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Tesla Cash Keeps Burning at $320 a Share

February 12, 2018 by EconMatters   Comments (0)

By EconMatters
Feb. 12, 2018

Financial markets are off to a good start today trying to stabilize after the worst week in two years for American equities. The tumultuous move in equities last week wiped $2 trillion from U.S. Tesla Inc. (TSLA) stock performance also took a beating at its worst week since July. The stock is trading around $316 at this writing, up 15% in the past 12 months. That compares with gains of 13% for the S&P 500 SPX, 20% for the Dow Jones Industrial Average (DJIA).

Tesla, EV and the Auto Industry

According to the latest sales data, the US auto industry has cooled off considerably with Americans keeping vehicles longer or purchasing lower-mileage used cars instead of new ones. Auto dealers have reduced prices and have extended loans to 72 months or more to move sales, but there is still an oversupply of new cars in the market. Crossovers, sport-utility vehicles and pickup trucks are the most popular making new car sales in the US.

For Tesla, Model X is supposed to be its answer to the SUV popularity in the US. However, even Musk said Model X is too complicated to configure and produce. So this means Tesla is missing out on roaring SUV boom. Adding insult to injury, Consumer Reports magazine rates the Model X second to last in its ranking of 15 luxury midsize SUVs.

For vehicle purchase, the deciding factor is still price (total cost of ownership, including resale value). Electric car prices are falling, but they still cost more than the gas counterparts due to their expensive batteries. With regular gas prices averaging $2.58 per gallon, it's hard to justify the price premium of an electric vehicle (EV).

Regarding resale value, according to, electric cars haven't yet proven their durability, and buyers of used electrics are worried about battery costs. This could be another reason to deter consumers taking the plunge into an EV instead of a traditional gas car.

Many have debated when EV will take over the world. Well, here and now, at least not today nor in the near term. With this macro back drop, how did Tesla as a company perform so far?

A Promise of “Positive Operating Income”

Tesla just released its fourth quarter earnings last Wed posting its biggest quarterly loss ever in the fourth quarter -- negative free cash flow of $(276.8) million and an adjusted EPS of negative $3.04 for the quarter. For the whole 2017, Tesla’s free cash flow (FCF) was negative $3.48 billion.

To soften the blow, Tesla said it's on track to produce 5,000 Model 3s per week by the end of its second quarter, and 2,500 a week by the end of first quarter 2018. The Model 3, with a starting price at $35,000, is Tesla's first vehicle targeted at the mass consumer market. According to CEO Elon Musk, once that Model 3 production target is met, Tesla could begin to generate sustained positive operating income in 2018. That “promise” partly pushed the stock up 3% on the day.

You might wonder what the big deal is about “positive operating income”? Every company is in the business to make positive income, right? Well, In Tesla’s case, the company has never made any money, that is, the company has been burning cash fast and furious since day 1, and yet investors seem to think the lofty $300+ price per share is a bargain. So a promise by the CEO to have “positive operating income” in 2018 probably brought tears to the eyes of many shareholders.

Model 3 Production Ramp in Question

Model 3 production is an important cash factor to Tesla as the ramp-up could mean more money coming in from customers taking delivery thus alleviating concerns about whether the company had enough cash.

That production target for Model 3 has been delayed by Musk several times already. Apparently, Similar to Model X, Tesla has run into supply chain problem with Model 3 as well, which Musk has described as "production hell." Then last Friday, just two days after the earning release, Tesla filed with federal regulators to “clarify” CEO Musk comment regarding the Model 3 production schedule.

I’m not going to mince and interpret the words by Musk and Tesla, but I am inclined to share the lingering concerns by many analysts about the Model 3 production ramp and the company’s cash position.

Cash Keeps Burning

Furthermore, pay attention to the devil in the detail of Tesla’s earning call.

The company indicated its capital spending will rise “slightly” from the 2017 level. With $10.4 billion in long-term debt and capital leases (by the way, with negative earnings, Tesla does not even have a PE ratio), it is more than likely that Tesla will rip through its cash and raise capital again later in 2018.

Without this frenzy from central banks QEs, Tesla would have encountered serious financial problems long ago. Yet a charismatic CEO and a sexy vision (and promise) of a cleaner better world have kept investors cash coming.

 The highest price target among the Wall Street analysts who cover Tesla is $500 per share. Ideology aside, investors really need to think long and hard before paying $320 a share for a company that can’t effectively resolve its operational issues and has never made a profit.

