Currency Wars: Riksbank Rattles Markets With Rate Cut Deeper Negative; Treasuries and Gold Soar, Societe Generale Drops 13%, Deutsche Bank 7%
Sweden's Central Bank, the Riksbank, rattled markets with a rate cut of .15%, now at -0.50%. Bank shares plunged again. Société Générale is down 13%, Deutsche Bank 7%, and Santander 6%.
US treasury yields are falling like a rock with gold flying high, up another $40. Oil fell towards $26, and US futures are at the lowest price in two years.
Despite the fact that negative rates cripple bank stocks and rob savers, cutting rates is the only damn thing many of these central banks know how to do.
Please consider Riksbank Cuts Rates Deeper Into Negative Territory.
Sweden's central bank moved its interest rates deeper into negative territory with an unexpectedly large cut, intensifying fears that global policymakers are being forced to take more extreme action to tackle low inflation.
The Riksbank cut its main repo rate by 15 basis points to minus 0.5 per cent, despite the fact that the country's economy is booming. The bank said it felt forced to act because of "weakening confidence" in achieving its inflation target of 2 per cent.
The move rattled currency markets, sending the Swedish krona down 1.6 per cent against the euro, while the yen hit a 14-month high of 111.39 against the US dollar.
Bank shares resumed their slide, led by Société Générale, which tumbled as much as 13 per cent. Deutsche Bank dropped 7.1 per cent, Santander lost 6.1 per cent, and UniCredit sank 8 per cent. The pan-European Stoxx 600 fell 3.4 per cent, while US markets were called to open at their lowest in almost two years.
The Swedish cut followed the Bank of Japan's decision to lower interest rates to minus 0.1 per cent in January, a move which stunned financial markets. At the meeting to approve the cut, some members of the BoJ's policy committee warned of a global race with other central banks to set the lowest interest rates.
"Today's action hints at the Riksbank's willingness to forearm itself also from the ECB's upcoming action expected in March," noted Marco Valli, economist at Unicredit.
The ECB lowered its deposit rate to minus 0.3 per cent in December and is expected to make another cut of at least 10 bps at its meeting next month.
Sweden is in the unusual position of having very strong economic growth currently but weak inflation, causing an acute policy dilemma for the Riksbank. It forecasts that economic growth will be 3.5 per cent this year, a little lower than the 3.7 per cent in 2015.
But inflation was just 0.1 per cent in December while core inflation, more closely watched by the Riksbank, was 0.9 per cent.
The Riksbank has been open about its desire to keep the krona weak as part of a global battle to depreciate currencies. The central bank earlier this year delegated authority to its governor and one deputy governor to intervene in the currency markets at any time, a move that has spurred some concern among politicians in Stockholm and dissent from another deputy governor at the Riksbank.
Mind Boggling Stupidity
With economic growth at 3.5%, it would make more sense for the Riksbank to thank deflation than fight it. Spain's growth is one of the best in the eurozone and Spain too is allegedly mired in deflation.
Next month, the ECB is likely to react with a cut sending its lending rate to -0.40 or -0.50%. Japan will feel forced to act in kind.
Meanwhile, the Yellen Fed still insists the Fed will hike rates this year. I suggest a global recession has begun.