Factbox: Central banks go negative - to what avail? Mortgage arrears near record lows as banks tighten lending

================================================================ Media Release Statement by Glenn Stevens, Governor: Monetary Policy Decision Number2016-10 Date3 May 2016 At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.75 per cent, effective 4 May 2016. This follows information showing inflationary pressures are lower than expected. The global economy is continuing to grow, though at a slightly lower pace than earlier expected, with forecasts having been revised down a little further recently. While several advanced economies have recorded improved conditions over the past year, conditions have become more difficult for a number of emerging market economies. China's growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook. Commodity prices have firmed noticeably from recent lows, but this follows very substantial declines over the past couple of years. Australia's terms of trade remain much lower than they had been in recent years. Sentiment in financial markets has improved, after a period of heightened volatility early in the year. However, uncertainty about the global economic outlook and policy settings among the major jurisdictions continues. Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative. In Australia, the available information suggests that the economy is continuing to rebalance following the mining investment boom. GDP growth picked up over 2015, particularly in the second half of the year, and the labour market improved. Indications are that growth is continuing in 2016, though probably at a more moderate pace. Labour market indicators have been more mixed of late. Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast. Monetary policy has been accommodative for quite some time. Low interest rates have been supporting demand and the lower exchange rate overall has helped the traded sector. Credit growth to households continues at a moderate pace, while that to businesses has picked up over the past year or so. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this. In reaching today's decision, the Board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate. At present, the potential risks of lower interest rates in this area are less than they were a year ago. Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting. Enquiries Media and Communications Secretary's Department Reserve Bank of Australia SYDNEY Phone: +61 2 9551 9720 Fax: +61 2 9551 8033 E-mail: rbainfo@rba.gov.au Mortgage arrears near record lows as banks tighten lending By business reporter Michael Janda =========================================================== Tue May 3, 2016 | 4:04 AM EDT Australia cuts interest rates to turn back global deflation tide A woman delivering catering walks past Australia's Reserve Bank in Sydney, November 3, 2015. REUTERS/Jason Reed/File Photo A woman delivering catering walks past Australia's Reserve Bank in Sydney, November 3, 2015. Reuters/Jason Reed/File Photo Australia cuts interest rates to turn back global By Wayne Cole SYDNEY (Reuters) - Australia's central bank cut interest rates to an all-time low of 1.75 percent on Tuesday, the first easing in a year as it seeks to restrain a rising currency and stave off the creeping curse of deflation. The Reserve Bank of Australia's (RBA) quarter-point cut sent the local dollar down more than one U.S. cent to $0.7567 as markets wagered a further move to 1.5 percent was now likely. Australia is just the latest in the Asian region to feel the chill of deflation as too many goods chase too little demand. Singapore surprised many by easing last month, and it followed India, Taiwan, Indonesia, China, Japan and New Zealand. Speculation of a possible cut flared last week when Australian government data showed inflation had slowed far more than expected in the first quarter of the year. Underlying inflation dropped to a record low of 1.5 percent, taking it well under the RBA's long term target band of 2 percent to 3 percent and effectively pushing real rates higher. "Inflation has been quite low for some time and recent data were unexpectedly low," RBA Governor Glenn Stevens said in a brief statement after the bank's May policy meeting. "These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast." Eight central banks globally have embarked on entirely new stimulus cycles so far this year while the Bank of Japan and European Central Bank have embraced sub-zero rates and expanded their asset-buying campaigns. All this easing abroad has in turn boosted the Australian dollar further than the RBA desired, hurting exports and tourism while pushing down import prices and, hence, inflation. UNLIKELY TO BE "ONE AND DONE" All of which argued for at least one cut in rates to offset these tighter financial conditions, and markets were quick to price in the possibility of a further move <0#YIB:>. "It's hard to see how one cut by itself is going to do much," said Commonwealth Bank Chief Economist Michael Blythe. "So you'd have to think the odds on a follow-up have also increased, very much tied in with how the inflation outlook evolves from here. August would be the most obvious timing." The easing comes just hours before the conservative government of Prime Minister Malcolm Turnbull reveals a budget that is considered crucial for his chances in a likely July election. Normally a rate cut and lower mortgage rates would be considered a political positive in Australia. Yet this cut could also raise an awkward question - if the economy was doing as well as Turnbull claimed, why would it need lower rates? While Australia is still struggling with the unwinding of a massive mining boom, economic activity has been generally favorable. Growth was a surprisingly brisk 3 percent for 2015 and unemployment recently fell to a 30-month low of 5.7 percent. The RBA had also been reluctant to