The Bank of Australia's base rates

 Bank of Australia base rate data

The ozzie central bankers must be in line for some sort of award, despite a domestic house price crash they've stood firm and maintained interest rates at near normal levels throughout the recession, astonishingly IRs are now trending upwards. Maybe if we asked them nicely they could pop over and let King et al know how a real central bank is run, i.e a bank that honours it's liabilities instead of attempting to inflate away all our financial problems.

Here's what the BofA has to say about it's monetary policy:  "Monetary policy decisions are expressed in terms of a target for the cash rate, which is the overnight money market interest rate."

And here's the technical bit: "From day to day, the Bank’s Domestic Markets Department has the task of maintaining conditions in the money market so as to keep the cash rate at or near an operating target decided by the Board. The cash rate is the rate charged on overnight loans between financial intermediaries.... The Reserve Bank uses its domestic market operations (sometimes called ‘open market operations’) to keep the cash rate as close as possible to the target set by the Board, by managing the supply of funds available to banks in the money market"

You can find more, here

To use an analogy, the banks are like dairy farmers and the central bank is like a mega-farm. The dairy farmers set prices in the marketplace but if the mega-farm is unhappy with those prices they either flood the market with milk or restrict their own output until a target price is achieved. The ebb and flow of these transactions make up most central banking activites, it's only when there's a major crisis do they tend to become more involved.

Bank of Japan Basic Discount Rate

Bank of Japan Data link

Given the homogeneous nature of Japanese interest rates this has been the easiest data set to create so far. As with the other central banks I've looked at the BofJ has more than one key rate, but the one I've charted is considered the main one; it's the rate at which the central bank will lend to the major commercial banks. The other important figure is known as the "uncollateralised overnight call rate", which is simply the interbank lending rate. There's a useful article about this process here.

The idea was to create a graph that logged Japanese base rate decisions just before the real estate bubble burst in 1990, as you can see although rates were low in the lead up to the crash they were still within normal parameters (just). It's often overlooked but they then tightened monetary policy for about 3-4 years, before raising the white flag and handing the economy over to the bankers and other rentiers. Perhaps I should send a copy of this graph to every MP in the land as well as Mervyn King, despite 17 years' worth of ZIRP (zero interest rate policy), they're suffered sluggish growth, deflation and absurdly high levels of government debt, if this policy didn't work in Japan what's makes them think it's going to work here?

Bank of England Base Rate

link to the source data


The Bank of England base rate, the graph tells a familiar story: during the noughties the BofE kept rates lower than the post WW2 average, and when the Crunch came their response was a wall of cheap money and ZIRP (zero interest rate policy). Quite what it will take for the monetary policy committee to normalise rates I don't know, but if we really are at 'peak debt' (as many argue) then a rise in rates would prove disasterous for the most heavily indebted over the short/medium term. The knock on effect to the banking system would be rapid as financial assets were destroyed, and this would plunge the country back into recession. Although arguably this is what we need -creative destruction and all that- the consensus is to put off the pain for as long as possible.

The worst case scenario would be to discover we've merely wasted 3 years with delaying tactics, if New Labour had allowed the banking collapse to proceed we could have been through the worst of it by now.

Rates of the ECB

Link to source data from the ECB

The European central bank rate in all it's glory. Although these rates get a little confusing as central banks tend to have two or three different ones, this headline rate is the minimum at which they'll lend to banks in return for "financial assets", like bonds or gilts etc, in technical jargon this is known as a repo (repurchase) agreement. There's a helpful explanation of the process here, on the ECB's website.

The claim often made about eurozone interest rates is that they were held too low for too long and that this lowness was directly responsible for the boom and subseqent bust that Europe is now suffering. The first statement is fairly easy to test, the historical average rate of interest is around 5% so yes, compared to this rates were indeed low. What's not so simple to answer is whether this deviation from the norm was responsible for Europe's financial chaos. The ECB's rate of interest was uniform across the zone yet some countries clearly suffered more than others, this indicates that there are other factors at work. The widespread corruption and tax avoidance in Greece for example would have crippled her economy whatever the ECB did, in fact higher rates could have just compounded the problems by saddling the Greeks with an unfavorable exchange rate and higher systemic banking costs.

 Rather than laying the blame at the door of the ECB and bankers in general, perhaps attention could be shifted to the politicians that set the rules of national and personal investment. In the right hands low IRs could be a major boon the nation's wealth, in the wrong ones it becomes another speculative instrument that only fuels inflation.

Federal funds rate yearly average