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Economy

Bank of England line up to taper emergency stimulus

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The Bank of England’s decision on Thursday to slow the pace of its bond-buying makes it the second central bank from a G7 economy to begin the slow exit from pandemic-era money-printing stimulus schemes.

The big three of central banking – the U.S. Federal Reserve, European Central Bank and the Bank of Japan – won’t officially pare stimulus for a while.

Yet there are growing signs that policymakers have their eyes on the exit as vaccine rollouts pick up and growth bounces back. The Bank of Canada‘s C$1 billion ($806 million) cut to its weekly bond-buying programme last month highlights the next phase is about slowing hefty asset purchases.

Bank of America estimates central bank asset purchases in the United States, Japan, the euro zone and Britain will slide to about $3.4 trillion this year from almost $9 trillion in 2020. For 2022, it predicts purchases of just $400 billion.

Here’s a look at who is tapering, who may raise interest rates and who might be the last to call time on pandemic-era monetary stimulus.

1/ NORWAY

Norges Bank is at the vanguard in terms of signalling a retreat, and said on Thursday it is on track to hike interest rates in the second half of 2021.

That has made the crown this year’s best performing G10 currency. The central bank doesn’t intervene in bond markets, so the taper debate is not applicable.

2/ CANADA

Having announced tapering, Canada has signalled that its key interest rate could rise from 0.25% late in 2022.

3/ BRITAIN

Flagging a stronger economic rebound, the BoE will slow bond-buying to 3.4 billion pounds ($4.7 billion) a week, from the 4.4 billion-pound current weekly pace.

However, it kept the total size of the bond-buying programme unchanged at 895 billion pounds and Governor Andrew Bailey said the move did not amount to tapering.

“Since the Bank has already purchased 70 billion pounds out of the 150 billion pounds in gilts to be purchased by the end of 2021, purchases were already set to naturally slow,” Ambrose Crofton, global market strategist at JPMorgan Asset Management, said.

 

For a graphic on British bond markets stable as BoE slows weekly bond buys:

https://fingfx.thomsonreuters.com/gfx/mkt/jbyvryljzpe/GB0605.png

 

4/ UNITED STATES

The Fed plans to keep borrowing costs near 0% and maintain monthly asset purchases worth $120 billion until it sees “substantial further progress” towards full employment and its 2% flexible inflation target.

But with the economy expected to grow by more than 6% this year and inflation to be a “little higher” – according to Fed boss Jerome Powell – markets are pricing in a rate rise in 2023. Many analysts expect tapering to start this year.

The Fed faces a delicate balancing act, ensuring that tapering at a time of massive U.S. government borrowing does not boost Treasury yields too much.

Pictet Wealth senior economist Thomas Costerg expects tapering to start by early 2022 and proceed at a monthly pace of $10 billion. That process would last about a year – “enough to keep expectations for the first rate hike well in the distance”, he added.

 

For a graphic on Central bank holdings of government bonds:

https://fingfx.thomsonreuters.com/gfx/mkt/yxmvjdwyevr/CBANKS2704.PNG

 

5/ SWEDEN

Swedish inflation is approaching the Riksbank’s 2% target but it has said interest rates would stay at 0% for years. However, its 700 billion crowns ($84 billion) asset purchase programme will wind down this year as planned.

6/ EURO ZONE

Anaemic long-term inflationary pressures mean euro area rates are unlikely to rise for years. But tapering may come sooner, especially within the European Central Bank‘s 1.85 trillion euro ($2.2 trillion) pandemic emergency purchase programme (PEPP).

Technically, this runs until March 2022 but some officials are already advocating reducing bond purchases as growth rebounds.

Danske Bank analysts reckon the ECB will end up using only 1.65 trillion euros of the total PEPP stimulus package.

 

For a graphic on ECB weekly PEPP purchases:

https://fingfx.thomsonreuters.com/gfx/mkt/jznpnrbeopl/ECB0605.PNG

 

7/ AUSTRALIA

Australia’s economic rebound has surpassed expectations but the Reserve Bank of Australia, which has underscored its dovish credentials by adopting yield curve control, could be among the last to tighten policy.

It wants unemployment slashed and inflation within its 2% to 3% target before shifting tack, and doesn’t see either happening until 2024. Economists expect rates to stay on hold until then.

The RBA’s A$100 billion ($77.45 billion) QE programme ends in September and it will consider in July whether to extend it.

8/ NEW ZEALAND

New Zealand’s strong recovery and red-hot property markets have raised speculation a rate rise may come sooner than expected.