risk a debt-fueled bubble in the housing market, though tightened rules on investment lending has seen prices cool in recent months. "At present, the potential risks of lower interest rates in this area are less than they were a year ago," Stevens said on Tuesday, providing another reason to expect further cuts. National Australia Bank (NAB.AX) and Westpac Banking Corp (WBC.AX) were quick to pass on the full quarter point cut to home borrowers, which could provide a new lease on life into house building and employment. Banking stocks also took off on the prospect of increased demand for mortgages, lifting the benchmark share index 2.1 percent for its biggest daily rise in three months. (Reporting by Wayne Cole; Editing by Eric Meijer) =================================================== Posted 51 minutes ago Auction sign outside listed property Photo: Less than 1 per cent of Australians are more than 30 days behind in repayments. (ABC News: Ian Cutmore) Map: Australia Australian mortgage arrears were at their lowest fourth quarter level in more than a decade, as low rates and rising prices insulated borrowers. Credit rating agency Fitch's "Dinkum" residential mortgage-backed securities (RMBS) index tracks the performance of a large number of loans that have been bundled up and sold by lenders to other investors. It found the level of 30-plus-day arrears overall was just 0.95 per cent over the three months to December 2015, the lowest fourth quarter level in 11 years. Arrears were down 0.2 of a percentage point compared to the same period in 2014. "The level of arrears in the fourth quarter of 2015 reflected strong house price growth, low unemployment, low standard variable rates and low inflation," the report noted. The actual loss rate on loans remained even lower, at 0.02 per cent, as rising property prices in most of the big cities meant lenders could recoup the value of their loans in case of default by the borrower. While Fitch expects this loan loss rate to remain low, it is also forecasting a small uptick as property price growth moderates over 2016 from the double-digit national average levels witnessed at times last year. Regulator moves result in 'tougher line' for borrowers The ratings agency said last year's moves by the bank regulator, APRA, to tighten financial institutions' measures of borrowers' ability to repay their loans are likely to keep a lid on loan losses. "The introduction of measures, such as interest-rate floors, means borrowers should have more buffers to withstand increases in interest rates and unemployment, and a slowdown in the housing market," the report observed. "The changes to underwriting standards are positive for holders of newer vintage RMBS transactions, especially in the current low-interest-rate and high house price environment that has fuelled household borrowing." Financial comparison website finder.com.au said that Australia has seen the most dramatic three-month fall in average loan sizes since 2000. With regulators cracking down on how much banks can lend to home buyers relative to their incomes, the average amount borrowed fell more than 4 per cent in February to $357,200 and is down 7.7 per cent over the past three months. The analysis of ABS data reveals that New South Wales had the biggest drop of 10.15 per cent over the past quarter. "Banks are scrutinising new loan applications more closely, taking a tougher line when assessing borrowers income," said finder.com.au money expert Bessie Hassan. While the overall news was positive, Fitch also noted a steep rise in 30-plus-day arrears for self-employed borrowers with low-doc loans. The arrears for this group were 7.29 per cent, a 32-basis-point increase. ======================================== Thu Apr 14, 2016 | 4:09 AM EDT Factbox: Central banks go negative - to what avail. By Balazs Koranyi FRANKFURT (Reuters) - Central bankers gather this week in Washington for the International Monetary Fund's spring meetings amid continued questions about the global economy. Some of the world's biggest central banks have cut rates into negative territory, hoping to boost growth and lift anemic inflation. Even as the U.S. Federal Reserve is cautiously raising rates, central banks from the euro zone to Japan moved in the opposite direction, fuelling fears of a 'currency war' among countries trying to depreciate their currencies. The following are the details what big central banks have done, why and what have been the consequences. EUROPEAN CENTRAL BANK The ECB has kept its deposit rate in negative territory since mid-2014, hoping to boost ultra low inflation in the 19-member euro zone, spur lending and generate growth in a region still reeling from its sovereign debt crisis. Facing deflationary risks tumbling commodity prices, the ECB has also been buying assets, mostly sovereign debt, since March 2015 and cut rates several times and most recently in March, when it reduced the deposit rate to -0.4 percent. Still, low oil prices are keeping a lid on price growth and inflation sank back into negative territory, putting the pressure on the ECB to do more and more. BANK OF JAPAN Facing low inflation and a strong currency, the Bank of Japan cut its key rate to -0.1 percent in January, introduced a three-tier deposit rate system and said it was ready to cut rates further if necessary. The move unleashed a torrent of criticism at the bank and the yen, instead of weakening, has rallied to trade around an 18-month high against the dollar. The Japanese currency has gained more than 10 percent against dollar so far this year. SWISS NATIONAL BANK Since January 2015, both the of the SNB's key interest rates have been in negative territory and its deposit rate is the lowest of any central bank in the world. The three-month Libor range was set between –1.25 and –0.25 percent while the interest on sight deposits at the central bank is -0.75 percent. However, the SNB's most punitive rate had only been applied to just over a third of deposits as of the end of last year because the rest of the cash parked at the central bank was within its exemption threshold. The SNB earned 1.2 billion Swiss francs ($1.26 billion) from its negative interest rates in 2015. ($1 = 0.9557 Swiss francs) SWEDISH RIKSBANK Facing low inflation and a strong currency, Sweden's central bank cut rates to -0.5 percent in February from -0.35, despite a relatively strong economy and concerns that super low rates would further stoke a housing bubble. The bank is also buying government bonds to stoke inflation and said it was prepared to intervene on currency markets to stem the krone's rise, despite warnings from economists that it risked getting into a currency war. Critics say the latest rate cuts show a too narrow focus on inflation and that they are fuelling a rally in house prices and lending. Riksbank Deputy Governor Martin Floden questioned the effectiveness of the latest rate cut in February and voted against it, along with another board member. DANMARKS NATIONALBANK The Danish central bank cut its key deposit rate to -0.75 percent in early 2015 before a hike to -0.65 in January, fighting to keep the crown EURDKK=D3 currency from firming and keeping it pegged to the euro in a narrow range. Investors poured cash into Danish assets in January and February last year, betting that the country would abandon its three-decade-old currency peg but the central bank held steady, intervening in the currency markets when necessary. Banks have not passed the negative rates onto households, there has been no unusual increase in the demand for cash and the central bank made a profit of 2.2 billion Danish crowns ($336.60 million) in 2015, mostly as a result of pressure on the crown. ($1 = 6.5360 Danish crowns) NATIONAL BANK OF HUNGARY Hungary's central bank cut its overnight deposit rate to -0.05 percent in March, although its base rate, considered at the most important benchmark, is still 1.45 percent. For a preview of the meetings, click: (Reporting by Balazs Koranyi, Joshua Franklin, Ole Mikkelsen and Daniel Dickson; editing by Mark John) ================================ Glut or no glut, what exactly is happening with apartments in our major cities? April 19, 20165:17pm Melbourne under construction: are there too many apartments? Picture: Jay Town Kirsten Craze,news.com.au     Email a friend  IF YOU are an inner city apartment dweller, or the future owner of an off-the-plan unit waiting for the last brick to be laid, you’d be forgiven for feeling a little confused right now. On one hand we hear doom and gloom stories of too many units being built in our capital cities, while on the other we’re seeing data that shows unit prices are still rising — even if only slightly. While Sydney apartments shot up a whopping 11.9 per cent last year, they were only up 1.5 per cent in the three months to January according to CoreLogic data. The yearly figure in Melbourne shows the rise was 11.4 per cent, but during the quarter flats were flat at an increase of just 1 per cent. However, in Brisbane where there has been less development than the bigger cities, the overall median unit price increased by a very modest 1.3 per cent during the year, and has remained neutral at 0 per cent for the quarter. So as the major cities’ skylines rise, are unit prices going to fall? WHERE THE IS THE SO-CALLED GLUT? Anyone familiar with the landscape of our three east coast capitals knows there seems to be a growing number of cranes dotting the horizon. Cue the RBA and its biannual Financial Stability Review. The report basically warns developers and potential buyers about building and buying in these high-density neighbourhoods. ABS figures show that Sydney recently took over the mantle from Melbourne as the leading capital for apartment developments with 35,538 approvals recorded over 2015 compared to 33,023. Across Sydney, Melbourne and Brisbane almost 45,000 apartments are due for completion and settlement by the end of 2016 according to figures from planning consultancy MacroPlan Dimasi. The RBA singled out these various inner-city apartment booms as a significant risk to the country’s ­financial future by pointing out concerns that high-rise unit developers could struggle if buyers back off or are unable to fund settlements due to lenders’ reticence around residential towers. WARNING: BACK OFF OFF-THE-PLAN It’s not all units that are at risk, but the warning bells are ringing in relation to the copious off-the-plan developments in these three cities. Just last month Fairfax reported that an oversupply in apartments had lead major home loan lender AMP to “blacklist” off-the-plan purchases in certain inner-city suburbs in every state. The central bank said in its review that investors should carefully consider buying units in city-fringe suburbs of Sydney, Melbourne and Brisbane, pointing out that an oversupply in stock would place a downward pressure on rents and resale prices. “An ongoing risk comes from the significant and geographically concentrated growth in supply of new apartments in Sydney, Melbourne and Brisbane due for completion over the next few years,” the review said. “If that occurs, investors will need to service their mortgages while earning lower rental income and any households facing difficulties making repayments may not be able to resolve their situation easily by selling the property,” the bank said in its report. In other words, landlords face not getting the rent needed to pay the bills and owner occupiers who need to move on could struggle to get the price they want, when they want it. “This is one reason why it remains important to have prudent lending standards ahead of such a possibility,” the RBA said. WHY INDUSTRY INSIDERS DISAGREE Chris Johnson, CEO of the Urban Taskorce said the RBA’s statement would act as a “brake on bank loans” for new housing when in