Disclosure: No Positions

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Azerbaijan cuts rate 200 bps, starts unwinding 2016 hikes

February 12, 2018 by CentralBankNews   Comments (0)

      Azerbaijan's central bank lowered its benchmark refinancing rate by 200 basis points to 13.0 percent as it begins to unwind four sharp rate hikes two years ago that were aimed at bolstering confidence in its manat currency and stem inflation following the plunge in crude oil prices.
       It is the first rate cut by the Central Bank of Azerbaijan (CBA) since it raised it by a total of 12 percentage points between February and September 2016, with the central bank attributing the rate cut to an expected decline in inflation and an improving external balance.
       The CBA believes further rate cuts are possible as it gradually transitions to a neutral monetary policy that will have a positive impact on economic activity.
        In addition to the cut in the refinancing rate, the central bank lowered the upper limit of its interest rate corridor to 16 percent from 18 percent and the lower limit to 8 percent from 10 percent.
        Oil and gas account for about 95 percent of Azerbaijan's exports and 75 percent of government revenue so the fall in crude oil prices in the second half of 2014 hit the economy hard, undermining confidence in the manat.
        From 2011 the CBA effectively pegged its manat to the U.S. dollar so the CBA had to draw heavily on its reserves to defend it. But as local depositors switched into U.S. dollars, the CBA was forced to abandon first its dollar-peg in early 2015 and then later that year a dollar-euro basket peg.
        In December 2015 the CBA then switched to a floating exchange rate regime that finally helped stabilize the exchange rate.
        Higher oil prices, along with economic reforms, helped Azerbaijan's current account balance swing into a surplus of 5 percent of Gross Domestic Product by end-2017 along with a trade surplus that exceeded US$5 billion as exports jumped 52 percent.
        An improved balance of payments not only resulted in an 11 percent rise in currency reserves, but helped stabilize the manat, with the CBA expecting the positive trend to continue this year.
        Earlier this month the CBA said its currency reserves had risen by an annal 24.4 percent to US$5.38 billion in January, with reserves in 2017 up by 34.2 percent from 2016.
        "The stabilization of the exchange rate of the manat has had a positive impact on the de-dollarization process, financial stability and a reduction of inflation expectations," the CBA said, adding the real effective exchange rate is down 36 percent since the end of 2014, stimulating the export of non-oil products and import substitution.
        Today the manat was trading at 1.7 to the U.S. dollar, largely steady this year but down  8.8 percent since December 2015 when it floated the currency.
        Azerbaijan's inflation rate eased to 12.9 percent in December last year, with the central bank saying average inflation in January was 5.5 percent.
        This disinflation trend is forecast to continue, with surveys showing a downward impact on inflation expectations by households and businesses.
        Azerbaijan's economy grew by 0.1 percent in 2017, up from a 3.8 percent contraction in 2016, with the central bank saying the state statistical committee estimated that the non-oil sector grew by 2.7 percent last year and positive growth this year is expected to continue based on increased investments, non-oil exports and higher consumer confidence.

Bitcoin: Neither a Borrower Nor a Lender Be

February 12, 2018 by EconMatters   Comments (0)

By EconMatters
Feb. 12, 2018

Bitcoin had rocketed from $900 to almost $20,000 in 2017.  We discussed how 20% of Bitcoin owners took out debt in this get-rich-quick gamble.  It could all work out for everyone if Bitcoin were to continue its run towards $25,000 or even $60,000 according to some overly zealous predictions.  The problem is Bitcoin has crashed to around $8,600 as I write this post today.  Central banks like PBOC are moving to tighten oversight of bitcoin exchanges.  Banks have banned purchasing bitcoins using their credit cards.

Yet another news tells a different side but equally disturbing story.  It turns out instead of racking up debt to finance a bitcoin investment,

....Others invested in lenders, which accept real money for “interest” paid out in fringe cryptocurrencies  

Quite a few coin companies have done aggressive marketing campaigns with ads and newslettera.  For example, one such ad says “Turn a single $100 bill into a retirement fortune, in a matter of months.”  A cryptocurrency company Davor Coin reportedly promised users on Jan. 31 "Lend us your money and you’ll have the chance to win $1,000,000".  All Davor Coin users had to do was loan Davor Coin their money. At the minimum, Davor promised huge returns on their loans, in the form of the company’s own kind of cryptocurrency DAV, not to mention there's chance to win the $1,000,000 jackpot.