While its key interest rate is expected to stay at 0.25% this year, some analysts predict a rise in the second half of 2022. The central bank meanwhile appears to be in no hurry to taper its NZ$100 billion ($72 billion) QE programme.

9/ JAPAN

The BOJ pledged last week to maintain stimulus using yield target control and via bonds and equity purchases.

It has been accused of “stealth tapering” because its bond-buying has slowed since yield curve control (YCC) was adopted in 2016, though purchases have picked up slightly in the past year.

In March, they were about 22.2 trillion yen ($204 billion)above levels a year ago. But that’s still a quarter of the 81.96 trillion yen year-on-year increase in August 2016, just before YCC came in.

 

For a graphic on BOJ steadily ‘stealth’ tapering its JGB buying:

https://graphics.reuters.com/GLOBAL-CENTRALBANKS/TAPER/bdwpkbmllvm/chart.png

 

10/ SWITZERLAND

The Swiss National Bank does not intervene in domestic bond markets, instead capping the Swiss franc through interventions which came to nearly 110 billion francs ($120 billion) in 2020. The proceeds are used to purchase foreign bonds and equities.

The SNB shows no signs of departing from its interventionist policy; its chairman Thomas Jordan said last week that negative rates and a readiness to intervene in currency markets remain “essential”.

 

(Reporting by Sujata Rao, Tommy Wilkes, Saikat Chatterjee and Dhara Ranasinghe in London and Leika Kihara and Daniel Leussink in Tokyo; Editing by Toby Chopra)

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G7 nations to boost climate finance

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G7 leaders agreed on Sunday to raise their contributions to meet an overdue spending pledge of $100 billion a year by rich countries to help poorer countries cut carbon emissions and cope with global warming, but only two nations offered firm promises of more cash.

Alongside plans billed as helping speed infrastructure funding in developing countries and a shift to renewable and sustainable technology, the world’s seven largest advanced economies again pledged to meet the climate finance target.

But climate groups said the promise made in the summit’s final communique lacked detail and the developed nations should be more ambitious in their financial commitments.

In the communique, the seven nations – the United States, Britain, Canada, France, Germany, Italy and Japan – reaffirmed their commitment to “jointly mobilise $100 billion per year from public and private sources, through to 2025”.

“Towards this end, we commit to each increase and improve our overall international public climate finance contributions for this period and call on other developed countries to join and enhance their contributions to this effort.”

After the summit concluded, Canada said it would double its climate finance pledge to C$5.3 billion ($4.4 billion) over the next five years and Germany would increase its by 2 billion to 6 billion euros ($7.26 billion) a year by 2025 at the latest.

There was a clear push by leaders at the summit in southwest England to try to counter China’s increasing influence in the world, particularly among developing nations. The leaders signalled their desire to build a rival to Beijing’s multi-trillion-dollar Belt and Road initiative but the details were few and far between.

Johnson, host of the gathering in Carbis Bay, told a news conference that developed nations had to move further, faster.

“G7 countries account for 20% of global carbon emissions, and we were clear this weekend that action has to start with us,” he said as the summit concluded.

“And while it’s fantastic that every one of the G7 countries has pledged to wipe out our contributions to climate change, we need to make sure we’re achieving that as fast as we can and helping developing countries at the same time.”

PLEDGE OVERDUE

Some green groups were unimpressed with the climate pledges.

Catherine Pettengell, director at Climate Action Network, an umbrella group for advocacy organisations, said the G7 had failed to rise to the challenge of agreeing on concrete commitments on climate finance.

“We had hoped that the leaders of the world’s richest nations would come away from this week having put their money their mouth is,” she said.

Developed countries agreed at the United Nations in 2009 to together contribute $100 billion each year by 2020 in climate finance to poorer countries, many of whom are grappling with rising seas, storms and droughts made worse by climate change.

That target was not met, derailed in part by the coronavirus pandemic that also forced Britain to postpone the U.N. Climate Change Conference (COP26) until later this year.

The G7 also said 2021 should be a “turning point for our planet” and to accelerate efforts to cut greenhouse gas emissions and keep the 1.5 Celsius global warming threshold within reach.

European Commission President Ursula von der Leyen said the G7 leaders had agreed to phase out coal.

The communique seemed less clear, saying: “We have committed to rapidly scale-up technologies and policies that further accelerate the transition away from unabated coal capacity, consistent with our 2030 NDCs and net zero commitment.”

The also pledged to work together to tackle so-called carbon leakage – the risk that tough climate policies could cause companies to relocate to regions where they can continue to pollute cheaply.