actual fact, more homes are needed, particularly in Sydney. “The NSW Department of Planning says that 33,200 new homes are needed each year for 20 years in Sydney but last financial year only 27,348 new homes were completed,” Mr Johnson said. “With a shortfall of nearly 6000 new homes during the boom times it is essential that more homes are built across Sydney. Our concern is that the RBA’s warnings will encourage banks to tighten up on lending for new homes particularly for apartments.” “Our members believe the market is still strong for new apartments in key parts of Sydney where cosmopolitan living is becoming the norm. They are concerned however that the market could be destabilised by a series of negative actions that combine to lower confidence in the industry,” he said. “My feeling is that the Melbourne market is a bit more stretched, with the potential for oversupply possibly more likely, and perhaps a bit more likely in Brisbane, but Sydney is quite secure, in terms of future markets,” he said. Mr Johnson said he saw an immediate future where apartment prices would plateau. “I think in the long term value will remain and that’s because of a fundamental shift in lifestyle. A lot of people are preferring a cosmopolitan lifestyle that’s close to public transport, shops and amenities and this is what’s going to keep prices up,” he said. “I don’t think there is going to be a fundamental drop in the price of apartments,” Mr Johnson said. WHAT’S THE WORST THAT COULD HAPPEN? A surge in apartment approvals and a subsequent rise in unit prices across these three cities in recent years all stemmed from an insatiable investor appetite for flats. But since late-2014 when the banking regulator stepped in to tighten lending standards for investors, apartment activity has noticeably quietened. These tighter credit standards could pose “near-term challenges” for some high-rise unit and office block developers, according to the RBA, particularly for those who have been targeting Chinese investors. “Any concerns over settlement risk and/or a slowdown in demand for Australian-located property by Chinese and other Asian residents could lead to difficulties for particular projects,” the RBA said. It’s speculation at this point from the RBA, but the report added that it would only take a hit to the global economy for investment in the Australian apartment sector to take a tumble. “There is some uncertainty about how these foreign buyers would react to a downturn in their home countries or in the Australian property market,” the report said. The RBA also referred to the state of affairs for the commercial property industry describing it as “adjusting with a lag to a slowing in demand”, particularly in cities that are heavily exposed to mining such as Perth. “This is most noticeable for office buildings in the resource-intensive states, where vacancy rates remain very high as further supply continues to come on line,” the review stated. ====================================== Apr 27 2016 at 5:47 PM Updated Apr 27 2016 at 6:07 PM Deflation has landlords rethinking CPI rents and leases Australia's first deflation reading has landlords rethinking CPI rents and leases. Australia's first deflation reading has landlords rethinking CPI rents and leases. Dominic Lorrimer by Matthew Cranston Robert Harley Landlords are bracing for lower rents and have been locking in new leases without consumer price indexed adjustments because of the prospect of deflation in Australia. A lower than expected CPI reading on Wednesday gave the first deflationary reading in eight years. Emil Ford Lawyers property partner Garry Pritchard said if the deflationary trend continued there would be pressure on rents in retail. "If over the next 12 months, the CPI declines, then retail rents will decline but for other properties it will depend on the wording of the lease," Mr Pritchard said. Other leading lawyers agreed that landlords and tenants would be reviewing their leases. Clayton Utz senior associate Carrie Rogers said those landlords stuck with leases drawn up from some time ago would be looking to renegotiate. She said there was a move away from CPI-indexed rents. "About six years ago it was quite common to have CPI-indexed rents but that has changed," Ms Rogers said, "I have done about five lease deals in the last few months and all have had fixed increases. I think this is the case because there is a level of uncertainty as to where CPI will go." King Wood Mallesons property partner Chris Wheeler said the likely place to see this problem was in smaller retail properties and that such reviews were annually, not quarterly. Norton Rose Fulbright partner Michael French said he expected some landlords would have leases where their rent will decrease unexpectedly if the CPI is negative over a 12-month period. Real estate groups such as JLL said the data was unlikely to represent the broader market demand pressure on rents. "For rents that are linked to the CPI a period of low inflation may imply potential for lower rents but supply/demand forces prevail for market rents," JLL managing director Stephen Conry said. Read more: http://www.afr.com/real-estate/deflation-has-landlords-rethinking-cpi-rents-and-leases-20160426-gofm1e?