Russia’s Central Bank said on Friday it had raised the limit on foreign exchange swap operations to $10 billion from $2 billion for Dec. 19 to alleviate a shortage of rubles in the money market.
Interbank overnight ruble rates climbed to around 25 percent on Friday, far above the bank’s 17 percent benchmark interest rate, as banks scrambled for rubles to balance up their books for the day and manage their liquidity needs.
To bring market rates back into line with the benchmark rate, the Central Bank will allow lenders to hand in more dollars and will lend them rubles in return.
“This measure contributes to narrowing the spread between the interbank market rates and the Bank of Russia key rate,” the Central Bank said in a statement.
The Central Bank has been limiting ruble liquidity in recent months to underpin the currency, which has nearly halved in value against the dollar this year. But this has led to ruble shortages among lenders, who are required to keep a certain amount of liquid cash on hand.
The bank had said a week ago that it would keep the limit on forex swap operations to an equivalent of $2 billion a day for Dec. 15-21.
In a scathing criticism of the RBI, covering the tenure of previous two governors, the mid-year economic analysis today said that monetary policy lost its credibility between 2007 and 2013.
“For a long time, the Indian economy had been drifting without a credible monetary anchor. Since late 2013, however, this has been laudably reversed,” said the mid-year economic analysis 2014-15 prepared by Chief Economic Advisor Arvind Subramanian.
The analysis further said that for nearly six years (2007 third quarter to 2013 third quarter), “India lost monetary policy credibility, reflected in the fact that real policy interest rates were consistently negative at a time when inflation was persistently in the double digit territory.”
Y V Reddy was Governor of the RBI from September 2003 to September 2008 and was succeeded by D Subbarao, who remained the central bank chief till September 2013.
Raghuram Rajan took over as 23rd Governor of the Reserve Bank of India on September 4, 2013.>> Read More
An improving labour market and sliding oil price has forced the Federal Reserve to cut its forecast for both unemployment and inflation.
In a fresh set of forecasts released following their final meeting of the year, the Fed’s Open Market Committee cut its forecast for the unemployment rate to 5.25 per cent by the end of 2015, instead of 5.5 per cent.
In the same year, it expects core inflation of 1.3 per cent, instead of 1.75 per cent.
The Fed also projected a slower pace of rate rises in 2015 and 2016. Its so-called dot plot (see first chart) shows that instead of expecting interest rates of 1.25 – 1.5 per cent by the end of 2015, the FOMC now expects rates of 1 – 1.25 per cent.
That suggests four quarter point rate rises next year instead of five.>> Read More
Stocks are bouncing today because the Fed will wrap up its monthly FOMC meeting and make a public statement this afternoon. Stocks have been rallying into FOMC meetings for the last three years, so traders are now conditioned to buy stocks in anticipation of this.
The prime focus for the markets is whether the Fed continues to state that it will raise rates after “a considerable time.” The reality is that the Fed cannot and will not raise rates anywhere near normal levels at any point because doing so would blow up the financial system.
Let’s walk through this together.
Currently, the US has over $17 trillion in debt. The US can never pay this off. That is not some idle statement… we issued over $1 trillion in NEW debt in the last eight weekssimply because we don’t have the money to pay off the debt that is coming due from the past.
Since we don’t have that kind of money, the US is now simply issuing NEW debt to raise the money to pay back the OLD debt. >> Read More
There have always been skeptics concerning the current highs for stocks who argue the markets are juiced by cheap money — the unusually low interest rates being facilitated by the US Federal Reserve — as well as demand chasing a shrinking supply of shares and massive stock buy backs by public companies.
When the Fed takes away the free money, the skeptics argue, normality will return to markets with a bang, financial assets will be priced accurately, and we should all watch out.
Well, on Wednesday, we might get some clues as to when the skeptics’ day of reckoning will come, when the Federal Reserve issues its latest policy statement at 2pm.
Traders and investors are agog waiting to see if the Fed changes the language in its long held vow to keep interest rates close to zero for a “considerable time” even after its massive bond-buying stimulus measures have ended.
The Fed’s large-scale buying of Treasury and mortgage related bonds – which took its balance sheet over $4 trillion – helped the US economy recover from the financial crisis of 2008-09 and helped keep interest rates near zero for years.>> Read More
Here is a brief round up of what to watch for next week:
Investors are now looking for clues as to when the Federal Reserve will lift rates after the end of the quantitative easing programme. Central to that is the Fed’s promise to keep interest rates low for a “considerable time”. Economists say that phrase could be retired after a better than expected payrolls report showed the US labour market in stronger shape than thought.
