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Bostic sees no 75 bps rate hike, hopeful inflation cools

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© Reuters. FILE PHOTO: Customers pay cash to buy up stocks of wine, food and kitchen supplies as the French restaurant Montmartre closes after 20 years of operation on Capitol Hill due to financial pressures caused by the coronavirus disease (COVID-19) outbreak in W

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By Howard Schneider

(Reuters) -Atlanta Federal Reserve President Raphael Bostic on Monday said he expects the U.S. central bank will deliver two or three more half-percentage-point interest rate hikes but won’t need to use anything bigger, noting some hopeful signs on inflation.

“I would say that (a 75-basis-point rate hike) is a low probability outcome given what I expect will happen in the economy over the next three to four months,” Bostic told Reuters during an interview on Twitter (NYSE:TWTR) Spaces.

“A number of supply chain challenges that have really been just persistent through the pandemic are starting to show signs of easing,” he said.

Trucking companies are no longer turning down business, as they were earlier, and shipping bottlenecks are easing, he said.

Meanwhile, Bostic said he sees as yet unrealized downside risks to demand from the war in Ukraine and simply as households react to high inflation by potentially pulling back on spending.

“I am going to stay open to the possibility that those sorts of adjustments will work in concert with our policy movements and get us to a place where inflation is approaching our policy … target at a faster rate than maybe some of my colleagues are projecting,” Bostic said. “In which case we will not need to do nearly as much.”

The Fed last week raised its target for overnight bank-to-bank lending by a half a percentage point to 0.75%-1%.

Fed Chair Jerome Powell said two more such rate hikes are likely at the U.S. central bank’s coming policy meetings as policymakers try to decisively curb inflation that is running at a 40-year high.

“That’s very aggressive by historic standards,” Bostic said. “I’m hopeful that will actually do the job in terms of really taking the reins and wrestling inflation closer to our target.”

A U.S. government report Wednesday is expected to show consumer price inflation slowed slightly in April, and Bostic said he will be watching month to month data closely.

At the same time, he said, the labor market has a lot of momentum.

That leaves room for a scenario under which rate hikes slow demand and inflation without forcing businesses to resort to layoffs or stop raising wages.

“If we start to see signs that businesses are thinking about reducing their forces that would be a signal that would be quite meaningful, and it would be quite a departure from really anything we hear today,” Bostic said.

The April unemployment rate was steady at 3.6% as businesses hired more workers than expected, the latest government job market report showed on Friday.

Economy

Australia’s Ruling Coalition Pledges Improved Budget in Costings

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© Reuters. Australia’s Ruling Coalition Pledges Improved Budget in Costings

(Bloomberg) — Australia’s ruling Liberal-National coalition said it will narrow the budget deficit by about A$1 billion ($700 million) via cuts to the bureaucracy as it announced costings for its election policies.

Treasurer Josh Frydenberg said Tuesday the government planned to increase an efficiency dividend for public service agencies to 2% from 1.5% over the next three years if re-elected on May 21. The measure will cover the costs of all the coalition’s election announcements while leaving the budget better off.

“It’s a responsible approach,” Frydenberg told reporters in Melbourne. “It ensures our budget bottom line actually improves over time.”

The opposition Labor party is due to release its policy commitment costings on Thursday ahead of Saturday’s ballot.

Australia’s books will remain deep in the red over the four-year horizon set out in this year’s budget, reflecting the hit to growth and vast fiscal spending deployed to support the economy through the pandemic. The center-right government, which is trailing in opinion polls, maintains Labor will increase taxes to pay for higher spending. 

©2022 Bloomberg L.P.

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Economy

ECB to hike deposit rate 25 bps in July, ditch negative rates by end-September: Reuters poll

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© Reuters. FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

By Swathi Nair

BENGALURU (Reuters) – The European Central Bank is expected to raise the deposit rate for the first time in over a decade in July and bring it out of negative territory at its following meeting in September, despite a 30% chance of recession within a year, a Reuters poll of economists showed.

With inflation hitting a multi-decade high of 7.5% in April and almost every other major central bank having already raised interest rates, ECB President Christine Lagarde backed calls for an early rate hike by policymakers last week.

The bank is now expected to end its bond purchases programme in July and follow that with a 25 basis-point deposit rate hike a few weeks later, according to a majority of economists polled from May 10 to 16.