&utm_source=social&utm_medium=twitter&utm_campaign=nc&eid=socialn:twi-14omn0055-optim-nnn:nonpaid-27062014-social_traffic-all-organicpost-nnn-afr-o&campaign_code=nocode&promote_channel=social_twitter#ixzz472AUs8w6 Follow us: @FinancialReview on Twitter | financialreview on Facebook ================================ Tighter lending policies see a reduction in investor and riskier lending types Earlier today the Australian Prudential Regulation Authority (APRA) released its quarterly Authorised Deposit-taking Institution (ADI) property exposures data for the March 2016 quarter. This data is really valuable as it provides additional insight into the mortgage market, including data which is not available from the monthly housing finance statistics. Chart 1 The data initially focuses on outstanding total values and shows that at the end of the March 2016 quarter there was $906.7 billion outstanding to owner occupiers and $501.3 billion to investors. While total lending continued to rise, up 8.7% year-on-year, it is interesting to see how the tilt away from investment lending has progressed. Over the past 12 months, total investor lending has increased by just 0.1% with the total value of investor mortgage lending outstanding down -3.2% from its June 2015 quarter peak. The data also indicates that investor credit growth now sits significantly below the APRA imposed 10% pa speed limit. This could lead to a rebound in lending to investors over the coming quarters. Total lending to owner occupiers has continued to increase and is up 14.0% year-on-year. In terms of the total value of outstanding mortgages, owner occupiers account for 64.4% compared to 35.6% to investors. The proportion of outstanding mortgages to investors has fallen sharply from its recent peak of 39.0% in June 2015. Chart 2 Although the total value of outstanding mortgages is rising you can see that growth is generally slowing. Mortgages with offset facilities account for a record-high 43.0% of all outstanding mortgages and the value of these mortgages has increased 20.4% year-on-year. Interest-only mortgages account for 39.3% of total outstanding mortgages, with the value having increased by 9.6% year-on-year. Reverse mortgages account for just 0.5% of all outstanding mortgages with the value of outstanding mortgages up 1.4% year-on-year. Only 2.4% of the value of outstanding mortgages are for low-documentation loans and 0.1% are other non-standard loans. Year-on-year the value of outstanding low-documentation mortgages is -16.5% lower and other non-standard mortgages are -4.0% lower. In fact the total value of outstanding low-documentation and other non-standard mortgages is at a record low. Chart 3 The average outstanding mortgage balance was recorded at $251,900 in March 2016, having increased by 4.8% year-on-year. At the end of March 2016, the average outstanding balances across loan types were: $307,200 for loans with an offset, $334,400 for interest-only, $96,500 for reverse mortgages, $192,200 for low-documentation and $193,400 for other non-standard loans. All loan types except for low-documentation (-1.1%) and other non-standard (-7.0%) have seen the average balance increase over the past year: offset (6.3%), interest-only (5.0%), reverse mortgages (2.4%). To date, all data analysed has focused on total balances outstanding, the following data will focus specifically on quarterly new lending. Chart 4 Over the March 2016 quarter there was $81.7 billion in new mortgage lending, which was the lowest quarterly value of new lending since the March 2014 quarter. This figure comprises of $56.0 billion in lending to owner occupiers and $25.7 billion in lending to investors. The value of new lending to owner occupiers has increased by 16.1% year-on-year while the value of investor lending is -25.5% lower year-on-year. The value of new lending to investors is the lowest since the March 2013 quarter and is -37.7% lower from its peak over the June 2015 quarter. The data indicates that there has been a significant pull-back in new lending to investors over recent quarters. Chart 5 With the value of new mortgage lending falling, the value of most loan types is now also falling. Over the March 2016 quarter, 0.3% of new lending was for low documentation loans, 34.9% was for interest-only, 0.1% was for other non-standard loans, 46.5% was originated through third part channels and 3.8% of loans were approved outside of serviceability. The value of new lending for low documentation mortgages was at a record low. The value of new interest-only lending was the lowest since the March 2013 quarter. The value of other non-standard lending was the lowest since the same quarter last year as was loans approved outside of serviceability. The value of new mortgage lending by third parties was the lowest since the September 2014 quarter. Higher loan to value ratio (LVR) lending is reducing meaning that borrowers are typically using larger deposits. In fact, the value of new lending for LVRS above 90% in the March 2016 was the lowest since the March 2011 quarter and has fallen by -22.8% over the past year. Lending for LVRs between 80% and 90% has increased by 2.7% year-on-year however, it has fallen over each of the past four quarters. In fact, lending for LVRs above 80% represented 22.4% of all new lending in March 2016 which was its lowest proportion on record and well down from the peak in March 2009 where it accounted for 37.6% of all new lending. The value of lending to investors is falling sharply as assessment criteria is tightened and investors are typically now charged a higher interest rate than owner occupiers. Interest-only lending which APRA and the Reserve bank have previously sounded warnings about is also starting to fall and is now at its lowest level since March 2013. Higher LVR lending which is associated with smaller deposits are also trending lower which indicates less risky lending. The added benefit surrounding lower LVRs is that if a borrower has a deposit of more than 20% of the value of the property they can typically avoid lenders mortgage insurance (LMI). New lending to loans outside of serviceability, low documentation loans and other non-standard loans has also been falling over recent quarters which is reflective of less risky lending practices being undertaken. These emerging trends can only be positives for the stability and security of the Australian mortgage lending market. Based on the data presented, it is apparent that tighter lending policies by lenders is having a noticeable impact on the mortgage market. Source: www.blog.corelogic.com.au

