Loose monetary policy and its opposite effect

One of the last Central Banks that have cut interest rates and stimulate monetary policy was the Bank of England. As a result, we see the British currency against the U.S. dollar below the area of 1.28-1.30, and on the contrary, above, that performs questionable actions of the regulator.

In addition we can recall the decision of other Central Banks in 2016 that conduct soft monetary policy, but the depreciation of the national currency is not affected.

To far to go, there is an example around the CBR and the Russian ruble. 10 June 2016 banking regulator of Russia decided to reduce the interest rate by 50 basis points. At that time, the rate of the currency pair USD/RUB was 64,90. Now quotes this currency instrument is equal to the former rate. In addition, after this decision, we observed bearish rally to 62 pieces.

Latest example is just the decision of the Bank of England to cut interest rates by 25 basis points and to increase the program of quantitative easing. Earlier, the currency pair GBP/USD was USD 1.3300. At the moment the pair is one figure lower, but still the result of this radical decision of the British regulator looks at least doubtful.

The following proof of the opposite effect of loose monetary policy was a policy of the Bank of Japan, which in late July agreed to increase the quantitative easing program. The main purpose of the Japanese regulator is the 2% CPI. In addition, Kuroda and Abe does not hide the fact that they want to see again the resumption of the depreciation of the Japanese yen. But instead of falling, the USD/JPY pair fell from 105 to 100 pieces. The strengthening of the Japanese currency, primarily due to the frustration of investors who were expecting a more drastic solution Haruhiko Kuroda.

There is an older story that began on March 10, 2016, when the ECB went to the recent decline in interest rates. The day rate for the currency pair Euro/dollar was at around 1.08 to 1.09. But in those days was the so-called local minimum, then the price headed North. At the moment the picture is not changing, and the trend is still bullish, going with “bear” on March 10.

The final nail of proof for this phenomenon to drive two of the banking regulator the commodity countries – the Reserve Bank of Australia and Reserve Bank of New Zealand. First spent the last interest rate decrease on 2 August and the second on August 10. As a result, current courses, as the Australian dollar, and new Zealand are above levels that have been set in those days.


Summing up, it is necessary to list such regulatory institutions as the Bank of England, Bank of Japan, Central Bank, ECB, RBA and RBNZ, which was carried out for 2016, the easing of monetary policy. But what is surprising is that in theory, under these decisions, the national currency should show a decrease due to the growth of the money supply. We have seen quite the opposite story, in which the exchange rate, namely Euro, pound, yen, ruble, Australian and new Zealand dollar have strengthened, which indicates the opposite effect during the influence of such monetary policy on the foreign exchange market.

The question arises: what is the cause of the phenomenon? Why in 2016, accommodative monetary policy started to cause a depreciation of the currency, but rather strengthening it. The answer to this question is difficult to find. Similarly, you can be confident in where to find the answer. Namely on the market of Treasury bonds, where we have the sum of 17 trillion dollars. This is the size of treasuries traded below the zero level. Is it normal that in a market economy? Hard to say, because even a theorist of the economy is on the verge of a great Revolution.

Loose monetary policy and its opposite effect 31.08.2016

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