Wed, 10th February 2016

Anirudh Sethi Report


Archives of “central banks” Tag

Bank of Japan Gov. Haruhiko Kuroda treads new ground in face of uncertainty

Bank of Japan Gov. Haruhiko Kuroda stayed true to his word that he will do whatever it takes to beat deflation. With falling oil prices and a slowing China threatening his inflation target, Kuroda resorted to negative interest rates, taking the central bank to uncharted territory.

     The negative rates aim to get deposits now sitting idle at the central bank circulating through the private sector, lifting the economy and prices in the process. The BOJ is effectively charging banks for holding their money — not a normal feature of monetary policy. The central bank is fully aware of possible side effects, including negative yields at banks.

      Turmoil in domestic and foreign markets has far exceeded expectations. The BOJ was forced to extend its time frame for achieving its 2% inflation target again, to around the first half of fiscal 2017.

     If the bank cannot allay uncertainty by this spring’s pay negotiations, wage growth will fizzle out. The deflation-fighting strategy coordinated by the government and the BOJ would get derailed.

     Before traveling to the World Economic Forum in Davos last week, Kuroda directed staffers to devise further easing measures. He presented their proposal for negative interest rates at the policy board meeting, bracing for stiff opposition.

ALERT-Bank Of Russia Calls “Emergency” Meeting To Address Ruble Rout


The sharp (and seemingly inexorable) decline in crude prices combined with Western economic sanctions and geopolitical turmoil have weighed on the currency of late and in the midst of a new leg down in oil, investors appear to be panic selling.  

Some investors are selling at any price,” Bernd Berg, an emerging-markets strategist in London at Societe Generale told Bloomberg by e-mail.

And even as Russian central bank Deputy Chairman Vasily Pozdyshev swears “there’s no systemic risk,” the Bank of Russia has now called an emergency meeting with state-run and private lenders to discuss the FX bloodbath.


This Week All Eyes on : Davos, China GDP, ECB

After another ugly week in markets lays on the horizon, as investors prepare to scrutinize the latest GDP report from Beijing as they digest fresh declines in the price of oil.

Markets will also have to digest a string of monetary policy decisions, corporate earnings in the US and the headlines emerging from Davos.

Here’s a selection of what to watch in the coming days.


Business leaders, central bankers, heads of state and celebrities will gather in Davos, Switzerland on Wednesday for the annual World Economic Forum. This year, the overarching theme is ‘The Fourth Industrial Revolution‘ — namely the rapid changes taking place in technology that are disrupting every industry in every country.

Mary Barra, chief executive of General Motors, Satya Nadella, chief exeuctive of Microsoft and Tidjane Thiam, CEO of Credit Suisse are among the co-chairs of the summit.

China GDP

With the Shanghai Composite back in a bear market and concerns about China driving investor pessimism around the world, the nation’s GDP report published Tuesday (local time) is sure to be closely watched.

BOJ’s Haruhiko Kuroda doubles down on 2% inflation target

The Bank of Japan is ready to take “even bolder” steps to meet its target of 2% price growth, Gov. Haruhiko Kuroda said Monday.

     The central bank “will do whatever it can” to raise growth in the consumer price index from its current near-zero level, the governor told a meeting of the Life Insurance Association of Japan. The target “will absolutely be realized,” he said.

So-called supplementary measures to the bank’s current monetary easing were hatched at a policy meeting Dec. 18. But those changes were merely technical tweaks to allow easing to continue smoothly, leaving market players who expected additional easing aimed at fighting deflation disappointed. Kuroda’s emphasis on openness to “drastic” measures seems designed to dispel fears that the bank has run out of room to expand easing itself.

     The governor since November has worded his statements carefully to keep open the possibility of further easing, after the decision to forgo such a move in October brought speculation that the central bank was not serious about its 2% inflation target. “When it comes to price developments being at stake, the bank must be the first mover,” he told business leaders in Nagoya on Nov. 30.