BOJ adopts negative rates in ramped-up stimulus campaign, stuns markets: competitive devaluation

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(Earth is rising over the Moon's Surface), Source: https://www.facebook.com/RealEstateSA5000/photos/a.899877783394135.1073741829.899009183480995/920077631374150/?l=734b9eef72 ========================= News Analysis: BOJ's surprising steps stopgap antidote to domestic woes, may spark broader devaluations Source: Xinhua 2016-01-30 14:45:04 by Liu Tian, Xu Yuan TOKYO, Jan. 30 (Xinhua) -- The Bank of Japan (BOJ) on Friday surprised markets by announcing that it would introduce a negative interest rate to show resolution in the fight against prolonged deflation. The proposed remedy, however, may hold few substantial cures for Japanese economic structural woes and may trigger other currencies' competitive devaluation, which would ultimately send stocks lower here and inhibit capital expenditure, the exact opposite of the central's ultimate reflationary goal. Japan's top central banker Haruhiko Kuroda told a press conference on Friday that "by adding an option for easing from the perspective of interest rates, we will make full use of easing measures with three dimensions, quantity, quality and interest rates." Although the BOJ chief was reluctant to follow suit when the European Central Bank plunged into negative interest rates, he hoped that Friday's "shock move" will suddenly motivate lending and thus spending, so as to actualize policy effects at the earliest possible juncture. The central bank planned to introduce the minus interest rate from next month and said it will further cut the interest rate if necessary. By doing so, the bank is hedging that commercial banks will be further incentivized to lend to businesses to promote widespread investment and growth, and put the bank back on track to hit its 2-percent inflation target, although the timeframe for this has once again been pushed back. But the danger of this gamble is that the BOJ has no means to ensure that the funds flowing out from commercial banks will be successfully injected into the real economy. If not, the market will soon erase surging gains made after the surprise announcement and return to a protracted spell of retreat into territory. This, more so if a "deflationary mindset" continues in businesses and households here, and other countries' currencies are forced lower and the yen used as a safe haven, which drives stocks lower, pummels Japan's export sector, which in turn impacts production and ensures businesses keep their purse strings tighter. Furthermore, the policy, to some extent, exposed the fact that the BOJ's previous monetary easing measures have failed to help bolster the banks reflationary efforts, while the meager rise in the consumer prices index in 2015 and the delayed timeframe of achieving the inflation goal, has proved that the country may possibly reenter its well-known deflationary quagmire. The BOJ, in terms of its monetary base, decided in the meantime to continue to increase the base at an annual pace of 80 trillion yen (around 674.48 billion U.S. dollars) through aggressive purchases of government bonds. But analysts here pointed out that the introduction of the negative interest rate showed that the BOJ's capability to purchase government bonds has reached its limit since commercial banks here will be reluctant to deposit cash in the BOJ and make it more difficult to continue such purchases. The BOJ's dramatic move temporarily halted the Japanese yen's appreciation and forced its devaluation, with the currency's fast retreating from the 118-yen level to the 121-yen zone versus its U.S. counterpart, after the BOJ's latest easing measures were announced Friday. However, a constantly depreciated yen will finally damage assets held by common Japanese people. Meanwhile, another issue of the minus interest rate that needs to be focused on, involves recent policy moves by the U.S. Federal Reserve raising its key interest rate and the European Central Bank hinting it will further ease its policy this spring. The BOJ's move triggering the yen's retreat will exert more pressure on other central banks to also ease their currencies and the result could end up severely hampering the tepid recovery of both regional and global economies. Related: BOJ to introduce negative interest rates, delays inflation target amid oil price slump TOKYO, Jan. 29 (Xinhua) -- The Bank of Japan (BOJ) on Friday following the conclusion of a two-day policy board meeting said it would introduce negative interest rates from next month to encourage more lending and business spending amid projections the central bank will not clear its 2 percent inflation goal, as oil prices' slide and a global economic downturn threatens to further impact spending. The BOJ surprised markets here, with economists widely believing further easing measures announced Friday would be negligible if at all, by saying it plans to introduce a negative interest rate from Feb. 16, as falling oil prices have hampered the bank's reflationary efforts, with the shock move aimed at proactively defending against global economic malaise denting business sentiment here.Full story Bank of Japan further eases monetary policy TOKYO, Jan. 29 (Xinhua) -- The Bank of Japan (BOJ) on Friday said it would implement new monetary easing measures amid projections the central bank will not clear its 2 percent inflation goal. While delaying the timing of its 2 percent inflation goal, the central bank also cuts its inflation target for fiscal year 2016, stating it now expects CPI to increase 0.8 percent. Full story =============================================== ------------------------ DEFINITION of 'Negative Interest Rate Policy (NIRP)' A negative interest rate policy (NIRP) is an unconventional monetary policy tool whereby nominal target interest rates are set with a negative value, below the theoretical lower bound of zero percent. BREAKING DOWN 'Negative Interest Rate Policy (NIRP)' During deflationary periods, people and businesses hoard money (A supply or store of something held or hidden for future use.) instead of spending and investing. The result is a collapse in aggregate demand which leads to prices falling even farther, a slowdown or halt in real production and output, and an increase in unemployment. A loose or expansionary monetary policy is usually employed to deal with such economic stagnation. However, if deflationary forces are strong enough, simply cutting the central bank's interest rate to zero may not be sufficient to stimulate borrowing and lending. A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe. Examples An example of a negative interest rate policy would be to set the key rate at – 0.2%, such that bank depositors would have to pay two-tenths of a percent on their deposits instead of receiving any sort of positive interest. The Swiss government ran a de facto negative interest rate regime in the early 1970s to counter its currency appreciation due to investors fleeing inflation in other parts of the world. In 2009 and 2010 Sweden and in 2012 Denmark used negative interest rates to stem hot money flows into their economies. In 2014 the European Central Bank (ECB) instituted a negative interest rate that only applied to bank deposits intended to prevent the Eurozone from falling into a deflationary spiral. Theoretically, targeting interest rates below zero will reduce the costs to borrow for companies and households, driving demand for loans and incentivizing investment and consumer spending. Retail banks may choose to internalize the costs associated with negative interest rates by paying them, which will negatively impact profits, rather than passing the costs to small depositors for fear that otherwise they will move their deposits into cash. Though fears that bank customers and banks would move all their money holdings into cash (or M1) did not materialize, there is some evidence to suggest that