JAKARTA (TheInsiderStories) – Major global central banks flails to lower interest rate amid the higher uncertainty. Some also bring the benchmark rates to negative zone.
On Wednesday, United States’ Federal Open Market Committee its expecting to cut the Federal Reserves Fund Rates followed President Donald Trump statement yesterday. Some analysts rated, its third rate cut represented the end of its policy loosening.
In the next day, Bank Indonesia (BI) will hold a board of governor to decide their monetary stance in this month. In October the central bank make a fourth straight cut during this year, after decided cut the BI 7-Days Reverse Repo rate (BI-7DRR) by 25 bps to 5 percent. IHS Markit sees the BI could opt for a fifth consecutive cut given.
Governor Bank of Japan (BoJ) Haruhiko Kuroda sees the central bank has room to deepen negative interest rates in the next meeting. He also signaled there were limits to how far it can cut rates or ramp up stimulus.
Kuroda said there was consensus within the central bank that it can deepen negative rates beyond the current -0.1 percent. But he said the central bank must carefully weigh the benefits and costs of further easing, suggesting the hurdle for expanding stimulus has risen due to the cost of prolonged easings, such as the effect it has on financial institutions’ profits.
“There is plenty of scopes to deepen negative rates from the current -0.1 percent. But I’ve never said there are no limits to how much we can deepen negative rates, or that we have unlimited means to ease policy,” Kuroda told a semi-annual parliament testimony on monetary policy, as quoted by Reuters.
Kuroda also said there was still enough Japanese government bonds left in the market for the BOJ to buy, playing down concerns its huge purchases have drained market liquidity. After years of heavy purchases to flood markets with cash, the BoJ now owns nearly half of the JGB market.
Under a policy dubbed yield-curve control, the BoJ pledges to guide short-term rates at -0.1 percent and the 10-year bond yield around 0 percent. It also buys government bonds and risky assets to achieve its 2 percent inflation target, which has so far been elusive.
The central bank kept policy steady last month but tweaked its forward guidance to say it would maintain ultra-low rates or even cut them for as long as needed to gauge overseas risks.
In addition, European Central Bank (ECB) Vice President Luis de Guindos said on Monday (11/18), low-interest rates will continue squeezing eurozone banks’ profitability in the foreseeable future,. Structural factors, such as overcapacity, are at the heart of the low profitability challenge of commercial banks.
Euro area banks have reported persistently low profitability in recent years, and are facing a challenging environment at the moment, de Guindos said at the opening ceremony of the 22nd Euro Finance Week in Frankfurt, Germany.
“The recent softening of the macroeconomic growth outlook and the associated low-for-longer interest rate environment are likely to weigh further on their profitability prospects,” de Guindos said.
Policymakers lowered a key interest rate further into negative territory in September, with -0.5 percent on lenders’ deposits at the central bank – effectively charging banks to park their cash in Frankfurt.
However, de Guindos dismissed concerns as “misleading” that it is the monetary policy to blame in worsening bank profitability. He stressed the monetary policy’s role in supporting economic activity, which could generate higher lending volumes, as well as the design of a two-tier system for reserve remuneration to mitigate the effect of negative interest rates on banks.
He said that “structural factors are at the heart of weak bank profitability.” There are too many banks that have low market shares and are under competitive pressures and endure cost inefficiencies, he said.
De Guindos suggested ways to increase profitability, such as to adjust business models to diversify income sources and invest more in digital technologies, or to achieve economies of scale and scope via mergers and acquisitions.
In another move to stimulate lending, growth, and inflation, the ECB also restarted it’s controversial “quantitative easing” bond-buying program.
“Market analysts are concerned about the drag on bank profitability” from such moves, de Guindos acknowledged, allowing they could eat into banks’ net interest margins – the difference between what they make from lending and the costs of refinancing.
European and especially German banks have much lower profitability than competitors in the United States, where rates are higher and regulations less onerous. But de Guindos argued eurozone lenders should do their homework by adjusting business models, cutting costs and investing in new technologies.
Meanwhile “policymakers may need to remove obstacles to cross-border mergers and acquisitions and pursue the banking union agenda,” he said, repeating a long-standing ECB appeal to the European Commission in Brussels.
Written by Lexy Nantu, Email: email@example.com