’ expectations.

However, the GDP for the fourth quarter of 2023 was revised from no growth to a contraction of 0.1%, indicating a technical recession in the euro zone for the latter half of the year.

There is growing anticipation that the European Central Bank (ECB) may reduce interest rates at the upcoming monetary policy meeting on 6th June 2024.

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WEF president warns about global debt levels

Global debt burden

Borge Brende, the president of the World Economic Forum (WEF), recently issued a stark warning about global debt levels.

Speaking at the ‘Special Meeting on Global Collaboration, Growth and Energy for Development‘ in Riyadh, Saudi Arabia, (see WEF website), he highlighted that global debt ratios are approaching levels not seen since the 1820s.

The WEF president also reportedly emphasized the risk of ‘stagflation‘ for advanced economies. He cautioned that without appropriate economic measures, the world could face a decade of low growth.

The current global growth estimate stands at around 3.2%, down from the 4% trend growth seen for decades. Brende urged governments to address the mounting debt situation and implement prudent fiscal measures to avoid triggering a global recession. 

He also noted the persistence of inflationary pressures and suggested that generative artificial intelligence could offer opportunities for developing nations. The International Monetary Fund (IMF) concurs with this concern, reporting that global public debt reached 93% of GDP last year, still 9% higher than pre-pandemic levels. 

The IMF projects that global public debt could approach 100% of GDP by the end of the decade.

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Recent U.S. data is indicating inflation is proving stubborn and isn’t going away anytime soon

Inflation has become a persistent challenge for the Fed

The battle against inflation persists, gradually impacting the U.S. economy and presenting substantial challenges for the Federal Reserve.

Despite concerted efforts to control it, inflation remains stubbornly remains, leaving policymakers in a dilemma – to stimulate economic growth or to curb spiraling prices.

Let the data speak

Recent data presents a concerning scenario. Indexes from the Commerce Department, used by the Federal Reserve as indicators of inflation, reveal that prices are rising at a rate significantly exceeding the central bank’s annual target of 2%. Consumer spending persists, encouraged by the excessive amount of money circulating in the financial system.

However, this spending spree isn’t sustainable, and consumers are dipping into their savings to fund purchases. The personal savings rate has plummeted to its lowest level since October 2022. Borrowing is up and debt is far too high!

The Federal Reserve’s primary inflation gauge, the personal consumption expenditures price index, rose to 2.7% in March, encompassing all items. The crucial core index, excluding the more volatile food and energy prices, remained constant at 2.8%. These figures highlight the ongoing inflationary pressures.

Fed’s dilemma

The Federal Reserve is navigating a precarious inflation situation. Should it shift towards rate reductions prematurely, there’s a risk that inflation might surge back in 2024. Conversely, persistent inflation could compel central bankers to not only sustain the present rates but also ponder additional increases. The aspiration for a gentle economic descent is at stake.

Outlook

Forecasters anticipate inflation to dip below 2.5% in 2024, yet challenges persist. The Federal Reserve faces the difficult task of steering the economy towards stability and controlling inflation expectations. With the central bank’s policy meeting on the horizon, speculation abounds regarding their forthcoming strategy.

Will they maintain the current interest rates or implement more assertive measures? Their decision is set to influence the economic outlook for the foreseeable future.

Conclusion

U.S. inflation continues to be a persistent challenge, and the Federal Reserve’s efforts are ongoing. The path forward demands cautious steering, as policymakers must achieve a fine equilibrium to sustain economic stability while simultaneously curbing inflation.

And remember, the Fed said inflation was ‘transitory’.

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U.S. GDP slows to 1.6% significantly below expectations

U.S. GDP

The gross domestic product (GDP) from January to March 2024, grew at an annualised rate of 1.6%, significantly underperforming the projected 2.4%.

The personal consumption expenditures (PCE) price index, crucial for the Federal Reserve’s inflation assessments, climbed at an annualised rate of 3.4% for the quarter, marking the largest increase in a year.

Meanwhile, consumer spending rose by 2.5% during the quarter, a decrease from the 3.3% rise in the previous quarter and falling short of the 3% expectation.

U.S. GDP from Q1 2021 – Q1 2024

U.S. GDP from Q1 2021 – Q1 2024
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FTSE 100 closes at new all-time high

FTSE 100 Index

The UK FTSE 100 stock index has reached a new record closing price on Monday 22nd April 2024

The new all-time high was likely propelled by a weakening pound and reduced tensions in the Middle East. The FTSE 100 has been the laggard for many months.