Voters in Japan head to the polls in what is expected to give current Prime Minister Shinzo Abe a clear mandate to continue with his ‘Abenomics’ economic policies. Pollspublished by the country’s five largest newspapers show Mr Abe’s ruling Liberal Democratic Party far ahead of opposition parties, and the LDP may win two-thirds of the overall vote.
Bank of England stress tests
Mark Carney will reveal the latest findings from the Bank of England’s stress tests, which will judge how the country’s eight largest lenders would fare under adverse conditions. The assessment of the doomsday scenarios, which include a 35 per cent decline in residential property prices and a jump in interest rates, will be released on Tuesday.
The Fed’s new “optimal control” study, completed in late November, is akin to putting the whole economy through a flight simulator to estimate how much fuel it needs to ride through a storm. Using a model known as FRB/US, Fed staffers simulate a path for the central bank’s benchmark interest rate–the federal funds rate–that results in the quickest possible return to low unemployment and stable inflation around 2%.
The study finds the best time to start lifting the fed funds rate from near zero is right now, in the fourth quarter of 2014, followed by increases to 1.4% by the fourth quarter of 2015, 2.6% by the fourth quarter of 2016 and 3.5% by the end of 2017. Looking out past 2020, the simulations never result in short-term rates above 4%.
These simulations are noteworthy in part because Fed Chairwoman Janet Yellen pays attention to them. She highlighted earlier versions of optimal control exercises in speeches in 2012, citing the work as evidence the Fed should take its time raising rates.>> Read More
Brazil has raised its benchmark interest rate 50 basis points to the highest level since 2011 as the government fights to win back investor trust.
The central bank lifted the Selic rate late on Wednesday to 11.75 per cent — its second increase in less than two months — in line with almost half of economists’ estimates. The remainder had expected a 25 basis point increase.
In an accompanying statement, the Central Bank of Brazil indicated the move was part of an aggressive but brief tightening cycle to control rising prices.
“Considering the cumulative and lagged effect of monetary policy, among other factors, the central bank committee evaluates that additional monetary policy efforts should be implemented sparingly,” said the bank.
Despite near-zero economic growth this year, 12-month inflation has remained far above the central bank’s official target of 4.5 per cent. Data for November are expected to show inflation at or around 6.59 per cent — above the 6.5 per cent ceiling of the tolerance band reserved for “economic shocks”.>> Read More
India’s GDP growth probably slowed to around 5 percent in the three months to September, slipping from 5.7 percent in the previous quarter, two senior finance ministry sources said, putting pressure on the Governor Raghuram Rajan-led Reserve Bank of India (RBI) to cut interest rates.
The sources said Finance Minister Arun Jaitley would argue forcefully for Reserve Bank of India (RBI) Governor Raghuram Rajan to lower interest rates when the two meet ahead of a decision on rates next Tuesday.
Six months after Prime Minister Narendra Modi swept to power with a promise that “better days are coming”, growth of 5 percent would be a serious slip back from the previous quarter and falls far short of the 8 percent that Asia’s third-largest economy needs to create enough jobs for its growing workforce.
Official GDP figures are due for release on Friday.
Indian finance ministers often “jawbone” the RBI on interest rates, but Jaitley’s calls have become unusually insistent of late. Aides say he will make the case for cuts forcefully when he meets Rajan.
“When Rajan meets the finance minister ahead of the policy review, he would be urged to cut the interest rates,” one senior finance ministry official with direct knowledge of the matter said.>> Read More
The divide is growing starker, forming a basic template for EM investors. Softer oil and commodity prices are subduing inflation in most countries, creating room for easier monetary conditions. Other countries, however, are still struggling with ideosyncratic frailties, preventing them from capitalising on the ebbing EM prices.
A Capital Economics note on Monday defined the EM monetary policy divide:
“Of the 56 EMs that we cover, 29 have autonomous control over monetary policy (the rest have fixed exchange rates). Since we last looked at the diffusion index in late June, of these 29 countries, 10 central banks have raised interest rates and nine have cut rates,” wrote Jason Tuvey, middle east economist.
This breakdown between those countries that have raised rates versus those that have lowered rates results in a slight bias toward overall tightening in the EM universe, as shown by the chart on the left.
Alongside China, the main other countries to have cut rates in recent months are Poland, Mexico and South Korea.>> Read More