The time has finally come for certain countries to adopt negative interest rate policy, moving further from zero interest rate policy. Japan has on 29 Jan announced a surprise deposit rate cut to negative, resulting in a benchmark rate of -0.1%. Initially this policy serves as an effort to weaken the yen in order to stimulate an investment shift to other asset classes. The JGB yields have fallen, which was expected as a result from the cut. However instead of weakening the yen, the currency rallied against USD, citing an impact from global slowdown and weak growth in China. BoJ still persistence in further cutting the interest rates as long as it is necessary to achieve an inflation target of 2%.
For central banks in the Eu and Japan, after years of ultra low and even negative rates as of now, its still unclear whether further easing is actually helpful to the economy.
China on the other hand, has eliminated quotas for foreign institutional investors in a bid to encourage local currency bond buying. This is considered as part of major deregulation process by the chinese government. At about USD 6 trillion, China bond market is the third largest in the world, but foreign investors only hold about 2% of the market. Opening of the bond market is also aligned with the PBoC’s effort to encourage Chinese companies to finance themselves in the local corporate bond market, where in turns to be less relying on China shadow banking system.
Besides that, PBoC has cut its reserve requirement by 50bps as to support growth. Malaysia’s central bank has also cut the statutory reserve requirement of 50bps to 3.5%, in an effort to stimulate liquidity in the market.
Rating downgrades for several countries, particularly Brazil, Bahrain, Oman, Saudi and Kazakhstan. Major reason cited by the rating agencies, among others, is the concern over the impact of extended low oil prices on the countries’ finances. Other than that, several commodity-related issuances also faced rating downgrades, particularly due to reason of high gearing level and also deteriorating cash flow debt protection level by the issuers.
From this, we predict for a sub trend global growth as our base case, low global GDP and inflation level, further slowdown in China and weak commodity prices. We havent seen the bottom of crude oil price yet. With the Iranian sanction being lifted-off, oil could depreciate further as supply increases.