The index concluded Monday at 8023 points, setting a new record and eclipsing its previous peak of 8012 from February of the preceding year.

At the close, it had risen by 1.62%, with retailers such as, Tesco, Sainsbury’s, M&S and Ocado being among the top gainers of the day.

The shares have gained from the depreciating pound since the London Stock Exchange index includes numerous companies with significant international operations.

A depreciated pound lowers the cost of exported goods for overseas buyers and boosts the value of international business transactions.

Update

On Tuesday morning 23rd April 2024 the FTSE 100 climbed to a new intraday high of: 8080

FTSE 100 5 day chart showing the intraday high of Tuesday morning 23rd April 2024
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IMF says Russia is expected to grow faster than all advanced economies in 2024

Oil

The International Monetary Fund calculates that Russia’s economy will expand more rapidly than all advanced economies this year.

According to the latest World Economic Outlook released by the IMF, Russia’s economy is projected to expand by 3.2% in 2024.

This growth outpaces the anticipated growth rates for the U.S. at 2.7%, the U.K. at 0.5%, Germany at 0.2%, and France at 0.7%.

G7 growth percentages

  • Russia at 3.2%
  • U.S. at 2.7%
  • France at 0.7%
  • U.K. at 0.5%
  • Germany at 0.2%

The forecast may be galling for Western countries that have endeavoured to economically isolate, restrict and punish Russia for its invasion of Ukraine in 2022.

Russia has demonstrated that Western sanctions on its industries have made it more self-sufficient and that private consumption and domestic investment remain resilient.

Oil exports

Oil and commodity exports to nations such as India and China, (two of the largest countries in the world by population) – as well as alleged sanction evasion and high oil prices, have allowed Russia to maintain strong oil export incomes streams.

UK and Europe growth

Outside of Russia, the IMF has revised its forecasts for Europe and the UK, projecting a growth of 0.5% for this year. This positions the UK as the second-lowest performer within the G7 group of advanced economies, trailing behind Germany.

The G7 also includes France, Italy, Japan, Canada and the U.S.

However, UK growth is expected to improve to 1.5% in 2025, placing the UK in the top three best G7 performers, according to the IMF.

The IMF also reported said that interest rates in the UK will remain higher than other advanced nations, close to 4% until 2029.

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Bank of England school report: must try harder – a brutal analysis of ‘out of date’ systems

Bank of England forecasts

The Bank of England (BoE) stands as a bastion of economic stability, guiding the United Kingdom through the ebbs and flows of financial tides. 

Modernising the Bank of England’s forecasting system has become a critical necessity. A recent independent review has cast a spotlight on the ‘serious deficiencies’ within its economic forecasting system, calling for an urgent modernisation.

Out of date forecasting methods

What have they all been doing for all these years to not have updated their systems?

The review, led by Dr. Ben Bernanke, a former chair of the U.S. Federal Reserve, paints a picture of an institution grappling with outdated systems and under-investment in critical infrastructure. The Bank’s staff, the report suggests, are hindered by software that is not just out-of-date but also complicates the already intricate task of economic forecasting.

This revelation comes at a time when accurate economic forecasting is more vital than ever. The world is still reeling from the effects of the pandemic, the 2008/2009 financial crisis and the UK faces unique challenges post-Brexit. The Bank’s ability to predict economic trends accurately is paramount in crafting policies that safeguard the nation’s financial health.

Deficiencies

The deficiencies highlighted are not just a matter of outdated software; they reflect a deeper need for a paradigm shift in how economic data is handled and analysed. The report recommends a complete overhaul of the system, emphasizing the need for automation of tasks that are currently performed manually.

Governor Andrew Bailey’s reportedly responded to the review by acknowledging the gravity of the situation, stating that updating the Bank’s systems is a ‘high priority’. This commitment to modernisation is a step in the right direction, but it should be followed by swift and decisive action, surely.

A broken compass?

The Bank of England’s forecasting system is more than a tool; it is the compass by which the nation navigates its economic future. Modernising this system is not just a recommendation; it is an imperative. As the UK charts its course in a rapidly changing global economy, the reliability and sophistication of its economic forecasting are not just beneficial but essential for continued prosperity.

In conclusion, the Bank of England’s economic forecasting system is at a crossroads. The call to modernise is clear, and the path forward must be paved with innovation, investment, and a steadfast commitment to excellence in economic stewardship.

