With the Fed contemplating whether to hike again next month and start “normalizing ” its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.
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Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned…
… Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.
A novel dilemma for the European Central Bank to contend with: above target inflation.
Prices in the single currency area have climbed by 2 per cent on the year for the first time in over four years, posing a fresh headache for the ECB’s dovish policymakers who will mark their two-year quantitative easing anniversary next week.
At the ECB’s latest meeting next Thursday, president Mario Draghi will face the task of convincing his more hawkish colleagues that the current leap in annual prices – from 1.8 per cent in January – is unlikely to be sustained having been driven by volatile energy costs. The central bank, which has been battling with more than three years of low prices, targets inflation of just under 2 per cent.
Here’s what analysts are making of Mr Draghi’s dilemma.
Despite the recent upsurge in inflation driven by higher oil prices Pete Vanden Houte at ING thinks inflation will begin to stabilise over the coming months. If anything, he says the ECB will opt to let inflation run above target to compensate for years of weak prices:
There is little doubt that the ECB will continue to be criticized for its loose monetary policy, especially in the core countries. But the bank will no doubt recall that the inflation target has to be reached over the medium term and for the whole of the Eurozone. If anything the ECB is more likely to err on the side of inflation, to compensate for the fact that consumer price increases have significantly undershot the ECB’s target for now 4 years in a row.
We therefore don’t see any change in monetary policy this year. However, in the third quarter, the ECB might announce its exit strategy, which in our view will probably entail a new extension of the QE program until mid-2018, but with some tapering included.
The eurozone’s annual inflation rate climbed above the 1 per cent mark for the first time since 2013 in December, underscoring the impact of climbing energy costs on consumer prices which have lagged at worryingly low levels for the last three years.
At 1.1 per cent, year-on-year inflation in December was confirmed in a second reading from Eurostat, which also showed an uptick in core inflation to 0.9 per cent.
But the inflationary performance across the 19-country bloc remains mixed – a development that could pose a headache for the European Central Bank, which targets average price growth of just below 2 per cent.
Germany, Europe’s largest economy, recorded a more than three-year high of 1.7 per cent last month while Italy remained more sluggish at 0.5 per cent.
The Eurogroup meeting between EU finance ministers has broken up for the day and will reconvene on Saturday according to reports.
As noted earlier, Greece is now refusing to agree to the IMF’s hardline stance on pension cuts and the VAT, while the IMF isn’t interested in a deal that sees Athens escaping long-term fiscal reform by resorting to short-term, unenforceable solutions such as tax hikes.
As EU leaders convene for a two-day summit in Brussels (where it will be all Greece, all day, despite what anyone says), German Chancellor Angela Merkel now looks to be leaning towards drawing a line in the sand consistent with her finance minister, her lawmakers, and her central bank chief.
GERMANY’S MERKEL TOLD EU PARTY LEADERS THERE MUST BE DEAL ON GREECE BEFORE MARKETS OPEN ON MONDAY -PARTICIPANTS
MERKEL ALSO TOLD CONSERVATIVE EPP LEADERS “WE WON’T BE BLACKMAILED” BY GREECE -PARTICIPANTS
This marks a critical turn of events. Until now, Merkel had been relucant to fold under pressure from Wolfgang Schaeuble as the Chancellor viewed the geopolitical risks of Grexit as too great given the situation in Ukraine and recent friction between Europe and Russia including the extension of economic sanctions, an anti-trust suit against Gazprom, and the seizure of Russian state assets in France, Belgium, and Austria.
Earlier today we showed why Greece is now literally living on borrowed time. The combined €2.9 billion in ELA cap increases ‘generously’ bestowed upon the flailing Greek banking sector by the ECB last week looks to have been barely enough to keep things from “ending very differently” (to quote Kathimerini) at the ATMs on Friday.
But perhaps more importantly from a big picture perspective, Greece may have already breached the upper limit of its borrowing base. JPM calculates Greek banks’ eligible collateral at €121 billion (€38 billion in EFSF bonds €8 billion in government securities, and €75 billion in “credit claims”). With Friday’s ELA increase, the country’s total borrowings (that’s OMO plus ELA) amount to some €125 bilion. Why would the ECB allow this? Because it knows the breach will be promptly limited or reversed on Monday, or there will be a deal.