But there were few details on how they would manage to cut emissions, with an absence of specific measures on everything from the phasing out of coal to moving to electric vehicles.

Pettengell said it was encouraging that leaders were recognising the importance of climate change but their words had to be backed up by specific action on cutting subsidies for fossil fuel development and ending investment in projects such as new oil and gas fields, as well as on climate finance.

British environmentalist David Attenborough appealed to politicians to take action.

“We know in detail what is happening to our planet, and we know many of the things we need to do during this decade,” he said in a recorded video address to the meeting.

“Tackling climate change is now as much a political and communications challenge as it is a scientific or technological one. We have the skills to address it in time, all we need is the global will to do so.”

($1 = 1.2153 Canadian dollars)

(Reporting by Elizabeth PiperAdditional reporting by William James and Kate Abnett in Brussels and Andreas Rinke in BerlinEditing by William Maclean, Raissa Kasolowsky and Frances Kerry)

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Economy

Canadian dollar goes up from Friday’s 4-week low

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Canadian dollar

The Canadian dollar edged higher against its U.S. counterpart on Monday as oil prices climbed and investors looked past domestic data showing factory sales falling in April, with the loonie clawing back some of Friday’s decline.

Canadian factory sales decreased by 2.1% in April from March, Statistics Canada said. Still, sales were up 1.1% after excluding vehicles and parts.

“Zooming out from the disruptions seen in the auto industry, the outlook for manufacturing sales is not all that bad,” Omar Abdelrahman, an economist at TD Economics, said in a note.

“The reopening of provincial economies and strength in Canada‘s largest export market (the U.S.) should provide a lift to demand,” Abdelrahman added.

The price of oil, one of Canada‘s major exports, was supported by economic recovery.

U.S. crude prices rose 0.9% to $71.56 a barrel, while the Canadian dollar was trading 0.2% higher at 1.2143 to the greenback, or 82.35 U.S. cents. On Friday, it fell to its weakest since May 14 at 1.2177.

Speculators have cut their bullish bets on the Canadian dollar, the strongest G10 currency this year, data from the U.S. Commodity Futures Trading Commission showed on Friday. As of June 8, net long positions had fallen to 45,281 contracts from 48,772 in the prior week.

A stronger Canadian dollar is usually seen hurting exporters, but the nature of the global economic recovery could help firms pass on their higher costs from the currency to customers, leaving exporters in less pain than in previous cycles.

Investors were awaiting a Federal Reserve policy announcement on Wednesday. Expectations that the Fed would stick to its dovish course have helped cap U.S. and Canadian bond yields.

Canada‘s 10-year yield touched its lowest level since March 3 at 1.365% before recovering to 1.381%, up 1.3 basis points on the day.

 

(Reporting by Fergal Smith; Editing by Bernadette Baum)

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Economy

Toronto stock exchange dips as losses in miners

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Toronto Stock Exchange

Toronto stock exchange index edged lower on Monday, as losses in mining stocks and dismal domestic manufacturing data overshadowed gains in energy stocks.

* The materials sector, which includes precious and base metals miners and fertilizer companies, lost 0.7% as gold futures fell 1.6% to $1,848.2 an ounce. [GOL/]

* Canadian factory sales slipped by 2.1% in April from March on lower sales of transportation equipment, as well as subdued petroleum and coal products sector, Statistics Canada said.

* At 9:43 a.m. ET (13:43 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was down 14.52 points, or 0.07%, at 20,123.83.

* The energy sector climbed 1.4% as U.S. crude prices were up 1% a barrel, while Brent crude rose 0.9%. [O/R]

* Financials slipped 0.3%, while industrials fell 0.1%.

* On the TSX, 120 issues were higher, while 107 issues declined for a 1.12-to-1 ratio favouring gainers, with a trading volume of 22.35 million shares.

* TSX’s top gainers were paper and packaging company Cascades Inc <CAS.TO> and IT firm Kinaxis Inc <KXS.TO>, jumping 4.1% and 4.0%, respectively.

* Biggest decliners were uranium producers Nexgen Energy Ltd <NXE.TO>, down 5.9%, followed by Cameco Corp falling 5.5%.

* The most heavily traded shares by volume were Canadian Natural Resources Limited <CNQ.TO>, BCE Inc <BCE.TO>, and Hut 8 Mining Corp <HUT.TO>

* Twenty-two stocks hit fresh 52-week highs on the TSX, while there were no new lows.

* Across all Canadian issues, there were 95 new 52-week highs and four new lows, with total volume of 43.57 million shares.

 

(Reporting by Amal S in Bengaluru; Editing by Rashmi Aich)

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