The future of the UK’s economy depends on it.

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UK inflation eases to 3.2% but down less than expected

UK inflation data March 2024

Inflation in the U.K. eased to 3.2% from 3.4% in March, the Office for National Statistics said on Wednesday 17th April 2024.

But a higher-than-expected reading creates more concern as investors push back bets on the timing of the first Bank of England (BoE) rate cut.

Economists expected 3.1% as inflation has been falling gradually since it peaked at 11.1% in late 2022.

Food prices provided the biggest downward drag on the headline rate, the ONS said, while motor fuels pushed it higher.

The core inflation rate, excluding energy, food, alcohol, and tobacco, was reported at 4.2%, slightly above the forecasted 4.1%. Services inflation, closely monitored by U.K. monetary policymakers, decreased from 6.1% to 6%, still surpassing the expectations of economists and the Bank of England (BoE).

The March core inflation figure, remaining above 4%, is expected to fuel speculation that inflation is more persistent than recent projections indicated, potentially delaying the anticipated timing of initial interest rate reductions.

UK inflation 3.2% March 2024

UK inflation 3.2% March 2024
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Latest UK pay growth and unemployment data

UK jobs

The latest figures on UK pay growth and unemployment present a complex picture of the country’s labour market.

The unemployment rate has seen a slight uptick to 4.2%, a rise from the previous 3.9%. This increase, which is more than anticipated, suggests a softening in the labour market.

Conversely, wage growth appears to be resilient in the face of rising unemployment. Although core wage growth has decelerated, it remains in the region of 6%. This could indicate that employers are maintaining competitive wages to attract and retain skilled workers, even amidst a slowing labour market.

Employment dipped according to the ONS

The ONS said employment rate dipped to 74.5% between December and February and the percentage of 16 to 64 year-olds defined as economically inactive rose from 21.8% to 22.2%, which equates to 9.4 million people.

In February 2024, the average weekly earnings were estimated at £677 for total earnings and £633 for regular earnings. This equates to an annual growth in regular earnings (excluding bonuses) of 6.0%, and annual growth in employees’ average total earnings (including bonuses) of 5.6%.

Adjusting for inflation using CPIH

However, when adjusted for inflation using the Consumer Prices Index including owner occupiers’ housing costs (CPIH), the real terms growth for regular pay was 1.9%, and for total pay was 1.6%. This implies that while nominal wages are increasing, the real purchasing power of these wages may not be keeping up with inflation.

Bank of England

The Bank of England will likely approach this data with caution. The combination of increasing unemployment and slowing wage growth could be indicative of a weakening economy, potentially prompting the Bank to contemplate rate cuts.

The response of the Bank of England to these trends will be pivotal in the forthcoming months.

Summary

In summary, the UK labour market is exhibiting signs of cooling with an increase in unemployment and a slowdown in wage growth. However, wages continue to grow at a relatively high rate. The real impact on workers will hinge on how these wage increases stack up against inflation.

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China’s economy expanded by 5.3% in Q1

On a quarter-by-quarter basis, China’s GDP grew 1.6% in the first quarter, compared to analysts’ expectations of around expectations of 1.4%.

Beijing’s growth target for 2024 is around 5%.

China’s growth was driven in part by external demand, as export volume grew by 14% year on year.

Industrial output for March grew 4.5% year on year, missing expectations of 6%.

Retail sales grew 3.1% year on year, lower than expectations of 4.6%.

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U.S. Supercore inflation measure indicates Fed may have a problem

Markets have fretted about core inflation recently, now analysts are concerned about a highly specific price gauge within the data – ‘supercore’ inflation.

This measure tracks services inflation, excluding food, energy, and housing, which has recently surged, rising 4.8% year-over-year in March 2024 and over 8% on a three-month annualised basis.

The situation is further complicated as some of the most persistent elements of services inflation include essential household expenses such as car and housing insurance, along with property taxes. Wall Street was unsettled by a recent consumer price index report that exceeded expectations, yet the focus is on the ‘supercore’ inflation reading within the data.

Economists also analysed the core CPI, which omits the volatile prices of food and energy, to discern the true inflation trend. The ‘supercore’ gauge goes a step further by also removing shelter and rent costs from its services calculation.

Federal Reserve officials find this measure particularly useful in the current environment, viewing the spike in housing inflation as a transient issue rather than a reliable indicator of underlying price trends.