So, it is literally “deal or no deal” time, because if JPM is correct and eligible collateral was either exhausted two weeks ago or, in the best case scenario, is right at the limit, capital controls will need to be put in place as early as Tuesday at which point the ATMs will officially stop dispensing freshly-minted euros which, incidentally, brings up an important point.As Barclays notes, during the same period over which Greek banks lost nearly €30 billion in deposits, banknotes in circulation jumped by some €13 billion. In short, because Greeks are increasingly prone to stuffing their euros in mattresses, a large proportion of the deposit flight has come in the form of hard currency withdrawals, meaning the Bank of Greece is forced to (literally) print billions in physical banknotes:
For just about 2 months the Indian bourses have shrugged off all the things that are worrying the rest of the world. Institutional money is coming in, and today the Government raised about USD 1 Bn through the sale of a 9 per cent stake in Axis Bank. The currency has strengthened somewhat, inflation is down and so are commodities including Oil. All of these factors put together have brought about a surge in Equities and brought a general cheer to the investing class. To this intoxicating brew have been added the concoction called NDA-widely tipped to come first at the hustings in May 2014.
Here is where the trouble starts. Polls apart there are evident signs that the NDA is as much a force of convenience as are the other political alliances in the country. There is the unique spectre of a 86 year old politician being cajoled by party men atleast twice in the past 3-4 months, The first occasion was when the NDA’s PM candidate was notified and the latest has been the selection of ticket for this once Deputy PM.
It is apparent groupism exists in the NDA, with some thinkers in the capital expressing dismay and a suggestion that the anti-PM nominee group will sabotage Elections to the detriment of NDA. So much so that instead of a far-away target of 272 seats, the front-runners end with 160. This scenario will lead to a return of the UPA III from the back door. All expectations of a decisive government in place by mid-summers will then vanish. What we will get is, what we have had for the past 10 years.
This scenario apart, were the NDA to come as a force they will still find the Government tough to run and difficult o achieve explicit aims. A March 19 report by Credit Suisse claims that most infra projects power, water, rail roads and so on are stuck at the State level. The thing is most of these projects were set up under unviable conditions. The bankrupt Southern States have chosen not to let these thermal and hydel plants run for the poor in their States will not be able to the bills. This will lead to even larger subsidies to Electricity and Water Boards and putting State finances deeper into the RED. Better let the debts of corporates and banks remain a central problem even if it means the population suffers at large.
The current optimism is inexplainable and will come to nought soon. There are voices that the Bull operators of Bombay will Exit equities before April 7. This will create a vaccum in the financial markets. At that juncture if the FIIs save Bombay then it is good, otherwise the Hope Rally will see a END.
Development financial institutions (DFIs) have lost their relevance in the present financial system in India and across the globe, RBI Deputy Governor K C Chakravarty said on Saturday.
“DFIs played an important role in the country’s development process earlier. But with the advent of universal banking, they have lost their importance now,” he said.
Chakravarty, who was speaking on ‘IDBI’s role as a DFI’ organised by United Forum of IDBI Officers and Employees here last night, said that earlier banks did not have access to long-term funds and used to provide short-term working capital.
On the other hand, the DFIs with government support had access to long-term funds and were able to provide term loans.
“But the scenario has changed now. The banks are now having access to long-term funds through pension and insurance funds,” he said.
“With these, the DFIs had lost their relevance as they were not able to compete with banks in terms of providing cheap funds”, he said.
He said globally also the DFIs had lost their relevance.
“Not only IDBI. Erstwhile DFI, ICICI had also changed into ICICI Bank,” he said. Read More
China’s recent economic data reinforce the International Monetary Fund’s forecast that the world’s second-largest economy will avoid a second-half slowdown and grow 7.75 percent this year, a fund official said on Thursday.
Markus Rodlauer, deputy director of the IMF’s Asia Pacific Department and the fund’s mission chief for China, said the IMF expected China’s economy to sustain its pace of growth despite a difficult international environment.
“This is borne out by a number of high frequency indicators out of China. These indicators suggest that activity has indeed been stabilising into the third quarter, into the second half,” Rodlauer told a conference in Tokyo.
He noted double-digit retail sales growth and figures for industrial added value and fixed asset investment as some examples of such indicators. Read More