negative interest rates in Europe cut down interbank loans. Read more: Negative Interest Rate Policy (NIRP) Definition | Investopedia http://www.investopedia.com/terms/n/negative-interest-rate-policy-nirp.asp#ixzz3ybyEE1ma Follow us: Investopedia on Facebook --------- Macroeconomics - The Consumer Price Index & Inflation Inflation Inflation is defined as an increase in the overall price level. Please note that inflation does not apply to the price level of just one good, but rather to how prices are doing overall. A consumer facing inflation that occurs at the rate of 10% per year will able to buy 10% less goods at the end of the year if his or her income stays the same. Inflation can also be defined as a decline in the real purchasing power of the applicable currency. Consumer Price Index (CPI) The CPI represents prices paid by consumers (or households). Prices for a basket of goods are compiled for a certain base period. Price data for the same basket of goods is then collected on a monthly basis. This data is used to compare the prices for a particular month with the prices from a different time period. Example: The inflation rate is computed by subtracting the CPI of last year's prices from the CPI value for this year, dividing that difference by last year's CPI value and then multiplying by 100. So if the value of the price index for the current year is equal to 165, and last year's value was 150, the rate would be calculated as: Inflation rate = (165 - 150)/150 X100= 10 CPI Sources of Bias The CPI is not a perfect measure of inflation. Sources of bias include: ·Quality adjustments - quality of many goods (e.g., cars, computers, and televisions) goes up every year. Although the Bureau of Labor Statistics is now making adjustments for quality improvements, some price increases may reflect quality adjustments that are still counted entirely as inflation. ·New goods - new goods may be introduced that will be hard to compare to older substitutes. ·Substitution - if the price goes up for one good, consumers may substitute another good that provides similar utility. A common example is beef vs. pork. If the price goes up, and the price of pork stays the same, consumers might easily switch to pork. Although the CPI will go higher due to the price increase in beef, many consumers may not be worse off. Also, when prices go up, consumers may effectively not pay the higher prices by switching to discount stores. The CPI surveys do not check to see if consumers are substituting discount or outlet stores. Read more: The Consumer Price Index & Inflation - CFA Level 1 | Investopedia http://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/consumer-price-index.asp#ixzz3ycdLQHk4 Follow us: Investopedia on Facebook ---------------------------------------- Thu Jan 28, 2016 11:59pm EST Related: Japan TOKYO | By Leika Kihara A line of waiting customers are reflected in a window as an employee counts money at the Bank of Tokyo-Mitsubishi UFJ foreign currency exchange in Tokyo October 10, 2008. Reuters/Yuriko Nakao The Bank of Japan ramped up its aggressive stimulus campaign on Friday, adding negative interest rates on central bank deposits to its massive asset-buying program, stunning financial markets that expected no action or a moderate increase in asset purchases. The central bank said the move was aimed at forestalling the risk of global financial turbulence hurting business confidence and reviving the "deflationary mindset" it is striving to wipe out with aggressive money printing. Asian shares jumped and the yen fell across the board and sovereign bonds rallied after the BOJ said it would charge banks for excess reserves parked with the institution, an aggressive policy pioneered by the European Central Bank. The BOJ maintained its pledge to expand base money at an annual pace of 80 trillion yen ($675 billion) via aggressive purchases of government bonds and risky assets conducted under its quantitative and qualitative easing (QQE) program. But in a narrow 5-4 vote, it also decided to charge a 0.1 percent interest to current accounts that financial institutions hold with the central bank. "The BOJ will cut the interest rate further into negative territory if judged as necessary," the bank said in a statement announcing the decision. Markets have been split on whether the central bank would ease policy as slumping oil costs and soft consumer spending have ground inflation to a halt, knocking price growth further away from the BOJ's ambitious 2 percent target. In a quarterly review of its forecasts released on Friday, the BOJ cut its core consumer inflation forecast for the coming fiscal year beginning in April to 0.8 percent from 1.4 percent projected three months ago. However, it expects consumer inflation to accelerate to 1.8 percent in the fiscal year ending in March 2018, taking into account the effect of Friday's measures. The decision came in the wake of data that showed household spending and output slumped in December, underscoring the fragile nature of Japan's recovery. Consumer inflation was just 0.1 percent in the year to December, invigorating expectations that the BOJ would eventually have to deliver further stimulus. Many BOJ policymakers have been wary of using their diminishing policy tools to counter what they see as factors beyond their control, such as volatile financial markets and China's economic slowdown. But pessimists on the BOJ board have worried that slumping Tokyo stocks may discourage firms from boosting capital expenditure, threatening the positive momentum the BOJ is trying to create with its heavy money printing. (Story refiles to correct spelling of bank in opening paragraph) (Reporting by Leika Kihara; Editing by Eric Meijer) =========================== MEDIA RELEASE 5/2016 27 January 2016 Embargo: 11.30 am (Canberra time) CPI December quarter 2015 rises 0.4 per cent The latest Australian Bureau of Statistics (ABS) figures show the Consumer Price Index (CPI) rose 0.4 per cent in the December quarter 2015, following a rise of 0.5 per cent in the September quarter 2015. The most significant price rises this quarter were in tobacco (+7.4 per cent), domestic holiday travel and accommodation (+5.9 per cent) and international holiday travel and accommodation (+2.4 per cent). These rises were partially offset by falls in automotive fuel (–5.7 per cent), telecommunication equipment and services (–2.4 per cent) and fruit (–2.6 per cent). The increase of 0.1 per cent for the housing group is the weakest movement since March quarter 1998 as price rises for rents (+0.2 per cent) and new dwelling purchase by owner occupiers (+0.1 per cent) have been subdued through the quarter. The 0.1 per cent rise for new dwellings purchase by owner occupiers is the weakest movement since March quarter 2014. The CPI rose 1.7 per cent through the year to the December quarter 2015, following a rise of 1.5 per cent through the year to the September quarter 2015. Further information is available in Consumer Price Index, Australia (cat. no. 6401.0) available from the ABS website: www.abs.gov.au Media note: When reporting ABS data you must attribute the Australian Bureau of Statistics (or the ABS) as the source. Media requests and interviews - contact the ABS Communications Section on 1300 175 070. This issue incorporates a feature article titled "Australian Dietary Guidelines Price Indexes". The article is available in Consumer Price Index, Australia (cat. no. 6401.0) available from the ABS website: www.abs.gov.au ================== The Federal Reserve started raising official interest rates in December. But in the stress tests that large U.S. banks have to undergo, the central bank is hypothesizing that short-term Treasury yields could drop below zero. The European Central Bank and, since Friday, the Bank of Japan are trying it with policy benchmarks. Though negative U.S. interest rates are for now only in the Fed’s worst-case scenario, they are becoming a plausible downturn assumption.