Another company Bitconnect, one of the largest crypto-lending companies, promised an impossible 1% daily return on investment.  Then there are also companies advertise cryptocurrency-based title loans for cars.

Does that sound just a tad like a ponzi scheme?   But not to the crytocurrency faithful crowd.  One study suggests that buyers of bitcoin or crytocurrency are comfortable with a loan scheme in exchange for the digital money, which they believe will soar in value.

Davor Coin's DAV plunged from $180 to less than $0.01 per coin right now.  That means the lenders in the real-money-for-DAV loan scheme are now left with pennies on the dollar.  Based on Facebook posts, one user said he loaned Davor $4,000 and was left holding $9.  Another one said his $20,000 loan to Davor Coin yielded the equivalent of $23.50 when he tried to cash out.

The good news is that both Bitconnect and Davor Coin have both been served cease-and-desist letters from the Texas State Securities Board this year.  Bitconnect is completely shut down while Davor has shut down its loan platform, but apparently DAV is still listed on separate coin exchange platform.

The bad news is that two scams down and many more are eager to take their places.  Type in "cryptocurrency lending company" in Google search, and you will see what I mean.  One such platform even boasts "These Bitconnect clones can help you make easy regular money like clockwork...You get paid on a daily basis anywhere from 3% - 20%." 

Judging from the recent act by the Trump administration to drop a lawsuit into a lender alleged to charge up to 950% interest, investors and consumers are left to their own devices not getting sucked into one ponzi scheme after another.       

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Russia cuts rate 25 bps and to cut further on low inflation

February 9, 2018 by CentralBankNews   Comments (0)

       Russia's central bank lowered its key monetary policy rate by 25 basis points to 7.50 percent and said it would continue to cut rates further as it moves toward a neutral policy stance this year as inflation is now sustainably low and inflation expectations continue to diminish.
       It is Bank of Russia's first rate cut this year and follows six rate cuts in 2017.
       The central bank has now cut its key rate by 750 basis points since January 2015 when it slowly began rolling back a sharp 750 point rate hike in December 2014 aimed at protecting the ruble after it plunged in the wake of the Ukraine conflict.
       Analysts had expected the rate cut following a drop in inflation to 2.2 percent in January, the lowest since measurements began in 1991, and well below the central bank's 4.0 percent target.
       And last week Elvira Nabiullina, Bank of Russia governor, then said rates could be cut faster than previously thought and as soon as today, adding she saw little economic or financial impact from possible new U.S. sanctions.
        Nabiullina also said the central bank's key rate could be brought to a neutral level of 6 or 7 percent sooner than the bank had planned as inflationary risks had eased.
        The steady decline in Russia's inflation rate from 2015 and the potential for further rate cuts will ease monetary conditions, setting up conditions for inflation to approach 4 percent and also enable the central bank to support domestic demand.
       "This year annual inflation is much less likely to exceed 4%," the central bank said, adding "in this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018."
        The central bank expects inflation to continue to ease in the first half of this year due to the comparison with high food prices last year and then remain somewhat below 4 percent in 2018 and remain close to this in 2019.
         The steady fall in inflation is helping curb inflation expectations though these still remain "unstable and uneven." But this should decline as inflation falls and expectations become more anchored and less sensitive to sudden changes in food prices as in the past.
       "Therefore the balance of inflationary and economic risks has slightly slightly towards the risks to economic growth," the central bank said.
       Russia's economy pulled out of a deep recession last year though the pace of growth eased in the fourth quarter, the bank said.
       But industrial output resumed its monthly growth in December and will be further supported by higher domestic demand as real wages rise and global economic growth expands.
        Gross Domestic Product grew by an annual rate of 1.8 percent in the third quarter, down from 2.5 percent in the second quarter. For 2017 growth has been estimated at 1.5 percent, below the government's aim for at least 2 percent growth.
         Russia's ruble has been rising steadily since January 2016 though it has depreciated in the last month. Today it was trading at 58.3 to the U.S. dollar, down 1 percent this year but up 3.8 percent since the start of 2017.