Supercore inflation accelerated to a 4.8% pace year over year in March 2024, the highest in 11 months.

Sticky inflation problem

Adding complexity to the situation is the declining consumer savings rate coupled with rising borrowing costs, which may compel the central bank to maintain a restrictive monetary policy “until something breaks,” according to Fitzpatrick.

Analysts warn that the Federal Reserve may struggle to reduce inflation through additional rate hikes, as the prevailing factors are more persistent and less responsive to stringent monetary policy.

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U.S. markets unfazed by hot CPI data

U.S. Flag

Despite the recent surge in the Consumer Price Index (CPI), and better than expected PPI data, markets have shrugged off any concern… for now

Fickle

On Wednesday 10th April 2024 the CPI data announcement pushed the markets down and on Thursday 11th the markets recovered after the PPI data was better than expected.

CPI Report for March 2024

  • Both headline and core CPI rose by 0.4%, surpassing forecasts.
  • Bond markets are now cautious about potential rate cuts, shifting from a floor of three cuts to a possible ceiling.
  • Groceries’ inflation has eased, but housing costs remain a pressure point.
  • Fed policymakers closely monitor Supercore services inflation.
  • Solid wage gains continue to impact prices.

Producer Price Index (PPI)

PPI increased by 0.6% in February 2024. Expectations persist for June rate cuts by the Federal Reserve.

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UK economy grew by 0.1% in February 2024

UK economy

One tenth of 1% is very little but we can at least hope the UK is on it’s on way out of recession

Let’s blame the weather

The economy grew by 0.1%, figures show, boosted by production and manufacturing in areas such as the car sector. The Office for National Statistics (ONS) said that construction was dampened by wet weather.

The official ONS statistics also revised its previous estimate for January 2024 from 0.2% growth up to 0.3%.

Hunt is happy with 0.1% growth…?

Chancellor Jeremy Hunt reportedly suggested that the new figures were a “welcome sign that the economy is turning a corner”. “We can build on this progress if we stick to our plan,” he added.

That’s good then Jeremy – well done you, nice plan!

UK growth February 2024 at 0.1%

UK growth February 2024 at 0.1%
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U.S. inflation data for March 2024 came in higher than expected

U.S. Inflation up slightly

The headline inflation rate registered at 3.5% year-on-year, surpassing the 3.4% economists had anticipated in a Dow Jones survey and marking a 0.3% increase from February 2024.

The core CPI experienced a 0.4% rise on a monthly basis and a 3.8% increase from the previous year, both exceeding expectations. U.S. stocks also dropped on the announcement.

Recent monthly readings have likely diminished any residual expectations for a Federal Reserve rate cut as early as May, according to some analysts.

Markets remain hopeful for a rate cut this summer; however, the Federal Reserve is seeking consistent signs of disinflation in the upcoming months before deciding.

Treasury yields have risen as stocks declined following the headline news.

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Does the U.S. jobs boom raise doubts about rate cuts?

U.S. job creation vs inflation and interest rates

The U.S. economy is on a rip, with employers adding around 303,000 jobs in March 2024 – the largest increase in almost a year.

As the world’s largest economy continues to surge, questions arise about the Federal Reserve’s next move regarding interest rates.

Stronger-than-expected Job Growth

The unemployment rate fell to 3.8%, indicating strong job growth in several sectors such as health care, construction, and government. While economists had predicted job gains of approximately 200,000, the actual numbers have easily exceeded those expectations.

The labour market’s surprising resilience has caught analysts off guard, leading to speculation about the timing of interest rate cuts.

Fed’s Dilemma

The Federal Reserve has held interest rates in a range of 5.25%-5.5%, the highest level in over two decades. Initially, the Fed raised rates sharply in 2022 to curb inflationary pressures. However, the subsequent cooling of price inflation (down to 3.2% in February) without a significant spike in unemployment has complicated matters. The central bank now faces a delicate balancing act.

Delayed Rate Cuts?

The significant increase of 303,000 in non-farm payrolls for March 2024 reinforces the Federal Reserve’s stance that the robustness of the economy permits a gradual approach to interest rate reductions.

The Fed had been expected to initiate rate cuts this year to mitigate the impact of high borrowing costs. However, the stronger-than-anticipated economic performance suggests that rate cuts may not occur until the second half of this year.

