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Central banks line up to dial back emergency stimulus

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Australia’s central bank on Tuesday said it would start to slow the pace of its bond purchases, the latest from the developed world to head towards exiting pandemic-time stimulus.

As major economies bounce back thanks to COVID-19 vaccination campaigns and an easing of lockdown restrictions, a debate about dialling back emergency stimulus has clearly begun.

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

Graphic: ECB bonds – https://fingfx.thomsonreuters.com/gfx/mkt/oakvedxgmpr/ECB%20lagarde.JPG

1/NORWAY

Norges Bank is at the vanguard in terms of signalling a retreat. It could hike its key policy interest rate twice in the second half of this year and also twice during the first half of 2022, central bank Governor Oeystein Olsen said last month.

Its key rate is at a record low 0% and looks set to rise in September.

This outlook has made the crown one of 2021’s best-performing G10 currency. The central bank doesn’t intervene in bond markets, so the taper debate is not applicable.

Graphic: FX returns – https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrzeoqve/FX%20returns.JPG

2/ NEW ZEALAND

Rate hike expectations are on the rise given stronger than expected economic growth in the COVID-free economy — business confidence improved sharply in the second quarter and firms are finding it harder to hire skilled labour.

Bank of New Zealand and ASB Bank economists have bought forward their rate-rise expectations to November 2021. A surging New Zealand dollar suggests investors agree.

Graphic: NZ economy – https://fingfx.thomsonreuters.com/gfx/mkt/gjnpwmdkgpw/NZ%20economy.JPG

3/ CANADA

Having announced tapering in April, Canada has indicated its key rate could rise from a record-low 0.25% in the second half of 2022. Data on Monday suggested the economic recovery is broadening out.

4/ UNITED STATES

The Federal Reserve in June began closing the door on its pandemic-era stimulus. Officials moved their first projected rate increases to 2023 from 2024.

The Fed also opened talks on how to end crisis-era bond-buying, adding that the 15-month-old health emergency was no longer a core constraint on U.S. commerce.

But Fed bond buying is set to remain significant for some time, likely limiting a selloff in bonds.

Graphic: An earlier liftoff – https://fingfx.thomsonreuters.com/gfx/mkt/ygdpzxgzwpw/Pasted%20image%201623877277274.png

Graphic: An earlier liftoff – https://fingfx.thomsonreuters.com/gfx/mkt/azgvoodqnvd/Pasted%20image%201623877421073.png

5/ AUSTRALIA

With the backdrop of a robust employment picture, Australia’s central bank on Tuesday took its first step towards tapering stimulus.

It retained the April 2024 bond for its three-year yield target of 0.1%, and announced a third round of its quantitative easing programme, albeit at a smaller size.

While it reiterated that the 0.1% cash rate needed to remain unchanged until 2024 to boost inflation, market pricing suggests the possibility of a rate rise in late-2022.

“Given that (RBA Governor Philip) Lowe has been keen to remain dovish for so long, they have moved in a significant way and there is scope for them to move further in coming months,” said Daiwa Capital Markets’ head of economic research Chris Scicluna.

Graphic: Australia bonds – https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkolgyvm/Australia%20bonds.JPG

6/ BRITAIN

The Bank of England is reluctant to step away too soon from aggressive stimulus. While it believes inflation could surpass 3% as Britain’s locked-down economy reopens, it also expects the climb further above its 2% target to be temporary.

In May, the BoE slowed its bond-buying to 3.4 billion pounds ($4.8 billion) a week, from 4.4 billion pounds. It kept the total size of the bond-buying programme unchanged at 895 billion pounds, with Governor Andrew Bailey stressing the move did not amount to tapering.

7/ SWEDEN

Swedish inflation is just above the Riksbank’s 2% target but the central bank believes inflation has peaked.

Policymakers have said rates would stay at 0% for years, warning against withdrawing support too quickly. A 700 billion crowns ($84 billion) asset purchase programme is scheduled to expire at end-2021.

8/ EURO ZONE

The ECB is sticking with an elevated level of bond buying and should be one of the last major central banks to hike rates.

As the economy rebounds some policymakers are making the case to start discussions about rolling back the 1.85 trillion euro ($2.21 trillion) Pandemic Emergency Purchase Programme (PEPP), scheduled to run until at least end-March.

ECB chief Christine Lagarde has said the recovery remains fragile and signalled she was not ready to wind down the PEPP just yet.

Graphic: ECB PEPP bond buying programme – https://fingfx.thomsonreuters.com/gfx/mkt/oakpedxzmvr/ECB0607.PNG

9/ JAPAN

The BOJ is expected to keep its money spigots wide open to support a fragile recovery, reinforcing expectations it will lag counterparts in reversing crisis-mode policies.

But even in Japan, which has battled with deflationary forces for years, a policy shift debate has started.

Former central bank executive Eiji Maeda said the BoJ could in 2023 start debating ways to phase out its extraordinary stimulus, such as ending negative interest rates.

10/ SWITZERLAND

The Swiss National Bank plans to keep monetary policy ultra-loose for the foreseeable future and believes projected higher inflation is no reason to change course.

The SNB’s Andrea Maechler believes the SNB “is not anywhere close” to starting a normalisation of its expansive monetary policy.

The SNB does not intervene in domestic bond markets, instead capping the Swiss franc through foreign exchange interventions. It spent just 296 million Swiss francs ($321 million) on foreign currencies during the first three months of 2021, massively scaling back market interventions as the global economy recovers.

