© Reuters. FILE PHOTO: Latvian central bank governor Martins Kazaks attends the bank’s macroeconomic forecast presentation in Riga, Latvia September 23, 2022. REUTERS/Ints Kalnins/File Photo
By Balazs Koranyi
MARRAKECH (Reuters) – The European Central Bank should discuss tweaks to a key bond buying scheme and weigh higher charges for commercial banks, Latvian policymaker Martins Kazaks said on Wednesday, arguing a recent rise in borrowing costs, including for Italy, was not worrisome.
Some investors were spooked by market volatility in recent weeks that pushed up the premium Italy must pay to borrow, and said the turbulence was a lesson for the ECB to stick with a scheme that forms a key plank in fighting off unexpected yield rises.
But Kazaks said the move was merely a reflection of Italy’s widening budget deficit and this should not stop the ECB from debating an early end to its reinvestments in the 1.7 trillion euro ($1.8 trillion) Pandemic Emergency Purchase Programme (PEPP).
“With regard to Italy, at least at the current stage, I don’t see anything that worries me about an impairment in the transmission mechanism or something that I would consider an unwarranted market reaction,” Kazaks told Reuters.
The ECB uses reinvestments in the PEPP scheme with a degree of flexibility, skewing purchases towards more indebted countries when warranted in what some policymakers call the bank’s first line of defence.
The ECB is set to reinvest all proceeds from the scheme until the end of 2024 but some have called for an earlier end, given that the bank has been tightening policy to fight inflation.
“I would say that we would gain credibility by adjusting instruments and explaining this, rather than sticking to an instrument for too long,” Kazaks said. “Do I think it’s necessary or possible to end reinvestments earlier than the end of next year? My answer would be yes.”
However, any further reduction in excess liquidity should be gradual and predictable, so changes to PEPP should not be abrupt, he argued.
Kazaks also said the ECB should revisit increasing the mandatory reserve requirement for commercial banks, which would force lenders to park more cash at the central bank with no interest.
Policymakers considered this option over the summer and decided against it, but some hope the issue would come back when the ECB reviews its broader operational framework early next year.
“This is an instrument that has been used in the past regularly,” Kazaks said. “There is a case to be discussed … I think a larger multiple would be a discussion point.”
But Kazaks played down the prospects of further interest rate hikes, arguing that communication at the ECB should now shift to the duration of high rates from further increases.
“I think interest rate levels are quite appropriate for us to get back to 2% inflation in the second half of 2025,” he said. “But I cannot shut the door to a further rate increase sometimes down the road.”
($1 = 0.9423 euros)
Fed pivot to interest-rate cuts seen likely to start in May
© Reuters. FILE PHOTO: The Federal Reserve building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo
By Ann Saphir
(Reuters) – A stronger-than-expected U.S. labor market won’t keep the Federal Reserve from pivoting to a series of interest-rate cuts next year, but it could take until May for it to deliver the first reduction, traders bet on Friday.
Employers added 199,000 workers to their payrolls in November, the Labor Department’s monthly jobs report showed, more than the 180,000 that economists had expected, and the unemployment rate unexpectedly fell to 3.7%, from 3.9% in October.
Hourly earnings ticked up 0.4% from a month earlier, more than expected and an acceleration from the prior month. But the labor force participation rate also rose, to 62.8%, easing the prospect that an overheated job market will short-circuit progress on the Fed’s inflation battle.
A separate report Friday showed U.S. consumer sentiment improved more than expected in December as households saw inflation pressures easing.
The U.S. central bank is expected to keep rates in the current 5.25%-5.50% range when it meets next week, leaving policy on hold since July. Traders before Friday’s jobs report had put about a 60% probability on a March start to Fed rate cuts, but after the data reduced that to just under 50%, with a first reduction seen as more likely to come in May.
Further rate cuts are priced in for the rest of 2024, with the policy rate seen ending the year in the 4%-4.25% range as the Fed adjusts borrowing costs downward not as an antidote to a weaker labor market but rather to keep pace with an expected continued cooling in inflation.