Emerging Markets :An Update

Idiosyncratic EM risk remains in play, but in some instances could take a bit of a breather.  Brazil’s congress is effectively on holiday until well into February, and so risks of negative impeachment headlines have ebbed.  On the other hand, this means no progress on fiscal measures until Q2.  South African and Turkish political risk could also quiet down, but negative fundamentals remain in play for all three of these countries and support our call for further ratings downgrades.

Brazil reports December trade later today.  Exports are expected at -1% y/y and imports at -35% y/y.  That would result in a $6.1 bln surplus, one of the largest on record.  Brazil then reports November IP Thursday, and is expected at -10.3% y/y vs. -11.2% in October.  Brazil reports December IPCA inflation Friday, and is expected to rise 10.78% y/y vs. 10.48% in November.  This would be a new cycle high and the highest since November 2003.  COPOM next meets January 20, and we think the tightening cycle will restart then with a 50 bp hike to 14.75%.

Mexico reports December PMI later today.  Manufacturing is expected to fall to 51.5 from 52.1 in November.  Mexico then reports December CPI Thursday, and is expected to rise 2.10% y/y vs. 2.21% in November.  This would be another record low, and further below the 3% target as well as nearing the lower bound of the 2-4% target range.  The next policy meeting is February 4, and no change is expected then.  Banxico officials have suggested that they will be largely taking their cue from the Fed, which is not expected to hike again until the March 16 meeting.
Korea reports November current account Tuesday.  The external accounts remain in good shape, more from plummeting imports than from strong exports.  The economy remains soft and so we think that the BOK may tilt more dovish this year.  The next policy meeting s January 14, but no change is expected that soon.  

Sweden holds rates, notes ‘somewhat stronger’ economy – repo rate unchanged at -0.35%

Decision just out

  • says they still highly prepared to act
  • developments in Swedish economy have been somewhat stronger than expected, while global uncertainty remains
  • sees repo rate averaging -0.41% in Q4,2016 as prev forecast
  • today’s decision was unanimous
  • highly prepared to make policy more expansionary even between mon pol meetings

Never underestimate the capacity for Nordic central banks to drop a surprise. Today, though, Sweden’s Riksbank has decided to hold its key rate at a super-low minus 0.35 per cent, as expected.

In a statement, the central bank said developments in the Swedish economy had been “somewhat stronger than expected” – a cheerful note that has kicked the krona higher. One euro now buys SKr9.2857, a decline of 0.4 per cent on the day.

Emerging Market -An Update

EM starts the week off in the familiar position of coming under pressure.  The strong US jobs report has all but cemented a Fed lift-off this month, helping the dollar to claw back some of its post-ECB losses.  Meanwhile, commodities continue to sink under the prospects of increased supply.  Brent oil in particular is making new cycle lows after last week’s OPEC meeting saw the quota system basically scrapped.  These factors all continue to conspire against EM assets in a broad fashion.
Within EM, idiosyncratic risks remain in play.  USD/ZAR made a new all-time high today near 14.55, with sentiment souring after S&P last week moved the outlook on its BBB- rating from stable to negative.  We think the rating will be cut to sub-investment grade in 2016.  Moody’s affirmed Turkey’s BBB- rating, but kept the negative outlook in place.  Here too, we see a cut to sub-investment grade in 2016.  Elsewhere, USD/COP made a new all-time high today near 3272.  We expect this trend to widen out to other EM currencies in the coming weeks.

Taiwan reports November CPI Tuesday, and is expected to rise 0.36% y/y vs. 0.31% in October.  The central bank does not have an explicit inflation target, but low price pressures should allow the easing cycle to continue at the December meeting.  November trade data reported today was much weaker than expected (with exports -17% y/y), underscoring downside risks to growth ahead. 

