Tue, 26th July 2016

Anirudh Sethi Report


Archives of “interest rate” Tag

ALERT-Bank of Israel cites Brexit risks as it keeps rates on hold

Israel’s central bank has cited the UK’s EU membership vote among the main considerations behind its decision to keep interest rates on hold at 0.1 per cent, where they have been since February of last year.

Repeating its oft-used guidance that monetary policy will remain accommodative for a “considerable time”, the Bank of Israel said uncertainty over the ramifications of the Brexit process is “expected to remain high”, highlighting the International Monetary Fund’s recent decision to cut global growth forecasts in light of Britain’s vote to leave the EU.

In Europe “weakness is becoming apparent and risks to the economy are increasing”, while in the US, indicators of activity such as labour market data were strong, said the Bank of Israel in a detailed commentary accompanying its rates decision on Monday.

Thus, policymakers concluded that the monetary policy of other major central banks is expected to remain “very accommodative”.

The Bank of Israel is targeting inflation within a range of 1-3 per cent a year but in June, the annual rate was a soggy -0.8 per cent.

The central bank said:

Nearly 80% of analysts see more BOJ easing in July: survey

Many market analysts predict the Bank of Japan will further loosen monetary policy at its upcoming meeting, to bolster flagging inflation expectations and price trends, a recent survey shows.

Nikkei Quick News conducted a survey of “BOJ watchers” — economists at banks and brokerages who are familiar with the central bank’s thinking — on July 19-24. The results, released Monday, showed 22 out of the 28 analysts expected the BOJ to take additional easing steps at the monetary policy meeting scheduled for Thursday and Friday.

 Many BOJ watchers believe the bank will take interest rates further into negative territory and step up purchases of exchange-traded funds; few predicted more purchases of government bonds.

The government is set to put together its latest economic policy package as early as the end of July. Speaking to reporters in Chengdu, China on the sidelines of a meeting of the Group of 20 finance ministers and central bank chiefs, BOJ Gov. Haruhiko Kuroda said Saturday that if a government takes fiscal steps while a central bank is simultaneously easing monetary policy, it has a great economic impact. Kuroda reiterated the bank will take additional measures, if necessary.

PanamaPapers Aftershocks: G20 to Prepare Tax Havens Blacklist by July 2017

OffshoreG20 Finance Ministers and Central Bank Governors will prepare a blacklist of countries not participating in the fiscal information exchange by the next meeting in July 2017, Russian Deputy Finance Minister Sergei Storchak said Sunday.

“G20 has decided to tackle non-cooperating jurisdictions seriously…the idea is implemented in the development of criteria by which a given economy will be assigned the status of a non-cooperating jurisdiction. The list must be ready by the next summit,” Storchak told journalists following the G20 Finance Ministers and Central Bank Governors meeting on July 23-24 in China’s Chengdu.

The idea to punish the countries refusing to cooperate on the issue of tax information exchange has been put on the G20 agenda after the so called Panama files have been published.

Bank of Japan wavers on more easing as prices flag

The Bank of Japan faces the tricky decision of whether to loosen monetary policy further at next week’s policy board meeting, with some officials hesitant to play the central bank’s few remaining cards despite investor hopes and stubbornly weak price growth.

The key question is how to interpret lackluster inflation. The consumer price index excluding fresh food has fallen steadily, moving further away from the 2% growth the BOJ is trying to achieve. This past spring yielded disappointing wage and price hikes. The BOJ plans to cut its inflation outlook for this fiscal year from the current 0.5%.

 Many on the board are keeping a close eye on the impact on future price growth. If companies and households get the sense that prices will not budge no matter what, those expectations would pose yet another hurdle to engineering inflation.

But the view is widespread within the bank that the mechanisms behind inflation are still working properly. Fiscal policy should also provide a boost. A consumption tax hike that had been scheduled for next April has been postponed, and Tokyo is planning a stimulus package believed to be on the scale of 20 trillion yen to 30 trillion yen ($188 billion to $282 billion).

With the labor market seen tightening further as well, many in the bank hold that the fiscal 2017 inflation outlook can be kept in the mid-1% range, not far off from the 1.7% estimate from April. Some even contend that the 2% target can be achieved next fiscal year as planned without further policy measures.

Next Week Watch For -US GDP, politics ,Fed & BOJ

Attention shifts squarely to the US next week as investors watch for the latest monetary policy decision from the Federal Reserve, second quarter economic growth figures and the Democratic convention.

Here’s what to watch in the week ahead.

US politics

After Melania Trump’s speech writer admitted to lifting lines from Michelle Obama and Ted Cruz refused to endorse Donald Trump at the Republican convention, investors turn their attention to the Democratic National Convention that gets underway in Philadelphia on Monday.

Hillary Clinton is expected to accept her party’s nomination for the presidential race on Thursday and delegates are also expected to ratify her pick for vice president. President Barack Obama is slated to speak on Wednesday.