The pace of that improvement in inflation will help determine the timing of the Fed’s pivot to rate cuts, analysts said.
“We maintain our call for the Fed to start cutting rates by mid-year, but it is contingent on inflation continuing to trend lower and further weakening in economic activity,” wrote Nationwide economist Kathy Bostjancic after the report.
Fed policymakers will release their own views of where the economy, inflation, and interest rates will go next year when they wrap up their last meeting of the year on Wednesday.
US consumers’ moods brighten as inflation worries subside – UMich
© Reuters. FILE PHOTO: A person arranges groceries in El Progreso Market in the Mount Pleasant neighborhood of Washington, D.C., U.S., August 19, 2022. REUTERS/Sarah Silbiger/File Photo
(Reuters) -U.S. consumer sentiment perked up much more than expected in December, snapping four straight months of declines, as households saw inflation pressures easing, a survey showed on Friday.
The University of Michigan’s preliminary reading of its Consumer Sentiment Index shot up to 69.4, the highest since August, from November’s final reading of 61.3.
The median expectation among economists in a Reuters poll had been for the index to edge up to 62.0.
“Consumer sentiment soared 13% in December, erasing all declines from the previous four months, primarily on the basis of improvements in the expected trajectory of inflation,” survey Director Joanne Hsu said in a statement.
The survey’s preliminary gauge of current conditions rose to 74.0 from last month’s final level of 68.3, while the expectations index climbed to 66.4, the highest since July, from 56.8 in November.
Consumers’ outlook for inflation in the year ahead plunged to 3.1% – the lowest since March 2021 – from November’s final expectation of 4.5%. The 1.4 percentage point decline was the largest monthly drop in one-year inflation expectations in 22 years.
Over a five-year horizon, consumers expect inflation to average a three-month low of 2.8%, down from 3.2% in November, which had been the highest since March 2011, when it reached the same level.
Russian inflation accelerates in November, rate hike beckons
© Reuters. FILE PHOTO: People shop at a local market in the town of Rostov in the Yaroslavl Region, Russia April 15, 2023. REUTERS/Evgenia Novozhenina/File Photo
MOSCOW (Reuters) – Inflation in Russia accelerated in November, data from state statistics service Rosstat showed on Friday, cementing expectations that the central bank will hike interest rates as it meets for the final time this year on Dec. 15.
The central bank has now raised rates by 750 basis points since July, including an unscheduled emergency hike in August, under pressure from a weak rouble, tight labour market and strong consumer demand. Analysts widely expect another hike, to 16%, next week.
High interest rates are one of several irksome economic challenges facing President Vladimir Putin, who on Friday said he would run again for president next year, although none seem insurmountable thanks to Russia’s success in evading a Western oil price cap helping to drive a recovery in economic growth.
In November, annual inflation stood at 7.48% year-on-year, up from 6.69% a month earlier and just shy of analysts’ expectations of a 7.6% reading.
The data suggests that annual inflation will exceed the central bank’s expectation of year-end inflation at the upper end of the 7.0%-7.5% range, which is well above its 4% target.
On a monthly basis, the consumer price index (CPI) rose 1.11% in November after a 0.83% increase in October, the data showed, coming just below analyst forecasts of a 1.2% increase. That was the fastest monthly rise since April 2022.
In the week up to Dec. 4, consumer prices rose 0.12%, separate Rosstat data showed.
Russian households regularly cite inflation as a major concern, with many having no savings after a decade of economic crises, while rising prices dragged living standards down across the country.
Rosstat gave the following details:
RUSSIAN CPI Nov 23 Oct 23 Nov 22
Mth/mth pct change +1.11 +0.83 +0.37
– food +1.55 +1.35 +0.40
– non-food +0.53 +0.55 +0.06
– services +1.23 +0.48 +0.76
Y/Y pct change +7.48 +6.69 +11.98
Core CPI y/y pct change +6.36 +5.50 +15.06
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