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Bank of England asks banks how ready they are for sub-zero rates By Reuters

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© Reuters. FILE PHOTO: The Bank of England is seen in the City of London

By Huw Jones and William Schomberg

LONDON (Reuters) – The Bank of England asked banks on Monday how ready they are for zero or negative interest rates, following up its announcement last month that it was considering how to take rates below zero if necessary.

Other central banks have pushed rates into negative territory in an attempt to spur banks to lend more, and the BoE said in September it was looking into what such a policy might mean in Britain.

“As part of this work, we are requesting specific information about your firm’s current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these,” Deputy BoE Governor Sam Woods said in a letter to banks.

The BoE and lenders had to understand the implications of any such moves “since the MPC may see fit to choose various options based on the situation at the time,” he said, referring to the central bank’s Monetary Policy Committee.

Woods said he wanted to know if there were any technology challenges to implementing zero or negative rates.

“We are also seeking to understand whether there may be potential for short-term solutions or workarounds, as well as permanent systems changes,” he said.

The BoE set a deadline of Nov. 12 – a week after its next monetary policy announcement – for banks to respond.

Money markets last week pushed back bets that the BoE would cut rates below zero. Investors see rates falling below zero in May 2021, instead of March.

The BoE cut its benchmark rate to record low of 0.1% in March to help the economy through the coronavirus crisis.

Its next move is widely expected to be an increase in its 745 billion-pound ($972.00 billion) bond-buying programme in November.

Sterling and British government bonds were little changed in early trade on Monday.

Governor Andrew Bailey has said the BoE’s assessment of negative rates was not a sign that it would cut rates below zero, and Woods echoed those comments in his letter.

Banks earn money from interest and negative rates would hit profitability, but Wood’s letter made no specific mention of this, focusing instead on the technical preparedness of lenders.

An accompanying questionnaire asked banks how their retail and wholesale business’s IT systems could cope, and how much time and money it would cost to make short-term “tactical” and permanent “strategic” changes.

Banks are already under pressure to help households and businesses struggling with the pandemic. They also could face a reduction in access to markets in the European Union when Britain’s post-Brexit transition period expires.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

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Economy

central bank governor By Reuters

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© Reuters.

BEIJING (Reuters) – China will strike a balance between stabilising economic growth and preventing risks, even as debt was allowed to temporarily rise this year to support the coronavirus-hit economy, central bank governor Yi Gang said on Wednesday.

Yi told a financial forum in Beijing that he expected China’s macro leverage ratio to stabilise next year as the economy expands, after the debt gauge rose in 2020.

Bank lending in the first nine months totalled 16.26 trillion yuan ($2.44 trillion) as policymakers looked to reboot economic activity, beating a previous peak of 13.63 trillion yuan in the same period last year.

“Monetary policy needs to guard the ‘gates’ of money supply, and properly smooth out fluctuations in the macro leverage ratio, and keep it on a reasonable track in the long run,” Yi said.

Ruan Jianhong, head of the statistics department at the People’s Bank of China (PBOC), said in July that the country’s macro leverage ratio jumped 14.5 percentage points in the first quarter and climbed further in the second quarter.

The central bank has not given further details.

The Institute for International Finance (IIF) said in July that China’s debt-to-GDP ratio was on track to hit 335%, from nearly 318% in the first quarter.

At the same forum, Vice Premier Liu He earlier said the economy will very likely grow this year, adding that prudent monetary policy should be kept appropriate and flexible, and liquidity reasonably ample.

On Monday, China reported gross domestic product grew 0.7% in January to September from a year earlier, versus a contraction of 1.6% in the first half following the outbreak of the novel coronavirus.

On Sunday, Yi said full-year GDP will likely grow by about 2%.

That would make China the only major economy expected to report growth in 2020, though it would be the country’s weakest annual expansion since 1976.

 

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Column: Savings stash squares brutal second-wave rescue costs

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© Reuters. FILE PHOTO: The Federal Reserve in Washington

By Mike Dolan

LONDON (Reuters) – The public’s financial caution around lockdowns continues to give governments and central banks both the reason and room for open-ended support of their economies through another looming wave of this year’s devastating pandemic.

With a second surge of the COVID-19 virus in full swing in Europe at least and no effective vaccine on the table yet, questions about how governments can afford the blinding costs of economic support through the Northern winter are resurfacing.

The unprecedented numbers being clocked up worldwide are daunting. Estimating a global tally for this year’s fiscal rescues so far, the International Monetary Fund last week pinned it at $11.7 trillion, or almost 12% of world output.