        The Bank of Russia issued the following statement:

"On 9 February 2018, the Bank of Russia Board of Directors decided to cut the key rate by 25 bp to 7.50% per annum. Annual inflation remains sustainably low. Inflation expectations are diminishing progressively. Short-term pro-inflationary risks have abated. Therefore the balance of inflationary and economic risks has shifted slightly towards the risks to economic growth. The uncertainty over the situation in global financial markets has increased. This year annual inflation is much less likely to exceed 4%. In this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018.
In making its key rate decision, the Bank of Russia recognised the following factors.
Inflation dynamics. Annual inflation remained sustainably low. In January 2018 it stood at 2.2%. Permanent factors slow down consumer price growth alongside temporary factors. Furthermore, permanent factors may have stronger effect on inflation than previously estimated.
In January 2018, annual consumer price growth declined across all staple goods and services. Food inflation slowed to 0.7% while non-food inflation declined to 2.6%; service prices increased by 3.9%. According to Bank of Russia estimates, most annual inflation indicators reflecting the most sustainable price movements are below 4%.
Increased supply in the farm produce market continued to exert downward pressure on food inflation. Most factors associated with the 2017 harvest will cease to have a disinflationary influence in the first half of 2018. At the same time, investment in agriculture and the sector’s technological advancement pave the way for a sustainable increase in its production capacity in the medium term. The contribution of the exchange rate dynamics of the latest months to annual inflation slowdown will be exhausted by the end of the first quarter of this year.
The slowdown of inflation was conducive to inflation expectation decline which nevertheless remains unstable and uneven. This requires both further decrease in inflation expectations and reduction in their sensitivity to price changes.
The slowdown of annual consumer price growth may continue in the first half of 2018. This partially results from last year’s high base effect of food inflation. According to the Bank of Russia’s forecast, annual inflation will remain somewhat below 4% in 2018 and will hold close to this reading in 2019.
Monetary conditions. Monetary conditions were gradually easing in 2017. Interest rate dynamics was a key contributor to easing of monetary conditions. At the same time, real interest rates remain positive promoting savings. Non-price lending conditions have been largely constraining with banks demonstrating conservative approach to screening borrowers and increasing lending on the back of elevated borrowers’ risks. A balanced recovery of lending poses no pro-inflationary risks.
The key rate decision and the potential for its decrease in the future will contribute to further easing of monetary conditions, thus creating prerequisites for inflation to approach 4% and supporting domestic demand.
In the course of transition to neutral monetary policy, the shape of the yield curve will continue to return back to normal. Given the situation, the potential for lowering short-term rates is greater than for long-term ones.
Economic activity. The fourth quarter of 2017 saw a slowdown in economic activity. However, some uncertainty remains in the assessments of the reasons behind this slowdown, also due to temporary factors.
After decline in November 2017 in December 2017, industrial output resumed monthly growth. Producer sentiment remains relatively high. It will be further supported by higher domestic demand as real wages increase and global economic growth expands. Unemployment does not generate any excessive inflationary pressure.
Inflation risks. Short-term pro-inflationary risks have abated. Therefore the balance of inflationary and economic risks has shifted slightly towards the risks to economic growth. The uncertainty over the situation in global financial markets has increased. This year annual inflation is much less likely to exceed 4%. In this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018.
The Bank of Russia hardly revised its medium-term risk estimates for inflation.
Depending on the situation, a number of factors may cause inflation to deviate from the target both upwards and downwards. They include the dynamics of highly volatile food and oil prices. The fiscal rule will set off the impact of oil market conditions on inflation and domestic economic environment as a whole. At the same time, certain factors generate mostly pro-inflationary risks: they include the developments in the labour market, potential changes in consumer behaviour, and the nature of inflation expectations.
In the medium term (in 2019-2020) the risks of inflation’s upward deviation from 4% still prevail over deviation below 4%. First, increased structural labour shortage may cause labour productivity growth to considerably lag behind wage growth. Second, inflationary pressure may stem from changes in households’ behaviour as the propensity to save becomes much lower. Third, inflation expectations remain elevated and subject to fluctuations caused by movements in prices of certain goods and services and the exchange rate. Besides, the medium-term balance of risks for inflation dynamics will depend on potential budgetary and tariff decisions in 2019–2020.The Bank of Russia will also monitor risks posed by external factors over the entire forecast horizon.

The Bank of Russia Board of Directors will hold its next rate review meeting on 23 March 2018. The Board decision press release is to be published at 13:30 Moscow time."

