Sun, 29th May 2016

Anirudh Sethi Report


Archives of “interest rate” Tag

Colombia lifts rates to 7.25%

Colombia has raised interest rates for the ninth time in a row as the Andean country continues to do battle with high inflation and a weak currency.

The Banco de la República lifted its benchmark rate by another 25 basis points to 7.25 per cent on Friday.

The increase is aimed at reining in inflation, which is currently running at almost twice the upper level of the bank’s 2-4 per cent target range as a severe drought drives up food prices and a weak peso lifts import costs.

Since September last year, the bank has raised its main interest rate by 275 basis points in one of the world’s most aggressive tightening cycles.

The increases have come despite the slowdown in the economy, which has been hard hit by the collapse in global oil prices.

While Colombia does not even figure among the world’s top 10 oil producers, crude plays an outsize role in the economy.

It accounts for more than a half of the country’s exports and generates more than a quarter of total government revenues, according to Bank of America Merrill Lynch estimates.

The Colombia peso was one of the worst performing emerging currencies in 2015, shedding more than a quarter of its value against the US dollar. It has rebounded slightly this year, rising 3 per cent since the start of January.

Fed’s Powell: data should support rate rise ‘fairly soon’

A continued strengthening in US economic data could clear the way for a second increase in short-term interest rates “fairly soon,” a senior Federal Reserve policymaker has said amid intense speculation about the outcome of this summer’s rate-setting meetings.

Jerome Powell, a member of the Fed’s Board of Governors, said the US still faces a range of risks from overseas, including the upcoming referendum on Britain’s membership of the European Union, uncertainties about China’s exchange rate policy, and “stubbornly low” growth and inflation for most US trading partners

However Mr Powell said in a speech in Washington DC that the US economy had still made “substantial progress” as it remains on track to reach the Federal Open Market Committee’s dual mandate of stable prices and maximum employment.

“Depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon,” he said at an event at the Peterson Institute for International Economics. “My view is that a continued gradual return to more normal monetary policy settings will give us the best chance to continue to make up lost ground.”

Canada keeps rates at 0.5%, sees Q3 rebound

Canada has kept its key interest rate unchanged despite growing uncertainty over the outlook for the economy following a run of weak economic data for April.

The Bank of Canada left its benchmark rate at 0.5 per cent on Wednesday. The move was expected by all 17 economists surveyed by Bloomberg.

In a statement accompanying its decision, the bank took note of the recent rebound in crude price and growing signs of strength in the US economy.

And while it warned that the forest fires that ravaged northern Alberta earlier this month are expected to cut 1.25 percentage points off real GDP growth in the second quarter, it also predicted the economy will rebound in the third quarter.

It said:

In Canada, the economy’s structural adjustment to the oil price shock continues, but is proving to be uneven…The second quarter will be much weaker than predicted because of the devastating Alberta wildfires.

The Bank’s preliminary assessment is that fire-related destruction and the associated halt to oil production will cut about 1 1/4 percentage points off real GDP growth in the second quarter. The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins. While the Canadian dollar has been fluctuating in response to shifting expectations of US monetary policy and higher oil prices, it is now close to the level assumed in April.

Breaking-Hungary trims interest rates (again)

Hungary has trimmed its benchmark interest rate by a further 15 basis points to 0.9 per cent, its third cut in three months.

Today’s move had been expected by economists. Hungary’s real economy has been in fairly robust shape of late but the country has been grappling with weak inflation, which stood at 0.2 per cent in April, well below the central bank’s 3 per cent target.

Hungary’s policymakers have also been battling to avoid excessive rises in the forint since the start of the European Central Bank’s quantitative easing programme last year, as investors on the hunt for attractive yields have cast their eyes beyond the borders of the eurozone.

It is the fifth time since the start of 2015 that the central bank has lowered rates.

Kenya unexpectedly cuts rates to 10.5%

Kenya’s central bank has unexpectedly cut its benchmark interest rate by 100 basis points to 10.5 per cent, citing falling inflation, buoyant foreign reserves and a “strong” outlook for both the domestic economy and the country’s main export partners.Most analysts had expected the central bank to keep rates unchanged for another few months, because of uncertainty in the global economy – particularly the threat of the UK leaving the EU and the possibility of another rate rise by the US Federal Reserve

But the bank’s monetary policy committee said in a statement issued on Monday afternoon there was “space for an easing of monetary policy while continuing to anchor inflation expectations”.

The benchmark rate has been at 11.5 per cent since July last year, when it was hiked 150 basis points.

Inflation has fallen to 5.3 per cent in April from 6.5 per cent in March, right in the middle of the government’s target range.

The Kenyan shilling has remained stable this year, supported by a narrower current account deficit driven by cheaper oil imports, improved earnings from tea and horticulture exports and strong diaspora remittances.

Israel keeps rates on hold

Israel’s central bank has decided to hold steady, maintaining its main interest rate at 0.1 per cent in May.

Policymakers cited weak inflation (consumer prices rose 0.4 per cent last month) and a slowdown in economic activity as reasons to hold off on a rate rise. The Israeli economy grew by a lower than expected 0.8 per cent in the first quarter of the year.

