Economy

Analysis-Cooling UK inflation may signal time for rethink for sterling bulls

Published

1 year ago

July 20, 2023

Analysis-Cooling UK inflation may signal time for rethink for sterling bulls

© Reuters. FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo

By Amanda Cooper and Dhara Ranasinghe

LONDON (Reuters) – Evidence that Britain’s red-hot inflation is finally cooling has knocked the wind out of sterling, which had been riding high as this year’s best-performing currency in the Group of Seven (G7) developed economies just a day ago.

The pound was headed for its biggest-one day fall against the dollar since March on Wednesday, mirroring the drop in British government bond yields – which plunged as prices surged – while London blue-chip stocks roared higher, led by interest-rate sensitive shares in homebuilders and landlords.

Perhaps sterling’s tumble is no surprise, given that positioning data suggests speculators hold their most valuable bullish bet on sterling since 2014.

Yet after data on Wednesday showed inflation slowed to 7.9% in June, below forecasts for a reading of 8.2% and down from May’s 8.7% rate, more traders may now be inclined to book profits.

The prospect of a sustained rise in the Bank of England (BoE) base rate to above 6% is now almost completely off the table, and with it some of sterling’s shine.

“There is likely to be a further repricing of expectations, in our view,” said ABN AMRO (AS:) senior currency strategist Georgette Boele. “This will probably weigh on sterling this year, especially versus the dollar.”

ABN AMRO forecasts sterling to weaken to $1.25 by year-end from around $1.29 currently.

Investors have widely perceived the BoE as being behind the curve in the fight against inflation and have consistently banked on UK rates to keep climbing, even after those elsewhere, such as the United States, start to plateau.

But even with a peak in rates at between 5.75-6.0%, as markets now reflect, Britain would still offer juicier returns than the United States, where rates are expected to rise to around 5.4% from roughly 5.125% currently.

“The work is not done yet for the Bank of England. As both wage growth and services CPI inflation remain stronger than the Bank forecasted in May, and signs of a turning point in inflation are only tentative for now, interest rates will be raised further,” BNY Mellon (NYSE:) Investment Management financial economist Sebastian Vismara said.

The UK still has the highest inflation of the G7. In the United States, headline consumer price pressures are running at just 3%, while euro zone inflation is at 5%.

Energy prices have fallen sharply, which has offered consumers and businesses some respite and another drop is due in July, when regulated household energy tariffs will fall. But mortgage rates are rising fast and grocery inflation is still in double digits – adding to a cost-of-living crisis for British households.

TOP SPOT GONE

Sterling is still up nearly 7% against the dollar this year and until Wednesday’s data, had outperformed all other major currencies. But after the pound’s post-inflation drop, the Swiss franc – up nearly 8% versus the dollar – now takes the top spot.

The pound tumbled 1% to as low as $1.2898 on Wednesday, marking its largest one-day fall since the banking turmoil of mid-March. Two-year gilt yields, meanwhile, fell by around a quarter of a percentage point on the day – also the most since March – to one-month lows around 4.84%.

Growing interest-rate differentials have been a big catalyst for the pound. The gap between U.S. and British 10-year borrowing costs was at its widest since early 2009 to a premium of 65 basis points just a week ago.

“Looking to the currency, these overshoots and economic signals have been a core driver of FX markets over the past 6 months,” said Joseph Calnan, a corporate FX dealing manager at Moneycorp.

“Once inflation eases off, if the drop is sharp enough, we will likely see the pound falling with it – so we need to be prepared for that, too.”

Economy

Russian central bank says it needs months to make sure CPI falling before rate cuts -RBC

Published

12 months ago

December 26, 2023

Russian central bank says it needs months to make sure CPI falling before rate cuts -RBC

MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.

The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.

Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.

“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.

Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.

“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.

The bank will next convene to set its benchmark rate on Feb. 16.

The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.

Economy

China identifies second set of projects in $140 billion spending plan

Published

12 months ago

December 25, 2023

China identifies second set of projects in $140 billion spending plan

© Reuters. FILE PHOTO: Workers walk past an under-construction area with completed office towers in the background, in Shenzhen’s Qianhai new district, Guangdong province, China August 25, 2023. REUTERS/David Kirton/File Photo

SHANGHAI (Reuters) – China’s top planning body said on Saturday it had identified a second batch of public investment projects, including flood control and disaster relief programmes, under a bond issuance and investment plan announced in October to boost the economy.

With the latest tranche, China has now earmarked more than 800 billion yuan of its 1 trillion yuan ($140 billion) in additional government bond issuance in the fourth quarter, as it focuses on fiscal steps to shore up the flagging economy.

The National Development and Reform Commission (NDRC) said in a statement on Saturday it had identified 9,600 projects with planned investment of more than 560 billion yuan.

China’s economy, the world’s second largest, is struggling to regain its footing post-COVID-19 as policymakers grapple with tepid consumer demand, weak exports, falling foreign investment and a deepening real estate crisis.

The 1 trillion yuan in additional bond issuance will widen China’s 2023 budget deficit ratio to around 3.8 percent from 3 percent, the state-run Xinhua news agency has said.

“Construction of the projects will improve China’s flood control system, emergency response mechanism and disaster relief capabilities, and better protect people’s lives and property, so it is very significant,” the NDRC said.

The agency said it will coordinate with other government bodies to make sure that funds are allocated speedily for investment and that high standards of quality are maintained in project construction.

($1 = 7.1315 renminbi)

Economy

Russian central bank says it needs months to make sure CPI falling before rate cuts -RBC

Published

12 months ago

December 25, 2023

Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.

“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.

Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.

“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.

The bank will next convene to set its benchmark rate on Feb. 16.

The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.