Mexico raises rate 25 bps, but strikes less hawkish tone

February 8, 2018 by CentralBankNews   Comments (0)

      Mexico's central bank raised its benchmark interest rate by a further 25 basis points to 7.50 percent, as expected, but struck a more neutral tone than in December by saying it would act in a timely and firm manner "if necessary" to anchor inflation expectations and meet its inflation target.
      Today's policy statement by the board of Bank of Mexico (Banxico) compares with its hawkish statement in its previous statement when it said it would be "vigilant" and act as soon as possible to anchor inflation expectations and achieve the inflation target, given the intensification of the risks that could affect inflation.
      It is Banxico's first rate hike this year but it has now raised its rate by a total of 450 basis points since December 2015 when the U.S. Federal Reserve began tightening its policy.
      Illustrating the more balanced guidance, the bank's board was unanimous in today's policy decision compared with December when the bank also raised the rate by 25 basis points but one member voted to raise it by 50 basis points.
       The board said today's hike took into consideration the more restrictive monetary conditions that are expected in North America in order to maintain a stance that anchors inflation expectations and reinforces the downward trend of inflation toward the bank's 3.0 percent target.
       Mexico's inflation rate decelerated to 5.55 percent in January from 6.77 percent in December and Banxico said it expects inflation to continue to ease and approach its 3.0 percent target during the year and then reach it by the first quarter of 2019.
       This is later than the central bank had expected, but it said this delay was due to the impact of the price of some energy products, fruits and vegetables that had pushed up inflation in recent months.

UK central bank holds rate but sees earlier tightening

February 8, 2018 by CentralBankNews   Comments (0)

      The U.K. central bank left its benchmark Bank Rate at 0.50 percent, along with its stock of assets, unchanged but expects to tighten its monetary policy stance "somewhat earlier and by a somewhat greater extent" than earlier expected to rein in inflation as the economy continues to improve.
       The Bank of England (BOE), which already raised its rate by 25 basis points in November last year, raised its forecast for economic growth in the first quarter of this year to 1.7 percent from 1.5 percent forecast in November and the forecast for Q1 2019 to 1.8 percent from 1.7 percent.
       Although the BOE acknowledged that such growth rates are "modest" by historical standards, it exceeds the rate of supply that has been worsened by uncertainty over the U.K. future relationship with the European Union (EU), reducing the slack in the economy and pushing up wages.
       BOE estimates the UK economy has only "a very limited degree of slack" and capacity will only grow around 1.5 percent a year, reflecting lower growth in labour supply and productivity that is around half of its pre-crises average.
       "As growth in demand outpaces that of supply, a small margin of excess demand emerges by early 2020 and builds thereafter," the BOE said.
       Inflation in the U.K. has exceeded the BOE's 2.0 percent target since February 2017 but eased slightly to 3.0 percent in December from 3.1 percent in November.
        The BOE expects inflation to remain around 3.0 percent in the short term due to higher oil prices and the past effects of the fall in the pound's exchange rate that pushed up import prices.
        But while the effect of higher oil prices and sterling's decline slowly dissipate, the BOE expects domestic inflationary pressures to rise as pay growth rises in response to tighter labour markets.
        In the medium term, inflation is expected to remain above the 2.0 percent target.
        In its latest inflation report, the BOE raised its forecast for consumer price inflation to 2.9 percent for the first quarter of this year, up from 2.6 percent, while the outlook for first quarter 2019 inflation was unchanged at 2.3 percent.
        The forecast for the Bank Rate - based on forward market interest rates - was unchanged at 0.5 percent and 0.8 percent for the first quarters of this year and 2019, respectively. But for the first quarter of 2020 the forecast was raised to 1.0 percent from a previous 0.9 percent. For Q1 2021 the Bank Rate is seen at 1.2 percent.
        As in December, the BOE's monetary policy committee was unanimous in today's policy decision, reiterating that future rate increases are expected to be at "a gradual pace and to a limited extent."
        The slightly more hawkish stance by the BOE pushed up sterling against the U.S. dollar to above 1.40 from around 1.38 earlier today, continuing sterling's rise over the last 12 months from around 1.20.