Global developments, including a “fragile” recovery in Europe and a slowdown in global trade, were also highlighted by the Bank of Israel’s latest policy statement, which added:

The Monetary Committee is of the opinion that the risks to achieving the inflation target remain high, and that the risks to growth have increased.

The central bank, once governed by Federal Reserve vice president Stanley Fischer, has kept its benchmark rate unchanged since February 2015.


Emerging Markets -An Update

EM had another rocky week, but managed to end on a slightly firmer note Friday.  Market repricing of Fed tightening risk was the big driver last week, and that could carry over into this week.  There are several Fed speakers in the days ahead, capped off with Fed chief Yellen on Friday. 

Several EM central banks meet this week, including Israel, Turkey, Hungary, and Colombia.  There is some risk of a dovish surprise from Turkey, while Hungary is expected to continue easing.  Colombia is an outlier, with high inflation seen leading to another 25 bp hike. 
Singapore reports April CPI Monday, which is expected at -0.7% y/y vs. -1.0% in March.  It then reports April IP Thursday, which is expected at -0.3% y/y vs. -0.5% in March.  Deflation risks may be easing, but the economy continues to slow.  If weakness persists over the summer, then another easing move at the October MAS policy meeting is possible.
Taiwan reports April industrial output Monday, which is expected at -1.8% y/y vs. -3.6% in March.  Last week, Taiwan reported April export orders at -11.1% y/y, which suggests little relief ahead for IP and exports.  The growth outlook remains weak, and so the central bank is likely to continue cutting rates at its quarterly policy meeting in June.
Israeli central bank meets Monday and is expected to keep rates steady at 0.10%.  Deflation worsened to -0.9% y/y in April, while Q1 GDP growth was much weaker than expected at 0.8% annualized.  As such, there is growing risk that the Bank of Israel will have to take further measures in H2 to boost the economy.  For now, officials will be happy with recent shekel weakness.  The central bank had been intervening to prevent strength in recent months, but the shekel has underperformed recently due to rising political risks.

Eric Rosengren sounds like he is ready to pull the trigger

Voting FOMC member rings the tightening bell

Boston Fed president Eric Rosengren told the Financial Times that he is getting ready to pull the trigger and back tighter monetary policy.
He commented that:
  • most of the conditions laid out in the minutes, as of right now, seem to be broadly being met
  • Has set a relatively low threshold for improvement in the US economic growth
  • Making progress on getting inflation to 2%
  • Stock markets globally has improved quite significantly
  • The data has been coming in better and not only in the United States, but in many other parts of the world
  • Some of the headwinds we thought might be significant problem as recently as March seemed to be little bit less of a significant problem as we going to June
  • The Fed funds rate at 35 basis points is “pretty low, given we are pretty close to full employment”
The Fed set three tests 

Economists’ expectations grow over Federal Reserve rate rise

More than half of economists expect the Federal Reserve to tighten monetary policy at one of its next two meetings, in stark contrast to market views at the start of the month when concern over lacklustre global growth and choppy financial markets seemingly stayed the US central bank’s hand until 2017.

Fifty-one per cent of the 53 leading economists surveyed by the Financial Times said they believed the US central bank would lift rates in June or July after the release last week of the minutes of the Fed’s April policy setting meeting.

Many of the economists who spoke with the FT, including several who believed the Fed would wait until September to lift rates, said the move would be dependent on several key economic reports over the coming weeks — including data on payrolls, retail sales and consumer spending.

Despite a lacklustre start to the year — economists put the risk of a US recession over the coming 12 months at 20 per cent — several indicators have improved from the first-quarter lull.

Retail sales and industrial production accelerated in April, a preliminary reading of consumer confidence rebounded in May to its highest level in nearly a year, and inflation firmed.

“The Fed has positioned itself very firmly if the data improve back to moderate,” said Lindsey Piegza, an economist with Stifel Nicolaus. “They’re not looking for a strong economy or a solid economy, they’re looking for moderate. They’re trying to remind the market that the bar for that second rate increase is much lower than in previous rate cycles.”

The Eurozone Is The Greatest Danger

With markets everywhere disrupted by interventions from central banks, governments, and their sovereign wealth funds, economic progress is being badly hampered, and therefore so is the ability of anyone to earn the profits required to pay down the highs levels of debt we see today. Money that is invested in bonds and deposited in banks may already be on the way to money-heaven, without complacent investors and depositors realising it.

It should become clear in the coming weeks that price inflation in the dollar, and therefore the currencies that align with it, will exceed the Fed’s 2% target by a significant amount by the end of this year. This is because falling commodity prices last year, which subdued price inflation to under one per cent, will be replaced by rising commodity prices this year. That being the case, CPI inflation should pick up significantly in the coming months, already reflected in the most recent estimate of core price inflation in the US, which exceeded two per cent. Therefore, interest rates should rise far more than the small amount the market has already factored into current price levels.

Most analysts ignore the danger, because they are not convinced that there is the underlying demand to sustain higher commodity prices. But in their analysis, they miss the point. It is not commodity prices rising, so much as the purchasing power of the dollar falling. The likelihood of stagflationary conditions is becoming more obvious by the day, resulting in higher interest rates at a time of subdued economic activity.