The stress tests are required each year under the Dodd-Frank Act, and the 2016 parameters for big financial institutions were announced last week. They come in “baseline,” “adverse” and “severely adverse” flavors. The last is supposed to represent a severe global recession, and that’s where the Fed has told banks to model negative yields on short-term Treasury securities – emphasizing that it’s a hypothetical scenario, not a forecast.

Yet it’s no longer looking outlandish. There’s plenty for now to keep the Fed on a gradual path toward higher rates, including healthy U.S. employment and relatively steady growth. Even the uninspiring first estimate for GDP last quarter, which indicated a 0.7 percent annualized pace, still showed year-on-year expansion of 1.8 percent.

There are deepening wrinkles, though. Global market volatility should matter to the Fed only to the extent it reflects or causes real economic trouble, but the flickering of screens in real time may loom larger than that psychologically. Another concern is that actions like Japan’s decision to set a negative rate add to the reasons for the dollar to strengthen, potentially making U.S. exporters less competitive.

Either way, another downturn will eventually come to the United States, and the option of going negative may appeal to the Fed on policy grounds, whether or not Treasury yields are below zero. If Chair Janet Yellen and her colleagues haven’t managed to raise rates much by then, there may not be much juice in cutting official rates only to zero.

Yellen in November told a House of Representatives committee that if the economy took a turn for the worse, “potentially anything – including negative interest rates – would be on the table.” If the ECB, the BOJ and others have shown by then that charging depositors is even marginally effective, negative rates could shift from the severely adverse scenario into the Fed’s regular toolkit.

The U.S. Federal Reserve on Jan. 28 published the scenarios for annual so-called stress tests required of large U.S. banks under the Dodd-Frank Act.

In the Fed’s Comprehensive Capital Analysis and Review scenarios, the worst of the three cases, dubbed “severely adverse,” represents a severe global recession, corporate financial stress and negative yields for short-term Treasury securities.

The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Jan. 29, surprising investors with another bold move to stimulate the economy.

Japan's inflation test: Mapping the road to 2 pct

Japan's inflation test: Mapping the road to 2 pct The central bank may yet hit its elusive goal, provided consumers spend, workers are productive and bond investors stay calm. A new Breakingviews calculator shows how much inflation Japan can expect after money-printing has ended. A 2017 sales tax hike would make the road harder.

The Bank of Japan has set out on a difficult journey. The central bank can only reach its destination of 2 percent inflation if consumers spend, workers produce and investors remain calm. Missing any of the three signposts could lead Japan astray, as a new Breakingviews calculator shows.

 

Click here to view interactive version

 

The interactive tool builds on economist Milton Friedman’s idea that inflation is “always and everywhere a monetary phenomenon.” But monetary policy can’t be gauged just by looking at how the economy is doing at present. The longer-term context matters. Higher productivity means people expect bigger pay checks; confident consumers spend more. An ageing population, on the other hand, is inherently deflationary. Monetary policy must respond to changing conditions. Applying that idea to Japan, the road to 2 percent inflation looks bumpy - but not impossible.

 

 

Start with interest rates. The BOJ’s huge bond-buying spree has crushed yields: 10-year government debt currently pays investors a measly 0.38 percent a year. Yields will rise as inflation takes hold and the BOJ gradually scales back its purchases. But as long as the yield doesn’t rise above 2 percent the target inflation rate could be hit and maintained.

Of course, if the BOJ is successful and inflation rises, investors could reasonably demand more than a zero percent real return for lending to the state. Much depends on what happens elsewhere. If risk-free rates in other developed nations, particularly the United States, are low, and the yen is expected to appreciate, investors might still be tempted. But as the U.S. economy strengthens, and real returns on dollar-denominated assets improve, the BOJ could get trapped into permanent monetary easing. Only a ridiculously cheap yen, engineered by hyper-aggressive money-printing, would keep Japanese assets attractive.

There is another way to keep yields low, however: the BOJ could promise never to sell the bonds it has already bought. Plus, the Japanese government could curb its high budget deficits so that the supply of available debt securities drops faster than demand. This combination of “helicopter money” and fiscal rectitude would keep a lid on yields.

Low interest rates alone won’t get the BOJ to its destination, however. Households must also be willing to spend at least 80 percent of their income. Japanese consumers are showing early signs of optimism: the spending propensity was 82 percent until November last year. If the measure returns to its 20-year average of 78 percent, however, core inflation will slide. (Propensity: 1. a natural inclination or tendency. 2. Obs. favorable disposition or partiality. )

Households have greater spending confidence if their incomes rise. For lasting wage gains, workers must become more efficient. But boosting the pace of productivity gains could be an uphill struggle. In the 1980s, Japan’s worker productivity grew at an annual average rate of 3 percent. This slowed to 1 percent in the 1990s, and to 0.8 percent in the last decade.

The calculator assumes average productivity growth of just 0.4 percent annually, or 2 percent over the next five years. That’s just as well, because ever since Prime Minister Shinzo Abe was elected in December 2012 on a pledge to end deflation and reinvigorate the economy, Japanese companies have only hired non-regular workers. This has implications for productivity because companies skimp on training the non-regulars. Abe’s pledge of labour market reforms, including allowing more foreign workers, has yet to change corporate behaviour.

Additionally, a planned second increase in Japan’s sales tax rate, which has been delayed to April 2017, could crater demand. That’s what happened after the first tax hike last year. The International Monetary Fund’s current forecast is for the Japanese economy to operate 0.2 percent below its potential in 2017. If that gap widens to the estimated 2014 level of 1.6 percent, inflation will fall.

Rapid ageing also complicates the BOJ’s journey. A greying society has fewer profitable investment opportunities, and a low appetite for credit. Even a slight uptick in real interest rates can make borrowers turn tail, leading to a deflationary savings glut. If the population shrinks faster than the annual 0.2 percent pace expected by the calculator, inflation will lag.

Contrary to what some sceptics believe, Japan should be able to achieve 2 percent inflation if consumers keep spending, workers become slightly more productive, and investors don’t lose their nerves. Nevertheless, the road will be long and far from straight. To see if Japan is moving in the right direction, a map will come in handy.