While the focus in January has been on the new QE program from the ECB, the more important issue facing financial markets is the race to zero rates around the world. This race is more than just from QE but from old fashioned rate cutting in order to make saving less attractive to domestic consumers and country investment through short-term capital flow less interesting to foreign investors.
No thanks, we do to want you to save. Sorry, we are not looking for foreign capital inflows. When this policy of cutting rates is pursued by all countries, the race to zero and beyond becomes the policy of the day. Is this lose-lose as some have called it? Clearly, pushing rates to zero will lead to misallocations in lending. There is no competitive advantage when every rate cut is matched by other countries. The impact on any one country if the relationship across rates stays is ambiguous. What is not ambiguous is the distortion in lending markets.
Right now, for a large sample of central banks:
- 22/26 central banks have had their last rate move to a lower level.
- 8/26 central banks have changed rates so far this year and 7/8 were lowered them.
- The only bank to raise rates has been the central bank of Brazil which is facing much higher inflation.
- Denmark and Switzerland have central bank rates negative and have negative rates for years out the curve.
- While the US has stopped QE and has discussed raising rates, the date is still unclear.
The question is who will be the winner on the race to zero.
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