Labour Market Dynamics

U.S. government spending in areas like high-tech manufacturing and infrastructure has bolstered the labor market. Additionally, an influx of more than three million immigrants last year has expanded the workforce, potentially keeping wage pressures in check. In March, average hourly pay rose by 4.1% year-on-year, consistent with expectations and near a three-year low.

America’s Comeback

President Joe Biden hailed the latest job figures as a “milestone in America’s comeback.” However, some market analysts argue that the strong jobs growth could complicate efforts to return inflation to the Fed’s 2% target. Some analysts even speculate that rate cuts may not materialize until 2025.

Global Implications

Higher U.S. interest rates have ripple effects worldwide, enticing investors to shift capital toward America. While the Fed’s in-tray still has some warnings, the delay in rate cuts reflects the economy’s underlying strength.

The U.S. jobs boom presents a conundrum for policymakers. Balancing economic vitality with inflation control remains a delicate task, and the Fed’s decisions will reverberate far beyond its borders.

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Euro zone inflation unexpectedly falls to 2.4% in March 2024

EU inflation

Eurozone inflation eased to 2.4% in March 2024, as indicated by preliminary figures released on Wednesday 3rd April 2024.

This decrease has increased expectations that interest rate cuts may start in the summer 2024.

Market analysts anticipate that the central bank will commence reductions in interest rates starting in June 2024, reflecting recent communications from the ECB.

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Fed Chair Powell stresses the importance of additional proof that inflation is subsiding before cutting interest rates

Powell

Federal Reserve Chairman Jerome Powell stated on Wednesday 3rd April 2024 that policymakers will need time to assess the current inflation situation, leaving the schedule for potential interest rate reductions unclear.

Referring to the stronger-than-anticipated price pressures at the year’s onset, Powell reportedly stated that he and his colleagues are not in a hurry to relax monetary policy.

Market expectations are leaning towards the FOMC initiating policy easing this year, although adjustments to the anticipated timing and scale of reductions have been necessary due to persistently high inflation.

Meanwhile, other economic indicators, especially in the U.S. labour market and consumer spending sectors, remain robust, affording the Fed the opportunity to evaluate the prevailing situation prior to taking action.

The target rate is 2%.

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UK recession confirmed but early signs of green shoots of recovery have been seen

UK recovery

The Office for National Statistics (ONS) has released updated UK GDP figures, confirming that the UK entered a technical recession in the last six months of the previous year.

The new data shows the economy contracted by 0.1% in the three months from June to August 2023, with a further decline of 0.3% in the subsequent financial quarter from September to December 2023. The overall economy grew by 0.1% throughout 2023.

However, early signs suggest that the UK began to recover in January 2024, with initial data indicating some growth, and surveys suggesting this trend may have gained momentum into February and March 2024.

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What if the Federal Reserve decided to hold interest rates in 2024?

The Fed

The Fed in March 2024, indicated for the markets to expect three interest rate cuts by the end of 2024 – but what if this didn’t happen?

The Federal Reserve’s decision to maintain interest rates in 2024 could have significant implications for the U.S. economy.

Fed cred – credibility would be the first to go!

The cost of borrowing would remain unchanged. This could discourage businesses from taking out loans for expansion or investment, potentially slowing economic growth. Consumers may also be less inclined to take on debt for major purchases, such as homes or cars, which could impact sectors reliant on consumer spending.

Value of the U.S. dollar could strengthen relative to other currencies. A higher interest rate typically attracts foreign investors seeking better returns, increasing demand for the dollar. While a strong dollar can benefit consumers by making imports cheaper, it can hurt exporters whose goods become more expensive for foreign buyers.

The decision could signal the Fed’s confidence in the economy’s health. By not lowering rates, the Fed may be indicating that it believes the economy can withstand higher borrowing costs without slipping into recession. This could boost investor confidence and potentially lead to increased market activity.

However, the decision could also exacerbate wealth inequality. Those with investments tend to benefit from higher interest rates, as they can earn more from savings and bonds. Conversely, those living paycheck to paycheck may not see any immediate benefit and could face higher costs if they need to borrow.

In conclusion, should the Federal Reserve decide to maintain interest rates in 2024 this could have a mixed impact on the U.S. economy.

The effects would likely be felt across various sectors, influencing everything from business investment and consumer spending, credit to the strength of the dollar and wealth inequality. As always, the actual outcome would depend on a multitude of factors, including the overall health of the global economy and domestic fiscal policy decisions.