Federal Reserve

Even as US economic data and global financial conditions have improved since the Brexit vote, policymakers at the Federal Reserve are expected to leave interest rates unchanged when they meet next week. However, the language in the statement is expected to reflect the improved tone of the data as job creation in the US rebounded last month and the so-called Federal Open Market Committee is expected to leave its options open for the timing of the next increase.

“Markets have recently repriced somewhat higher the chances for rate hikes this year, with around a 25% market-implied probability by September, and just over a 45% probability by December,” Ethan Harris, economist at Bank of America, notes. “We would not expect the July FOMC statement to materially change those probabilities, as we do not anticipate any substantive changes: the Fed is still watching the post-Brexit data evolve and should remain cautious overall.”

Global corporate debt is expected to swell to $75tn by 2020-Standard & Poor’s

Global corporate debt is expected to swell to $75tn by 2020, from $51tn at present, and a correction in credit markets is unaviodable, analysts at ratings agency Standard & Poor’s warn.

And with central banks around the world engaging in expansive monetary policy that has seen interest rates turn negative in Europe and Japan, investors on the hunt for yield are expected to push global corporate borrowing demand to $62tn.

The Entire Financial System Is Exposed To This ‘Junk’ Bond Market

Japan got there first. 15 years ago, we met a Japanese equity manager who made an astonishing prediction:

 “Japan was the dress rehearsal. The rest of the world will be the main event.”

That seemed an extraordinary suggestion 15 years ago. Today, not so much.

In the aftermath of the late 1980s real estate and stock market bubble, and its subsequent banking crisis, Japan became a giant laboratory experiment for novel insane monetary policies.

In 2001 the Bank of Japan tried Quantitative Easing. It was a policy that Richard Koo of the Nomura Research Institute described as the “greatest monetary non-event”.

It turned out, not for the first time, that academic economists had it all wrong.

Show me how inflation is low: Raghuram Rajan on ‘dialogues’ by critics

RAGHU-GOLDTaking his critics head-on, RBI Governor Raghuram Rajan has challenged them to show how inflation is “very low” before accusing him of “being behind the curve” in his focus on containing price rise than on growth and debunked such criticism as mere ‘dialogues’.

Rajan, who has often been seen as being critical of the government and its policies, also said there is “lot of frustration” about the pace of economic recovery, but attributed it to the two successive droughts, weak global economy and external shocks like Brexit.

Given these constraints, performance of Indian economy has been “quite creditable” and prospects of good monsoon as well as structural reforms and macroeconomic stability will accelerate the growth going forward, he added.

On GDP growth figures, the outgoing Governor said he has refrained from “thumping on the table” to put a number on GDP growth, adding people sometimes get “overly fixated with a particular growth number”, though figures like 7.6 per cent and 8 per cent are within the same range.

Speaking to a select group of journalists here on a wide range of issues, Rajan said regarding financial inclusion, it is not possible to have bank branches in every village because that would be too expensive, but RBI is exploring other options like mobile branches and mini or micro branches.

INDIA-Bank union threatens to disclose names of 7,000 defaulters

All-India Bank Employees Association (AIBEA) today threatened to make public the names of top 7,000 wilful corporate loan defaulters who have defrauded around Rs 70,000 crore.

The union also demanded filing criminal cases against these defaulters.

AIBEA General Secretary C H Venkatachalam also said around 10 lakh employees and officials would go on a one-day strike, called by nine unions on July 29 to oppose what he calls the “anti-people banking reforms being pushed by the government.”

“Wilful defaulters have taken loans for some purpose but have diverted and misused the money. There are around 7,000 big companies who are wilful defaulters and they owe Rs 70,000 crore to the system. We will reveal their names in a few days,” Venkatachalam said here.

He accused the government of going soft on these big defaulters saying, “we believe the government is soft on wilful defaulters. We want to know why no criminal action is taken against them, but only civil suits are being filed against them?”

European Financial System is ‘Nearing a Grand Catastrophe’

The European Central Bank purchased €85.1 billion ($94.8 billion) of debt in June as it increased its asset-purchase program, Bloomberg reported.

The asset-purchase program is part of the ECB’s quantitative easing plan. The pace of buying in June compares with a target of €80 billion per month. Thus, the bank is directly investing into the European economy, bypassing the banking system.

This program creates significant risks while its advantages are questionable, financial expert Ernst Wolff said. He warned that the initiative may result in a total financial collapse.

The analysts explained that the ECB policy creates serious risks for small and less developed countries like Greece. At the same time, big economies like Germany take advantage of working with the regulator because the ECB acts in favor of rich and powerful investors.

In addition to corporate bonds, the ECB is buying government bonds. However, according to its rules, the bank cannot purchase bonds at a yield lower than the bank’s deposit rate, which is currently —0.4 percent.