China reports November trade Tuesday. 
Exports are expected at -5% y/y, while imports are expected at -11.9% y/y.  China then reports November CPI and PPI Wednesday, with the former expected to rise 1.4% y/y and the latter expected to contract -6.0% y/y.  On Saturday, China reports November retail sales and IP.  The former is expected to rise 11.1% y/y, while the latter is expected to rise 5.7% y/y.  The economy appears to be stabilizing, but downside risks remain and so we expect further PBOC easing in 2016.

How big an ECB surprise has the euro priced in?

Never underestimate the shock value of the European Central Bank.

It should not be news to anyone who has been paying attention that the central bank isvery likely lining up a new dollop of easing at its final scheduled meeting of the year next week. And yet every fresh sniff of action send the euro, and bond yields, sliding. That happened yet again yesterday, and the effect has not worn off.

“Mario Draghi is regularly under-estimated,” said Kit Juckes at SocGen. “‘Whatever it takes’ means exactly that.” Well, quite.

In very subdued Thanksgiving Day trading, the euro is holding steady just above $1.06, with no bounce back from the drubbing that followed the Reuters report yesterdayfleshing out how the (potential) extra easing will work. One plan under consideration, Reuters wrote, is to create a two-tier deposit rate – a move that could cushion commercial banks from too much damage from a penalty on parked funds.

Once again, analysts and investors are rethinking the ECB’s next step, and upping the ante.

Says BNP Paribas:

Our economists have revised their forecast for the ECB’s 3 December policy meeting and now expect a 20bp deposit rate cut (10bp previously). This is in addition to a €10bn increase in the monthly rate run of asset purchases and a 12m extension of the programme to September 2017.

We expect the euro to remain under pressure as expectations for ECB action continue to build, particularly given that short euro positioning remains light

BoJ’s Yutaka Harada explains why 2% inflation is problematic

A few key lines from Bank of Japan boardmember Yutaka Harada help explain why the central bank held fire at its October 30 meeting.

Mr Harada, speaking in Tochigi on Wednesday, was a little more downbeat — one is tempted to say realistic — about the economy, than BoJ chief Haruhiko Kuroda.

He acknowledged as much, saying his outlook on the economy and inflation is “slightly weaker” than the central bank’s. He also cited a number of overseas risks: slowing emerging markets, especially China; an “unexpected shock” from the US lifting interest rates, or Europe’s debt crisis resurfacing.

In the event these events hurt Japan, the BoJ “should implement additional monetary easing without any hesitation,” he said.

But, Mr Harada was less concerned about the forces of domestic support, i.e. consumption and exports. While neither is exactly firing on all cylinders, he has a similar outlook to Mr Kuroda, which emphasises how the tight labour market will create a “virtuous cycle of income to spending.”

And here’s the key: while almost half of economists expected the BoJ to cut its inflation target last month, then respond with renewed stimulus efforts, Mr Harada downplayed the need to hit the BoJ’s 2 per cent inflation target right away:

BOJ : Kuroda’s march to 2% bogs down in stagnant wages

The Bank of Japan is caught in a dilemma. The central bank has fallen behind in its pursuit of inflation, but speeding up asset purchases could produce the wrong kind of price growth even as wages remain sluggish.

     The trend in prices has been one of steady improvement, BOJ Gov. Haruhiko Kuroda stressed to reporters Friday. 

     He and the rest of the bank’s policy board had just pushed back the target date for reaching its 2% price growth target by six months, but they did not increase monetary easing.

     Excluding fresh food and energy, consumer price index growth did quicken to 1.2% year on year in September, up from 1.1% the month before. This marks the fastest pace since Kuroda’s BOJ launched its current quantitative easing program in April 2013.

     But with energy prices factored in, inflation remained negative for a second straight month. This reflects a drop in the price of crude oil that will eventually fade into the background. But if inflation stays close to zero after that, consumer expectations of rising prices may remain low.

     “We have to keep a careful watch for changes in the trend,” a senior BOJ official said.