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New guidelines from China reportedly blocks U.S. chips in government computers

U.S. China trade microchip trade battle

China has reportedly prohibited the use of U.S. processors from both AMD and Intel in government computers and servers. The directive is designed to encourage the use of domestic alternatives.

Chinese government agencies are now required to choose ‘safe and reliable’ domestic alternatives for these chips. The sanctioned list features processors from Huawei and the state supported firm Phytium, both of which face bans in the U.S.

In addition to processors, China is now also restricting Microsoft Windows on government devices, opting instead for domestically produced operating systems.

These guidelines are part of a broader tech trade battles between China and the U.S. While the impact on Intel and AMD remains to be seen, it’s clear that China is taking aggressive steps to reduce reliance on U.S. built technology.

The global tech landscape continues to evolve, and these decisions have far-reaching implications for both countries and the industry as a whole.

U.S. and China trade tensions are unlikely to recede anytime soon.

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Japan’s Nikkei hits another new record

Nikkei index up

Japan’s Nikkei 225 index briefly surpassed 41000, reaching a new all-time high on Friday 22nd March 2024, as the nation’s inflation rate reportedly accelerated in February 2024. Other Asia-Pacific markets experienced declines.

The headline inflation rate in Japan for February 2024 was reported at 2.8%, an increase from the 2.2% recorded in January 2024. The core inflation rate, which excludes the cost of fresh food, also rose to 2.8% from the 2% reported the previous month.

In its monetary policy statement, the Bank of Japan (BoJ)stated that it aims to achieve the price stability target of 2% in a sustainable and stable manner.

The Nikkei retreated to close just below 41000, ending up at 40888

The Nikkei retreated to close just below 41000, ending up at 40888
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Dow hits new record high! Nasdaq & S&P 500 follow

Stock markets up!

On Wednesday, 20th March 2024, the three major U.S. indices soared to record all-time closing highs after the Federal Reserve decided to maintain rates and kept its ‘expectations’ for three rate cuts by the end of 2024.

The Dow Jones Industrial Average surged 401.37 points to close at 39,512. The S&P 500 finished at 5224, breaching the 5200 level for the first time. The Nasdaq Composite climbed 1.25% to end at 16369.

Federal Reserve

The Federal Reserve kept rates steady but announced plans for three reductions before the year’s end, echoing its previous projection from December 2023. However, the central bank noted that it requires more substantial evidence of inflation subsiding before commencing any interest rate cuts.

Futures continued their historic ascent into Thursday21st March 2024.

Thank you Fed.

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UK inflation down to 3.4% in February 2024

UK inflation

In February 2024, inflation decreased to 3.4%, a decline from January’s 4%, moving closer to the Bank of England’s self-imposed target of 2%


This reduction signifies that the cost of living is increasing at its least rapid rate since September 2021, when it was recorded at 3.1%.

Since reaching a peak of 11.1% in October 2022, the highest in 40 years, inflation has been on a steady decline. In the big inflation picture, that’s a pretty good result.

It has only taken around 16 months to move the rate from 11.1% (a 40-year high) down to just 1.4% above the BoE’s target of 2%.

The primary factor contributing to this decrease, as reported by the Office for National Statistics (ONS), is the deceleration of food price inflation.

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Bank of Japan ends negative rates: a seismic shift in monetary policy

The flag of Japan

In a move that reverberated across global financial markets, the Bank of Japan (BOJ) recently bid farewell to its negative interest rate policy – the last of its kind in the world. This decision marks a pivotal moment in the realm of central banking and has far-reaching implications for economies and investors worldwide.

The Negative Interest Rate Saga

To understand the significance of this shift, let’s rewind the clock. Japan, grappling with deflation for years, embarked on an ambitious economic experiment known as ‘Abenomics’ in 2013. The strategy combined massive government spending with unconventional monetary measures. The BOJ, under the leadership of then-Prime Minister Shinzo Abe, injected liquidity into the system by purchasing bonds and other assets. The goal? Achieve a 2% inflation target and kickstart growth.

Among these measures was the adoption of negative interest rates. The idea was simple: discourage banks from hoarding excess reserves and encourage lending. However, the path to higher inflation proved elusive, and the BOJ found itself navigating uncharted waters.

The Change

Fast forward to 2024. Japan’s economy has experienced a moderate recovery, prompting policymakers to reassess their strategic options. The Bank of Japan (BOJ) has elevated its short-term interest rate from minus 0.1% to a range between zero and 0.1%. This adjustment marks the first increase in rates since 2007, representing a significant, even a ‘seismic’ policy shift.

