Watching the No 2’s

It’s six-years to the day since the Bank of England “monetary policy committee” cut the bank’s base rate to a record low of 0.5%, the longest period of keeping rates on hold since the 1950s. The stated intention of the MPC, alongside of their counterparts at the Fed, the ECB, Japan and China, of maintaining historic interest rate lows, alongside of massive credit stimulus measures such as QE, has been to re-flate their respective economies, post the 2007 debt-induced financial crisis and to encourage an increase in global debt in some half-baked idea that the world could borrow itself to prosperity.

5 March 2015 Blog 1

Apologies if the first chart looks a little like a map of the London underground network but it’s actually a simple pictorial view of the UK base-rate, UK CPI and the UK 2-year Government Bond Yield.

 Aside of the initial boost to inflation, as measured by UK CPI, which actually had nothing to do with the MPC policy decision but more to do with the lag from the unsustainable credit growth that preceded 2007, the Bank’s objective of “re-flating” has patently failed, as the UK’s CPI rate is fast approaching de-flation, or negative CPI, as is the US, joining the 23 of 28 EU member states already in Deflation.

 Note also that central banks’, as evidenced by the UK’s MPC in this case, have never made a pro-active decision in their lives, only re-active. The Bank of England base- rate has followed the trend of the 2-year Gilt yield, not the other way round.

So forget the myth that central banks control interest rates, the market does this job and sometimes with a vengeance, particularly when the market ends a long-term trend.

 The 2-year market interest rate for the UK and the US, which we’ll refer to as “No 2s,”  a take on the rhyming slang for doing a poo, actually bottomed (excuse the pun) in mid-2012, since when they have been trending higher. The Euro-Zone No 2 diverged over the past year, however, as the market either believed in the ECB’s Drahgi “I’ll do whatever it takes,” to avoid deflation promise OR the market still thinks of sovereign debt as the safest on the planet, despite repeated “short, back and sides” over recent years.

 The second chart shows the 2-year Government Bond Yield for the UK, the US and for the Euro-Zone, which are now all singing in tune, albeit that in the Euro-Zone’s case it’s an increase from -25% to -10% pa.

5 March 2015 Blog 2

The UK and US No 2s have jumped by a respective 72% and 46% over the past month or so and we suspect that the trend increase will surprise on the upside, ending the MPC’s six-year run and placing many of the increased debtors,’ that they have encouraged, to be well and truly in the poo, governments included.

Advertisements

3 responses to this post.

  1. […] recent “Watching the No 2’s” reminded that it’s the market that decides on interest rate changes, not Janet, Alex or any […]

    Reply

  2. […] early March commentary, “Watching the No 2’s,” showed a chart of 2-year Government bond yields for the US, the UK and for the Euro-Zone, […]

    Reply

  3. […] March of this year the “watching the No 2s” stated that it was six-years to the day since the Bank of England “monetary policy […]

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: