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Tag Archives: Central Bank

China’s Central Bank to Cut Banks’ Reserve Requirement Ratio to Support Economy

The People’s Bank of China (PBOC) said it will cut the amount of cash lenders need to keep in reserve, injecting about 500 billion yuan ($70 billion) into the financial system to keep liquidity ample and support sectors and small companies “severely impacted” by the Covid-19 pandemic.

PBOC will lower financial institutions’ reserve requirement ratio (RRR) by 25 basis points, or 0.25 of a percentage point, December 5, according to a statement Friday on its website. The weighted average RRR of financial institutions will fall to around 7.8%. It is the second reduction this year; in April the ratio was also cut by 25 basis points, releasing around 530 billion yuan of liquidity into the financial system.

Source : Caixin

China Central Bank to Offer Cheap Loans to Support Developers’ Bonds

Julie Zhu and Engen Tham wrote . . . . . . . . .

China’s central bank will offer cheap loans to financial firms for buying bonds issued by property developers, four people with direct knowledge of the matter said, the strongest policy support yet for the crisis-hit sector.

The People’s Bank of China (PBOC) hopes the loans will boost market sentiment toward the heavily indebted property sector, which has lurched from crisis to crisis over the past year, and rescue a number of private developers, said the people, who asked not to be named as they were not authorised to speak to the media.

China has stepped up support in recent weeks for the property sector, a pillar accounting for a quarter of the world’s second-biggest economy. Many developers defaulted on their debt obligations and were forced to halt construction.

The country’s biggest banks this week pledged at least $162 billion in credit to developers.

The PBOC loans, through its relending facility, are expected to be at much lower than the benchmark interest rate and would be implemented in the coming weeks, giving financial institutions more incentive to invest in private developers’ onshore bonds, two sources said.

Terms such as the interest rate on the loans were not immediately known.

The PBOC is also drafting a “white list” of good-quality and systemically important developers that would receive wider support from Beijing to improve their balance sheets, two of the sources said.

The central bank did not immediately respond to a request for comment on the planned measures.

At least three private developers – including Longfor Group Holdings Ltd, Midea Real Estate Holding Ltd and Seazen Holdings – received the green light this month to raise a total of 50 billion yuan ($7 billion) in debt.

If there were not enough demand from investors for such new bonds, the PBOC would likely step in to provide liquidity via the relending facility for the rest of the issuance, said one of the four people and another source.

Hong Kong’s Hang Seng Mainland Properties Index was up as much as 4.7% on Friday, adding 1 percentage point after Reuters reported the PBOC moves. China’s top developer by sales, Country Garden, was up 10%, CIFI Holdings was up more than 5% and Longfor nearly 4%.


Relending is a targeted policy tool the PBOC typically uses to make low-cost loans to banks to support the slowing economy, as the central bank faces limited room to cut interest rates on concerns about capital flight.

The PBOC in recent months has used the relending facility to support sectors including transport, logistics and tech innovation that were hard hit by the COVID-19 pandemic or are favoured by long-term state policies.

Beijing’s aggressive support for the property sector marks a reversal from a crackdown begun in 2020 on speculators and indebted developers in a broad push to reduce financial risks.

As a result of the crackdown, though, property sales and prices fell, developers defaulted on bonds and suspended construction. The construction halts have angered homeowners who have threatened to stop mortgage payments.

The PBOC also plans to provide 100 billion yuan ($14 billion) in M&A financing facilities to state-owned asset managers mainly for their acquisitions of real estate projects from troubled developers, two sources said.

Chinese media reported on Monday the central bank planned to provide 200 billion yuan in interest-free relending loans to commercial banks through the end of March for housing completions.

Among other recent official support, China’s interbank bond market regulator said this month it would widen a programme to support about 250 billion yuan ($35 billion) of debt offerings by private firms.

Much of Beijing’s previous support targeted state-owned developers.

Yi Huiman, chairman of China’s securities regulator, said on Monday the country must implement plans to improve the balance sheets of “good quality” developers.

Fitch Ratings said on Thursday private Chinese developers face higher liquidity risk, in terms of debt structure with greater short-term maturity pressure, than state-owned peers as banks and other creditors are becoming reluctant to lend.

Source : Reuters

Chart: Balance Sheets of Central Banks of U.S., EU, Japan and China

Source : GnS Economics

Chart: Central Bank Policy Rates of 10 Most Traded Currencies

Source : Reuters

Chart: Latin Central Banks Lead Interest Rate Hike Cycle

Source : FT

Global Rate Hikes Strike the Wall of Debt Maturity

Daniel Lacalle wrote . . . . . . . . .

More than ninety central banks worldwide are increasing interest rates. Bloomberg predicts that by mid-2023, the global policy rate, calculated as the average of major central banks’ reference rates weighted by GDP, will reach 5.5%. Next year, the federal funds rate is projected to reach 5.15 percent.

Raising interest rates is a necessary but insufficient measure to combat inflation. To reduce inflation to 2%, central banks must significantly reduce their balance sheets, which has not yet occurred in local currency, and governments must reduce spending, which is highly unlikely.

The most challenging obstacle is also the accumulation of debt.

The so-called “expansionary policies” have not been an instrument for reducing debt, but rather for increasing it. In the second quarter of 2022, according to the Institute of International Finance (IIF), the global debt-to-GDP ratio will approach 350% of GDP. IIF anticipates that the global debt-to-GDP ratio will reach 352% by the end of 2022.

Global issuances of high-yield debt have slowed but remain elevated. According to the IMF, the total issuance of European and American high-yield bonds reached a record high of $1,6 trillion in 2021, as businesses and investors capitalized on still-low interest rates and high liquidity. According to the IMF, high-yield bond issuances in the United States and Europe will reach $700 billion in 2022, similar to 2008 levels. All of the risky debt accumulated over the past few years will need to be refinanced between 2023 and 2025, requiring the refinancing of over $10 trillion of the riskiest debt at much higher interest rates and with less liquidity.

Moody’s estimates that United States corporate debt maturities will total $785 billion in 2023 and $800 billion in 2024. This increases the maturities of the Federal government. The United States has $31 trillion in outstanding debt with a five-year average maturity, resulting in $5 trillion in refinancing needs during fiscal 2023 and a $2 trillion budget deficit. Knowing that the federal debt of the United States will be refinanced increases the risk of crowding out and liquidity stress on the debt market.

According to The Economist, the cumulative interest bill for the United States between 2023 and 2027 should be less than 3% of GDP, which appears manageable. However, as a result of the current path of rate hikes, this number has increased, which exacerbates an already unsustainable fiscal problem.

If you think the problem in the United States is significant, the situation in the eurozone is even worse. Governments in the euro area are accustomed to negative nominal and real interest rates. The majority of the major European economies have issued negative-yielding debt over the past three years and must now refinance at significantly higher rates. France and Italy have longer average debt maturities than the United States, but their debt and growing structural deficits are also greater. Morgan Stanley estimates that, over the next two years, the major economies of the eurozone will require a total of $3 trillion in refinancing.

Although at higher rates, governments will refinance their debt. What will become of businesses and families? If quantitative tightening is added to the liquidity gap, a credit crunch is likely to ensue. However, the issue is not rate hikes but excessive debt accumulation complacency.

Explaining to citizens that negative real interest rates are an anomaly that should never have been implemented is challenging. Families may be concerned about the possibility of a higher mortgage payment, but they are oblivious to the fact that house prices have skyrocketed due to risk accumulation caused by excessively low interest rates.

The magnitude of the monetary insanity since 2008 is enormous, but the glut of 2020 was unprecedented. Between 2009 and 2018, we were repeatedly informed that there was no inflation, despite the massive asset inflation and the unjustified rise in financial sector valuations. This is inflation, massive inflation. It was not only an overvaluation of financial assets, but also a price increase for irreplaceable goods and services. The FAO food index reached record highs in 2018, as did the housing, health, education, and insurance indices. Those who argued that printing money without control did not cause inflation, however, continued to believe that nothing was wrong until 2020, when they broke every rule.

In 2020-21, the annual increase in the US money supply (M2) was 27%, more than 2.5 times higher than the quantitative easing peak of 2009 and the highest level since 1960. Negative yielding bonds, an economic anomaly that should have set off alarm bells as an example of a bubble worse than the “subprime” bubble, amounted to over $12 trillion. But statism was pleased because government bonds experienced a bubble. Statism always warns of bubbles in everything except that which causes the government’s size to expand.

In the eurozone, the increase in the money supply was the greatest in its history, nearly three times the Draghi-era peak. Today, the annualized rate is greater than 6%, remaining above Draghi’s “bazooka.” All of this unprecedented monetary excess during an economic shutdown was used to stimulate public spending, which continued after the economy reopened… And inflation skyrocketed. However, according to Lagarde, inflation appeared “out of nowhere.”

No, inflation is not caused by commodities, war, or “disruptions in the supply chain.” Wars are deflationary if the money supply remains constant. Several times between 2008 and 2018, the value of commodities rose sharply, but they do not cause all prices to rise simultaneously. If the amount of currency issued remains unchanged, supply chain issues do not affect all prices. If the money supply remains the same, core inflation does not rise to levels not seen in thirty years.

All of the excess of unproductive debt issued during a period of complacency will exacerbate the problem in 2023 and 2024. Even if refinancing occurs smoothly but at higher costs, the impact on new credit and innovation will be enormous, and the crowding out effect of government debt absorbing the majority of liquidity and the zombification of the already indebted will result in weaker growth and decreased productivity in the future.

Source : Daniel Lacalle

Central Banks Are Buying Gold At The Fastest Pace In 55 Years

Alex Kimani wrote . . . . . . . . .

Central banks globally have been accumulating gold reserves at a furious pace last seen 55 years ago when the U.S. dollar was still backed by gold. According to the World Gold Council (WGC), central banks bought a record 399 tonnes of gold worth around $20 billion in the third quarter of 2022, with global demand for the precious metal back to pre-pandemic levels. Retail demand by jewelers and buyers of gold bars and coins was also strong, the WGC said in its latest quarterly report. WGC says that the world’s gold demand amounted to 1,181 tonnes in the September quarter, good for 28% Y/Y growth. WGC says among the largest buyers were the central banks of Turkey, Uzbekistan, Qatar and India, though other central banks also bought a substantial amount of gold but did not publicly report their purchases. The Central Bank of Turkey remains the largest reported gold buyer this year, adding 31 tonnes in Q3 to bring its total gold reserves to 489 tonnes. The Central Bank of Uzbekistan bought another 26 tonnes; the Qatar Central Bank bought 15 tonnes; the Reserve Bank of India added 17 tonnes during the quarter, pushing its gold reserves to 785 tonnes.

Retail buyers of gold bars and coins also surged in Turkey to 46.8 tonnes in the quarter, up more than 300% year-on-year.

These developments are hardly surprising taking into account gold is still considered the pre-eminent safe asset in times of uncertainty or turmoil despite the emergence of cryptocurrencies like bitcoin. Gold is also regarded as an effective inflation hedge, though experts say that this only rings true only over extended timelines measured in decades or even centuries.

Unfortunately, rising interest rates spoiled the party for the gold bulls, with exchange traded funds (ETFs) storing bullion for investors becoming net sellers. Indeed, offloading of bullion by ETFs countered buying by central banks pushed gold prices down 8% in the third quarter. Gold is a non-interest bearing asset, and investors tend to move their money to higher yielding instruments during times of rising interest rates. An overly strong dollar has also not been helping gold (and commodity) prices. Gold prices are down 9.3% YTD and nearly 20% below their March peak of $2,050 per ounce.

Long-term bullish

Luckily for the gold bulls, the long-term gold outlook appears to tilt bullish. Markets are currently primed for the fourth 75-basis point hike in a row, after which the Federal Reserve is expected to signal that it could reduce the size of its rate hikes starting as soon as December.

“We think they hike just to get to the end point. We do think they hike by 75. We think they do open the door to a step down in rate hikes beginning in December. The November meeting isn’t really about November. It’s about December,” Michael Gapen, chief U.S. economist at Bank of America, has told CNBC. Gapen expects the Fed would then raise interest rates by a half percentage point in December.

While inflation in the U.S. has remained stubbornly high, there are growing signs that high interest rates are beginning to slow the economy with the housing market slumping, and some mortgage rates nearly doubling. This calls for the Fed to go easy on its aggressive hikes.

Gold traders appear to agree that the long-term gold trajectory is up.

According to a survey of the bullion industry, gold prices will rebound next year, despite higher interest rates. Traders expect prices to rise to $1,830.50 an ounce by this time next year, nearly 11% above current levels..

“I tend to think that Fed hawkishness is largely now ‘in the price. That said, the scope for a near-term major rebound in gold prices is very limited while rates climb and the US dollar remains strong, “Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights Ltd, said in an email.

Finay, a weakening dollar is likely to improve the gold outlook. The dollar may finally be losing its luster after a long period of relative strength against other major currencies. The dollar index–a metric that pits the U.S. dollar against six leading currencies–recently fell to multi-month lows. According to Wells Fargo, the dollar’s surge is likely to continue this year as interest rates rise further but Fed rate cuts in 2023 should push the dollar into “cyclical decline.” In other words, the dollar is set to fall in 2023 as the U.S. enters recession and the Fed cuts rates.

Source : Oil Price

Central Banks Are Losing Billions, Wiping Out Profits

Enda Curran, Jana Randow and Jonnelle Marte wrote . . . . . . . . .

Profits and losses aren’t usually thought of as a consideration for central banks, but rapidly mounting red ink at the Federal Reserve and many peers risks becoming more than just an accounting oddity.

The bond market is enduring its worst selloff in a generation, triggered by high inflation and the aggressive interest-rate hikes that central banks are implementing. Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years.

Rate hikes also involve central banks paying out more interest on the reserves that commercial banks park with them. That’s tipped the Fed into operating losses, creating a hole that may ultimately require the Treasury Department to fill via debt sales. The UK Treasury is already preparing to make up a loss at the Bank of England.

Britain’s move highlights a dramatic shift in countries including the US, where central banks are no longer significant contributors to government revenues. The US Treasury will see a “stunning swing,” going from receiving about $100 billion last year from the Fed to a potential annual loss rate of $80 billion by year-end, according to Amherst Pierpont Securities LLC.

The accounting losses threaten to fuel criticism of the asset purchase programs undertaken to rescue markets and economies, most recently when Covid-19 shuttered large swathes of the global economy in 2020. Coinciding with the current outbreak in inflation, that could spur calls to rein in monetary policy makers’ independence, or limit what steps they can take in the next crisis.

“The problem with central bank losses are not the losses per se — they can always be recapitalized — but the political backlash central banks are likely to increasingly face,” said Jerome Haegeli, chief economist at Swiss Re, who previously worked at Switzerland’s central bank.

The following figures illustrate the scope of operating losses or mark-to-market balance-sheet losses now materializing:

  • Fed remittances owed to the US Treasury reached a negative $5.3 billion as of Oct. 19 — a sharp contrast with the positive figures seen as recently as the end of August. A negative number amounts to an IOU that would be repaid via any future income.
  • The Reserve Bank of Australia posted an accounting loss of A$36.7 billion ($23 billion) for the 12 months through June, leaving it with a A$12.4 billion negative-equity position.
  • Dutch central bank Governor Klaas Knot, warned last month he expects cumulative losses of about 9 billion euro ($8.8 billion) for the coming years.
  • The Swiss National Bank reported a loss of 95.2 billion francs ($95 billion) for the first six months of the year as the value of its foreign-exchange holdings slumped — the worst first-half performance since it was established in 1907.

While for a developing country, losses at the central bank can undermine confidence and contribute to a general exodus of capital, that sort of credibility challenge isn’t likely for a rich nation.

As Seth Carpenter, chief global economist for Morgan Stanley and a former US Treasury official put it: “The losses don’t have a material effect on their ability to conduct monetary policy in the near term.”

RBA Deputy Governor Michele Bullock said in response to a question last month about the Australian central bank’s negative-equity position that “we don’t believe that we are impacted at all in our capacity to operate.” After all, “we can create money. That’s what we did when we bought the bonds,” she noted.

But there can still be consequences. Central banks had already become politically charged institutions after, by their own admission, they failed to anticipate and act quickly against budding inflation over the past year or more. Incurring losses adds another magnet for criticism.

ECB Implications

For the European Central Bank, the potential for mounting losses comes after years of purchases of government bonds conducted despite the reservations of conservative officials arguing they blurred the lines between monetary and fiscal policy.

With inflation running at five times the ECB’s target, pressure is mounting to dispose of the bond holdings — a process called quantitative tightening that the ECB is currently preparing for even as the economic outlook darkens.

“Although there are no clear economic constraints to the central bank running losses, there is the possibility that these become more of a political constraint on the ECB,” Goldman Sachs Group Inc. economists George Cole and Simon Freycenet said. Particularly in northern Europe, it “may fuel the discussion of quantitative tightening.”

President Christine Lagarde hasn’t given any indication that the ECB’s decision on QT will be driven by the prospect of incurring losses. She told lawmakers in Brussels last month that generating profits isn’t part of central banks’ task, insisting that fighting inflation remains policymakers’ “only purpose.”

BOJ, Fed

The Bank of Japan remains apart for now, not having raised interest rates and still imposing a negative rate on a portion of banks’ reserves. But things could change when Governor Haruhiko Kuroda steps down in April, and his successor is confronted by historically high inflation.

As for the Fed, Republicans have in the past voiced opposition to its practice of paying interest on surplus bank reserves. Congress granted that authority back in 2008 to help the Fed control interest rates. With the Fed now incurring losses, and the Republicans potentially taking control of at least one chamber of Congress in the November midterm elections, the debate may resurface.

The Fed’s turnaround could be particularly notable. After paying as much as $100 billion to the Treasury in 2021, it could face losses of more than $80 billion on an annual basis if policymakers raise rates by 75 basis points in November and 50 basis points in December — as markets anticipate — estimates Stephen Stanley, chief economist for Amherst Pierpont.

Without the income from the Fed, the Treasury then needs to sell more debt to the public to fund government spending.

“This may be too arcane to hit the public’s radar, but a populist could spin the story in a way that would not reflect well on the Fed,” Stanley wrote in a note to clients this month.

Source : BNN Bloomberg

How the Bank of England Should Respond to U.K. Fiscal Policy Crashing the Pound

Adam S. Posen wrote . . . . . . . . .

Given the irresponsible fiscal policy announcement of the UK government last Friday, and the rout of the pound that followed, the Bank of England had few good options on Monday. Clearly, there is a fundamental macroeconomic conflict between the Truss government’s so-called growth program of large-scale spending and the Bank’s need to reduce trend inflation. While there cannot be a currency crisis in the UK, which has a flexible exchange rate and issues public debt in its own currency, a collapsing currency is still a major problem for its inflation and financial stability. The Bank had to make a choice.

So the Bank’s governor, Andrew Bailey, issued a statement that the central bank’s Monetary Policy Committee (MPC) would make a “full assessment” at its next scheduled meeting in November and that “The MPC will not hesitate to change interest rates by as much as needed….” The pound then continued to fall, and market expectations priced in more future interest rate increases, up to 6 percent in 2023.

It is right and necessary for an independent central bank to wait silently (in public) for the elected government to move forward with its fiscal plans, whatever they are. When the Bank of England leadership made clear a preference on fiscal policy for one party’s platform in the run-up to the 2010 UK election, it was a grievous mistake. But it is also right and necessary for an independent central bank to speak frankly about the economic impact of the sitting government’s fiscal plans once made and state that it will alter policy in response. Part of the inflation problem in the US at present is because the Federal Reserve failed to respond publicly to the massive short-term fiscal stimulus of the American Rescue Plan once passed in March 2021. There is a point in the sequence where the central bank should not stay neutral or encouraging (just as elected officials are free to criticize monetary policy ex post).

I believe that the Bank of England should be making it clear that the government’s reckless budgetary statement is having consequences that will surely require higher interest rates. The Bank can do so by making clear the program’s implications for the UK economy and thus for what the Bank will do with interest rates. When a government’s discretionary expansionary fiscal policy leads to a falling rather than a rising currency, despite rising rates, it is a clear signal that markets doubt the credibility of the government’s economic competence or goals, in this case for good reason.

One option would have been for the Bank to remain silent, letting the currency fall further. This would have been a clear statement that depreciation of the pound was only to be expected, given the fiscal policy, and the onus was on the government to reverse that policy. That would be a risky choice, and if a newly installed Prime Minister and Chancellor had privately made clear they would not reverse until calamity hit, it would be irresponsible for the Bank to let the pound go into free fall.

Once the Bank decided to speak, however, it should have put more emphasis on a promise of higher interest rates, rather than sounding neutral about the proposed fiscal policy and even positive about parts of it. For example, I would not have acknowledged that the initial effect of the energy price caps would be to reduce headline inflation since that benefit is likely to be offset, perhaps fully, by the inflationary effects of tax cuts and depreciation of the pound. Certainly, I would not have included in the statement the seemingly complimentary comment, “I welcome the Government’s commitment to sustainable economic growth,” when the option was available to make no normative comment at all.

So, the statement I would have issued would read as follows:

“It is a simple economic reality that sustained large movements in exchange rates will affect the UK inflation forecast, and therefore the amount and duration of moves in the Bank’s policy rate in response. It is also a simple reality that the Bank takes the Government’s programs as given when making our forecasts, so large movements in HM Government’s fiscal stance will be responded to by monetary policy in so far as they alter the inflation outlook on net.

Our path of interest rate hikes in the period ahead therefore will likely have to steepen and lengthen from what it was before the Chancellor’s announcement last Friday and the subsequent movements in the trade-weighted pound exchange rate (if those changes persist). If in the Monetary Policy Committee’s assessment the inflation outlook will be higher, policy will be set accordingly. While it remains for the Committee to make a more precise update of the economic outlook ahead of our November meeting, there is no question that outlook must be for significantly higher inflation now than it was when we last met.

The exchange rate is not a target of the Bank’s monetary policy. The pound is not in a fixed exchange rate arrangement, and therefore there is no market-traded level of the pound that threatens the Bank’s mandated goals in and of itself. The impact of movements in the exchange rate, however, can be material for the inflation outlook, and accelerating movements can be destabilizing in extreme situations for inflation expectations and financial markets.

As was the case in 2008-09, the MPC is ready to make rapid adjustments in the stance of monetary policy between scheduled meetings as part of our mandate should financial conditions warrant. These adjustments could be in the policy rate, in balance sheet operations, or both, as needed. If we see acute indications of rising financial stress or jumps in inflation expectations, we will not wait for a planned MPC meeting to respond.”

The irony is that the founding triumph of the Bank of England’s inflation targeting regime was the anchoring of inflation when the pound left the European Exchange Rate Mechanism in 1992, 30 years ago this month. For the three decades since then, including during the Global Financial Crisis, the Bank was able to largely ignore the exchange rate when setting monetary policy. This was because it was confident that the pass-through from moves in the sterling exchange rate to domestic inflation would be temporary and one-off.

As I warned starting in 2017, Brexit would undermine this anchor because it would make less credible the commitment of UK governments to stability. A smaller, more closed economy, with less access to markets and more friction with its largest economic partners, would be less buffered from economic shocks. Large inflation shocks would then be more persistent contributing to trend inflation, not simply one-off as before.

That meant the UK macro regime was going partway back to the 1970s, irrespective of the Bank of England’s commitment to its inflation target. The MPC would have to again start to keep one eye on the exchange rate when setting policy, not solely focusing on the domestic outlook.

Now, the Truss-Kwarteng fiscal policy package has taken the UK policy regime right back to 1974, bringing pound weakness front and center. The years that followed were the nadir of British postwar economic performance and awful for the British people.

One key difference now is that the Bank of England is independent. That independence should be exercised to put up rates quickly all the while explaining to the public that interest rates will have to go even higher for longer than they otherwise would have, given the government’s fiscal stance and its impact on the pound.

As with Brexit, UK elected officials have the right to disregard predictable and predicted economic costs. And as with Brexit, the Bank was right to stay publicly silent on those costs until the political decision was made. Now, however, the Bank of England should not hesitate to respond to those sad realities and to matter of factly attribute them to the government’s choices.

Source : The Peterson Institute for International Economics

Chart: Most Central Banks Raised Interest Rates in 2022

Source : Statista