Until recently, forecasters were expecting the ECB to wait until the final quarter of the year to raise the deposit rate, currently at -0.50%.

Of the 46 of 48 economists who expect the deposit rate to rise in the third quarter, 26 said rates would rise by 50 basis points by the end of the period, implying quarter-point moves at both the July and September meetings.

Another 18 respondents said the deposit rate would only rise 25 basis points in Q3 and two said it would only climb 10 basis points to -0.40% by the end of the quarter.

An even clearer majority expect rates to no longer be negative by the end of the year. About 90% of economists, or 43 of 48, said the deposit rate would be 0% or higher by then, with 44%, or 21 of 48, saying it would be at 0.25% by then and 8%, or 4 of 48, saying it would be at 0.50%.

“There is widespread support for ending negative interest rate policy at the ECB, but they will take a very cautious approach to policy normalisation, in light of substantial macro uncertainty and concerns about a growth slowdown,” said Jens Eisenschmidt, chief European economist at Morgan Stanley (NYSE:MS).

“This will be the first time in over a decade that the ECB is lifting rates – with no support from asset purchases – so taking smaller steps would allow the ECB to observe the reaction in markets, with a possible fragmentation of financing conditions in the euro area likely a key concern”.

The latest poll results are still lagging rate futures, which are pricing in a cumulative 90 basis points of rate increases for the rest of the year or between three and four 25 basis-point moves.

Even that would leave the ECB well behind the U.S. Federal Reserve, which is currently expected to have its federal funds rate around 2.00-2.25% by the end of this year. [ECILT/US]

However, the poll also found the time window to raise rates is closing for the ECB, with a steady median 30% probability of a recession in the next 12 months, as the war in Ukraine pushes energy prices higher and saps consumer spending power.

The bloc’s economy was expected to grow 0.3%, 0.5% and 0.6%, in the second, third and fourth quarters. This is a downgrade from 0.4%, 0.6% and 0.6% predicted last month.

On an annual basis, it was expected to grow 2.7% this year, down from 2.9% and 2.3% next, the same as predicted last month.

The European Commission cut its growth forecast for the euro zone this year to 2.7% from 4.0% projected in February, and upgraded its inflation forecasts to 6.0% this year from 3.5%.

Rising inflationary pressures, driven by a persistent surge in food and energy prices, have deepened the cost of living crisis in the euro zone.

Prices are set to rise 7.7% this quarter, over three times the ECB’s 2.0% target and higher than the 7.3% prediction given last month. It will ease gradually over coming quarters but medians did not show it at target through next year, the forecast horizon.

Asked what impact the cost of living crisis would have on growth, 19 of 25 economists said it would be severe and two said very severe. Only four said it would be mild.

It will be over six months before the crisis eases significantly according to 90% of the respondents to another question.

Despite recession risks, unemployment in the single currency bloc is expected to remain near record low levels at 6.9% and 6.8% this year and next.

Meanwhile, average wage growth was expected to be 3.0% this year, the poll median showed.

“While current dynamics are triggering higher wage demands, companies are still being cautious due to the weakening outlook,” said Bas van Geffen of Rabobank.

“Anecdotal evidence is therefore also pointing to shorter wage agreements so that there’s flexibility to adjust next year, either higher or lower, depending on inflation. So, so far it still seems to be mostly catch-up wage growth rather than forward-looking”.

(For other stories from the Reuters global economic poll:)

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Economy

Japan’s Nomura targets up to 90% jump in core pretax income in 3 years

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© Reuters. FILE PHOTO: A logo of Nomura Holdings is pictured in Tokyo, Japan, December 1, 2015. REUTERS/Toru Hanai

TOKYO (Reuters) -Nomura Holdings Inc, Japan’s biggest brokerage and investment bank, said on Tuesday it is targetting an up to 90% jump in pretax income in three years as it plans to beef up digital and advisory services.

Setting out guidance in a mid-term presentation, Nomura said it would target annual pretax income of between 350 billion yen and 390 billion yen ($2.7 billion and $3.0 billion) for its three core divisions in the year to end-March 2025.

That compared to 205.2 billion yen it posted for the year ended in March 2022.

Nomura also said it will create a new digital asset company later this year that will allow institutional investors to trade products linked to cryptocurrencies, stablecoins, decentralized finance and non-fungible tokens.

($1 = 128.9100 yen)

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