The Effect

  1. Policy Pivot: The BOJ acknowledges that negative rates have played their part. With improving wages and corporate profits, the time is ripe for a change. The new rate range signals a departure from the era of ultra-accommodative policies.
  2. Global Implications: Japan now stands as the last central bank to exit negative rates. For years, central bankers worldwide wielded cheap money and unconventional tools. Now, the tide turns. The era of negative rates draws to a close, and other central banks take note.
  3. Market Response: Tokyo’s Nikkei 225 index responded positively, gaining 0.7%. The Japanese yen weakened against the dollar. Investors recalibrate their strategies, adjusting to a world where negative rates are no longer the norm. The Nikkei is sitting close to or at its all-time high!

Nikkei 225 3 month chart at: 40003 – close to its recent new all-time high of 40109

Nikkei 225 3 month chart at: 40003 – close to its recent new all-time high of 40109

The future?

As the BOJ takes its first step toward policy normalization, questions abound. Will further rate adjustments follow? How will markets adapt? And what does this mean for global liquidity?

One thing is certain: The decision of the Bank of Japan resonates beyond the confines of the nation. It heralds the beginning of a new era in which central banks adjust their strategies, economies establish stability, and investors once more chart a course through unfamiliar territory.

Within the chronicles of monetary history, the cessation of negative rates at the Bank of Japan will be marked as a pivotal moment. As the final details of this policy transition are solidified, the global community observes, prepared for the forthcoming developments.

Disclaimer: The views expressed in this article do not constitute financial advice. Readers are encouraged to consult professional advisors before making any investment decisions.

Remember to always do your own research

RESEARCH! RESEARCH! RESEARCH!

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More than 20% of UK adults not seeking work

Not working

More than a fifth of working-age adults in the UK are currently not actively seeking employment, according to recent figures.

The economic inactivity rate during the period from November 2023 to January 2024 stood at 21.8%, a slight increase compared to the previous year. This means that approximately 9.2 million people aged between 16 and 64 are neither employed nor actively searching for jobs. The total figure has risen by over 700,000 since before the onset of the coronavirus pandemic.

Several factors contribute to this problem

Long-Term Illness: Approximately one-third of the working-age population not participating in the labour force cite long-term illness as the primary reason for their inactivity. Health-related issues have kept a significant portion of the population away from work.

The pandemic: of 2020 caused work flight. 700,000 extra out of the workplace since the coronavirus pandemic Covid 19 hit the UK in 2020.

Students and Education: Students pursuing education are often classified as economically inactive. Their focus on studies and lack of job-seeking activity contribute to this category.

Care Responsibilities: Individuals who care for family members or manage household responsibilities fall into this bracket. Caring duties can be time-consuming and prevent active job hunting.

People with Disabilities: Those with disabilities may face barriers in accessing employment opportunities. Accommodations and inclusive policies are essential to address this issue.

Early Retirement: Some adults choose early retirement, and once retired, they rarely express a desire to return to work. This group contributes significantly to the inactive population.

Discouraged Workers: Individuals who have given up on job searches due to discouragement or lack of suitable opportunities are also part of this category.

Gender Gap: Historically, more women have been classified as economically inactive compared to men. However, this gap has narrowed over the years as more women have entered the workforce.

Age Trends: Recent data indicates that while the number of economically inactive individuals due to illness has decreased, there has been an increase among those aged 16 to 34. Mental health issues are believed to be a contributing factor in this age group.

Persistently high level

The persistently high level of economic inactivity poses challenges for the UK economy. As the country emerges from the pandemic, addressing workforce shortages becomes crucial. Measures such as reducing National Insurance Contributions and extending free childcare services aim to encourage people to seek employment or increase their working hours. 

More effort is needed to further incentivise workforce participation, if not, the UK economy will suffer for many more years than would otherwise be necessary.

Office for national statistics

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UK swings to economic growth in January 2024

UK economy

The economy grew by 0.2%, ONS figures show, boosted by sales in shops and online and from more construction activity.

Hopefully this means the UK is on its way out of recession.

The Office for National Statistics (ONS) said the services sector led the bounce back.

This is an early dataset, but demonstrates how the UK, which entered recession at the end of 2023, is faring.

ONS data suggests UK could be exiting a short-lived ‘technical’ recession

UK swings to economic growth in January 2024