(Reporting by Dhara Ranasinghe, and Saikat Chatterjee; Additional reporting by Sujata Rao; Editing by Chizu Nomiyama)

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The global economy is falling below expectations – The Economist

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IT IS WELL known that markets hate uncertainty. Bad news, then, that by one measure the world economy is throwing up more nasty surprises for investors. Citigroup’s global economic-surprise index (CESI), which measures the degree to which macroeconomic data announcements beat or miss forecasts compiled by Bloomberg, has fallen into negative territory for the first time since November (the indices for America and China have been negative since mid-May). Since the summer of 2020 economic indicators had tended until recently to surprise on the upside. But as inflation has surged and consumer confidence has flagged, they are now failing to meet forecasters’ expectations. (See chart.)

Measures of economic surprises appear to be a useful way to gauge market sentiment. When the economy is booming data releases will typically be better than analysts expected, boosting the CESI. During an economic downturn, economic statistics will fall below the consensus estimate, leading to negative surprises. From June 2020 to July 2021, when the CESI for America was positive thanks to upbeat employment, inflation and housing figures, the S&P 500 index of big American firms rose by 38%. Since then the CESI has bounced above and below zero, and shares have fallen by roughly 9%.

In a paper published in 2016 Chiara Scotti, an economist at the Federal Reserve, constructed her own surprise index based on five indicators: GDP, industrial production, employment, retail sales and manufacturing output. America’s index also measured personal income. Ms Scotti found that positive economic surprises in America were associated with appreciation of the dollar relative to the euro, pound sterling and yen. (In fact, Citi’s index was designed by the bank’s foreign-exchange unit for trading currencies, not stocks.)

But the surprise index can be hard to interpret. The CESI includes both backward- and forward-looking macroeconomic indicators, and is weighted in favour of newer releases and those that tend to have the biggest impact on markets. Because the index reflects economic performance relative to expectations, it can be negative during expansions if forecasters are too optimistic, and positive during contractions if they are too gloomy. But as Citi analysts wrote in a research note, “coincident rather than causal relationships are relied on even if they have no consistency whatsoever.”

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Sri Lanka Economy Shrinks 1.6% Amid Political Chaos, Inflation – BNN

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(Bloomberg) — Sri Lanka’s economy fell back into contraction last quarter as the country battled its worst economic problems since independence, with emergency aid to stabilize the island nation proving elusive.

Gross domestic product declined 1.6% in the quarter ended March from a year earlier, the Department of Census and Statistics said in a statement on Tuesday. That’s shallower than a 3.6% contraction seen by economists in a Bloomberg survey and compares with a revised 2% expansion in the previous quarter.

The contraction likely marks the beginning of a painful and long recession for the country, whose Prime Minister Ranil Wickremesinghe last week said the economy had “completely collapsed.” The crisis follows years of debt-fueled growth and populist fiscal policies, with the Covid-19 pandemic’s hit to the dollar-earning tourism industry serving as the last straw.

Absence of foreign exchange to pay for import of food to fuel led to red-hot inflation, the fastest in Asia, triggering protests against the government led by the Rajapaksa clan that eventually led to the resignation of Mahinda Rajapaksa as premier. While the months-long protests hurt business activity in parts of the country, the government on Monday imposed new curbs, which includes a call to residents to stay home until July 10 to conserve fuel. 

That will depress activity further, while raising the risk of more unrest given lingering shortages of essential goods.

Sri Lanka is in talks with the International Monetary Fund for aid to tide over the crisis, with at least $6 billion needed in the coming months to prop up reserves, pay for ballooning import bills and stabilize the local currency. The central bank has raised interest rates by 800 basis points since the beginning of the year to combat price gains that touched 39%.

Other details from the GDP report include:

  • For the first quarter, the services sector grew 0.7% from a year earlier
  • Industrial production slipped 4.7% and agriculture output contracted 6.8%

©2022 Bloomberg L.P.

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China's economy recovering but foundation not solid, premier says – Financial Post

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BEIJING — China’s economy has recovered to some extent, but its foundation is not solid, state media on Tuesday quoted Premier Li Keqiang as saying.

China will strive to drive the economy back onto a normal track and bring down the jobless rate as soon as possible, Li was quoted as saying.

“Currently, the implementation of the policy package to stabilize the economy is accelerating and taking effect. The economy has recovered on the whole, but the foundation is not yet solid,” Li was quoted as saying.

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“The task of stabilizing employment remains arduous.”

China’s economy showed signs of recovery in May after slumping the previous month as industrial production revived, but consumption remained weak and underlined the challenge for policymakers amid the persistent drag from strict COVID-19 curbs.

China’s nationwide survey-based jobless rate fell to 5.9% in May from 6.1% in April, still above the government’s 2022 target of below 5.5%.

In particular, the surveyed jobless rate in 31 major cities picked up to 6.9%, the highest on record. Some economists expect employment to worsen before it gets better, with a record number of graduates entering the workforce in summer.

Li vowed to achieve reasonable economic growth in the second quarter, although some private-sector economists expect the economy to shrink in the April-June quarter from a year earlier, compared with the first quarter’s 4.8% growth.

(Reporting by Kevin Yao and Beijing newsroom; Editing by Andrew Heavens, William Maclean)

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