       The Bank of England released the following monetary policy summary:

"The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 7 February 2018, the MPC voted unanimously to maintain Bank Rate at 0.5%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

The MPC’s latest projections for output and inflation are set out in detail in the accompanying February Inflation Report. The global economy is growing at its fastest pace in seven years. The expansion is becoming increasingly broad-based and investment driven. Notwithstanding recent volatility in financial markets, global financial conditions remain supportive. UK net trade is benefiting from robust global demand and the past depreciation of sterling. Along with high rates of profitability, the low cost of capital and limited spare capacity, strong global activity is supporting business investment, although it remains restrained by Brexit-related uncertainties. Household consumption growth is expected to remain relatively subdued, reflecting weak real income growth. GDP growth is expected to average around 13⁄4% over the forecast, a slightly faster pace than was projected in November despite the updated projections being conditioned on the higher market-implied path for interest rates and stronger exchange rate prevailing in financial markets at the time of the forecast.

While modest by historical standards, that rate of growth is still expected to exceed the diminished rate of supply growth. Following its annual assessment of the supply side of the economy, the MPC judges that the UK economy has only a very limited degree of slack and that its supply capacity will grow only modestly over the forecast, averaging around 11⁄2% per year. This reflects lower growth in labour supply and rates of productivity growth that are around half of their pre-crisis average. As growth in demand outpaces that of supply, a small margin of excess demand emerges by early 2020 and builds thereafter.

CPI inflation fell from 3.1% in November to 3.0% in December. Inflation is expected to remain around 3% in the short term, reflecting recent higher oil prices. More generally, sustained above-target inflation remains almost entirely due to the effects of higher import prices following sterling’s past depreciation. These external forces slowly dissipate over the forecast, while domestic inflationary pressures are expected to rise. The firming of shorter-term measures of wage growth in recent quarters, and a range of survey indicators that suggests pay growth will rise further in response to the tightening labour market, give increasing confidence that growth in wages and unit labour costs will pick up to target-consistent rates. On balance, CPI inflation is projected to fall back gradually over the forecast but remain above the 2% target in the second and third years of the MPC’s central projection.

As in previous Reports, the MPC’s projections are conditioned on the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union. The projections also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship. Developments regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook. In such exceptional circumstances, the MPC’s remit specifies that the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.

Over the past year, a steady absorption of slack has reduced the degree to which it was appropriate for the MPC to accommodate an extended period of inflation above the target. Consequently, at its November 2017 meeting, the Committee tightened modestly the stance of monetary policy in order to return inflation sustainably to the target.

Since November, the prospect of a greater degree of excess demand over the forecast period and the expectation that inflation would remain above the target have further diminished the trade-off that the MPC is required to balance. It is therefore appropriate to set monetary policy so that inflation returns sustainably to its target at a more conventional horizon. The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.

In light of these considerations, all members thought that the current policy stance remained appropriate to balance the demands of the MPC’s remit. Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent. The Committee will monitor closely the incoming evidence on the evolving economic outlook, and stands ready to respond to developments as they unfold to ensure a sustainable return of inflation to the 2% target.

Philipinnes maintains rate but 'watchful' over inflation

February 8, 2018 by CentralBankNews   Comments (0)

     The central bank of the Philippines kept its key policy rate steady at 3.0 percent but said the risks to the inflation outlook remain weighted toward the upside due to possible further rises in oil prices and it was "watchful against any signs of second-round effects and inflation becoming broader based."
      Bangko Sentral ng Pilipinas (BSP), which has maintained its monetary policy stance since September 2014, said it latest forecast shows higher inflation this year but it is still expected to moderate and then settle within the target range of 3.0 percent, plus/minus 1 percentage point.
      But BSP raised its 2018 inflation forecast to 4.3 percent - above its target range - from an earlier 3.4 percent due to higher global oil prices, higher taxes and food prices.
      For 2019 BSP forecasts 3.5 percent inflation, up from 3.2 percent previously forecast.
      Inflation in the Philippines accelerated to a higher-than-expected 4.0 percent in January from 3.3 percent in December, for the highest rate since October 2014, as the cost of food, transport and housing rose.
      Although the BSP has said the rise in inflation is temporary and partly reflects last month's tax increases, economists expect the central bank to raise its rate soon, with some speculating the BSP could have raised its rate today while others are looking toward a March hike.
      Today's statement by the BSP's monetary board is more hawkish than its statement in December when it said it would remain vigilant against any risks to the inflation outlook and will adjust policy settings to ensure inflation is consistent with its target and still supports growth.
       "The monetary board stands ready to take appropriate measures as necessary to ensure that the monetary policy stance continues to support price and financial stability," the BSP said today.
       Interest rates globally are moving upwards in response to solid global growth and three central banks in Asia - South Korea, Malaysia and Pakistan - have already raised their rates in recent months.
       The BSP added that prospects for economic activity continue to be firm on the back of robust domestic demand and the sustained recovery in global economic growth.
       The Philippine economy grew by an annual rate of 6.6 percent in the final quarter of 2017, down from 7.0 percent in the third quarter.