And that was before the latest resurgence of the virus and renewed clampdowns on mass gatherings, socialising and travel.

The IMF reckons developed economy governments are likely to have exploded annual budget gaps by about 11% of gross domestic product (GDP) by the end of the year, lifting debt-to-GDP ratios by almost a fifth to 125%.

This year’s deficit in the United States is set to jump more than 12 percentage points to almost 19% and the euro zone budget shortfall is due to balloon 9 points to more than 10% – or almost a trillion euros ($1.2 trillion).

The commensurate surge in central bank bond buying is clearly the main reason financial markets haven’t run scared and benchmark 10-year borrowing rates remain near record lows of less than 1% stateside and below zero in much of the euro zone.

And on that, the IMF estimates the European Central Bank (ECB) has bought as much as 71% of all euro government debt sold since February while the U.S. Federal Reserve has snapped up 57% of all Treasury debt issued since then.

The question for the public at large, however, is how long can governments keep this up and what’s the payback?

Part of the answer lies in a circular flow involving the mass build-up of precautionary household savings during pandemic lockdowns and beyond, and whether, or how quickly, they get run down and spent.

Unlike the money supply implosion that accompanied the banking crash and credit crunch 12 years ago, the opposite happened this year as governments pre-empted their own shutdowns with a flood of income support, lending and credit guarantees while firms rushed to borrow and build cash buffers.

Yet without households running down those savings fully, its unlikely the money supply surge from government and central bank largesse will spur any significant inflation – in itself the only significant reason central banks would rethink underwriting the government bond boom and keeping debt costs affordable.

“If more fiscal stimulus is needed, the ECB will buy it,” said UniCredit chief economist Erik Nielsen. “So long as this debt is parked on the central bank’s balance sheet, it’ll be de facto cost-free for governments and taxpayers.”

Money printing is only inflationary if people and companies spend it, Nielsen wrote, and there’s really no realistic prospect of the private savings glut becoming inflationary even if spent in a very short period.

“It’s an output gap story. The huge expansion in private savings in recent months illustrates this, so the fiscal expansion is basically no more than an exercise in propping up demand as the private sector retrenches.”

SAVING THE WORLD

U.S. household savings quintupled from January to more than $6.3 trillion in April, with the savings rate as a share of income quadrupling to a record of more than 33% as most people continued getting paid, or received additional benefits, but had little to spend it on during lockdowns.

The savings rate has more than halved since to 14% – or $2.4 trillion – in August. But it remains more than twice as high as in January.

While Europe only publishes savings data on a quarterly basis, it paints a similar picture. Eurostat shows the euro zone savings rate more than doubled to a record of almost 25% by the middle of the year.

That’s why TS Lombard economist Shweta Singh describes the money growth surge back to World War Two peaks in the United States as a “false positive” and no precursor to inflation.

What’s more, if the virus dissipates, consumer spending re-emerges and those precautionary savings are run down quickly, it will most likely be an environment where deficits and debt sales shrink too and central bank balance sheets flatten out.

Myriad questions and longer-term conundrums persist.

Can debts rise endlessly if inflation never emerges? What happens to sovereign credit ratings in that scenario? What happens if, or when, inflation does re-emerge?

Investors at Columbia Threadneedle, for example, think caution is still warranted over the “political will” in the euro zone to manage the rising debt stock of countries such as Italy and Spain which have debt-to-GDP ratios above 100% but no domestic central bank.

Pan-European borrowing helps, they say, but it may have political limits too.

Yet on the issue of “exit policies” and inflation in a recovery, UniCredit’s Nielsen is adamant: “If I were a central banker, I would be much happier navigating those future challenges than those that they have been facing these past few years.”

(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)

(by Mike Dolan, Twitter: @reutersMikeD; Editing by David Clarke)





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things could have been far worse By Reuters

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© Reuters. Britain’s Chancellor of the Exchequer Rishi Sunak leaves Downing Street, in London

LONDON (Reuters) – After statistics showed state borrowing had soared while tax receipts had fallen, British finance minister Rishi Sunak said on Wednesday that things could have been far worse had the government not acted to protect livelihoods.

“Whilst it’s clear that the coronavirus pandemic has had a significant impact on our public finances, things would have been far worse had we not acted in the way we did to protect millions of livelihoods,” Sunak said.

“Over time and as the economy recovers, the government will take the necessary steps to ensure the long-term health of the public finances,” he said.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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