Currency wars to the right, deposit wars to the left

The undeclared global currency war and local bank deposit war forced Glenn Stevens' hand yesterday, but all to no avail.

With a resigned sigh, Reserve Bank governor Glenn Stevens has been forced by Mario Draghi and Shinzo Abe to get out his trusty popgun and join the currency wars.
Cannons are booming across oceans – interest rates at zero, cash ordinance pouring into the financial system. “Take that”, squeaks the Reserve Bank, popping the cash rate by 0.25 per cent to 2.75 per cent.
The other factor forcing its hand is the deposit wars among the Australian banks, which has kept both deposit and lending rates relatively high and muted the effect of monetary policy.
It has nothing to do with the economy being in the same swamp it was the last two times that interest rates were this low, in 2009 and 1960. It is, as always, not as good as the government says it is and not as bad as the Opposition says it is, although the latter is more correct than the former.
But domestic economic conditions do not, in aggregate, justify a rate cut. As Glenn Stevens said in yesterday’s statement, growth is “a bit below trend” and unemployment remains “relatively low”. But the currency does justify it.
The exchange rate is “unusual” given the decline in export prices and interest rates said the governor, master of the understatement. In fact it has been stable for two years, apart from a short-lived correction in each year as global growth slowed.
Stevens’ hand was forced by last week’s rate cut by the European Central Bank and, more importantly, the statement by its President Mario Draghi that they had an “open mind” about negative interest rates – that is, charging the banks to park money with the European Central Bank.
That was a month after the Bank of Japan launched its own radical money printing, accelerating the decline of the yen that began last September, just before the election of its new Prime Minister Shinzo Abe. The Japanese currency has now devalued by more than 20 per cent, leading to a 60 per cent rise in its sharemarket.
Currency warfare? Yes, but an undeclared one. In fact finance ministers and central bankers at the G20 meeting in Washington two weeks ago scrupulously talked about anything but their currencies.
They’ve flooded the world with more than $6 trillion worth of fresh cash in the past few years, and still printing, and reduced interest rates semi-permanently to virtually zero, but “beggar-thy-neighbour” currency manipulation? Certainly not! (Pass the biscuits please.)
Australia’s bond rate has dropped 70 basis points in two months but remains at a juicy – for a AAA sovereign – 3 per cent. Bank dividend yields are an even more juicy 5 per cent.
And the average one-year term deposit rate is 4 per cent. When the cash rate was 3 per cent in the middle of 2009, the one-year term deposit rate was also 3 per cent. The at-call rate is also higher now than it was then.
The competition for deposits also means that while the cash rate is at a record low, the standard variable mortgage rate is not. It’s now 6.13 to 6.24 per cent; in 2009 it was 5.5 per cent.
So the deposit war means the Reserve Bank has cut more to have the same impact.
The currency war means that it won’t be enough.

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