         Bangko Sentral ng Pilipinas issued the following statement:

"At its meeting on monetary policy today, the Monetary Board decided to maintain its policy rate, the interest rate on the BSP’s overnight reverse repurchase (RRP) facility, steady at 3.0 percent. The corresponding interest rates on the overnight lending and deposit facilities were also kept unchanged.
The Monetary Board’s decision is based on its assessment that while latest baseline forecasts show higher inflation outturns for 2018, the inflation path is expected to moderate and settle within the inflation target range of 3.0 percent ± 1.0 percentage point in 2019. The Monetary Board also noted that prospects for domestic activity continue to be firm on the back of robust domestic demand, manageable growth in credit and liquidity, and a sustained recovery in global economic growth. The higher inflation in January is also due to better enforcement of tax laws on tobacco as well as temporary increases in prices of selected food items, such as fish and vegetables.
Nevertheless, the Monetary Board observed that the risks to the inflation outlook remain weighted toward the upside owing mainly to price pressures emanating from possible further increases in global oil prices. At the same time, the Monetary Board saw that inflation expectations continue to be anchored within the inflation target band over the policy horizon. The BSP is watchful against any signs of second-round effects and inflation becoming broader based.
Given these considerations, the Monetary Board reiterates that it remains committed to the BSP’s price stability objective and will continue to closely monitor the evolving conditions for prices and output for any threats to the inflation target. The Monetary Board stands ready to take appropriate measures as necessary to ensure that the monetary policy stance continues to support price and financial stability."

Brazil cuts rate by 25 bps and expects to pause in easing

February 7, 2018 by CentralBankNews   Comments (0)

      Brazil's central bank cut its key Selic interest rate by a further 25 basis points to 6.75 percent, as expected, but said it would now take a pause if the economy evolves as expected after cutting the rate by a total of 7.50 percentage points since embarking on an easing cycle in October 2016.
      But the Central Bank of Brazil's monetary policy committee, known as Copom, didn't completely shut the door on further rate cuts, saying it may still change its view in favor of additional
"moderate" monetary easing if the balance of risks change, and the next step in policy still depends on economic activity, inflation forecasts and expectations.
       Today's rate cut follows the central bank's guidance in December, when it said an "additional moderate reduction of the pace of easing" was appropriate at its meeting in February.
       Copom said its baseline forecast for inflation largely had evolved as expected, with various measures of inflation at "comfortable or low levels."
        Brazil's inflation rate rose slightly to 2.95 percent in December from 2.8 percent in November and the central bank said it was projecting 2018 and 2019 inflation of 4.2 percent, assuming the Selic rate ends this year unchanged at 6.75 percent and then rises to 8.0 percent by end-2019.
       Brazil's economy grew by a better-than expected annual rate of 1.4 percent in the third quarter of last year, up from 0.4 percent in the second quarter, boosted by household spending and exports.
       After rising in the first half of 2016, Brazil's real has been steady since then and was trading at 3.27 to the U.S. dollar today, up 1.2 percent this year.

       The Central Bank of Brazil issued the following statement:

​"The Copom unanimously decided to reduce the Selic rate by 0.25 percentage point, to 6.75 percent per year.
The following observations provide an update of the Copom's baseline scenario:
The set of indicators of economic activity released since the last Copom meeting shows consistent recovery of the Brazilian economy;
The global outlook has been favorable, as economies grow worldwide. This has so far contributed to support risk appetite towards emerging economies, notwithstanding recent volatility of financial conditions in advanced economies;
The Committee judges that its baseline inflation scenario has evolved, to a large extent, as expected. Inflation developments remain favorable, with various measures of underlying inflation running at comfortable or low levels. This includes the components that are most sensitive to the business cycle and monetary policy;
Inflation expectations for 2018 collected by the Focus survey are around 3.9%. Expectations for 2019 and 2020 remain around 4.25% and 4.0%, respectively; and
The Copom's inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey stand around 4.2% for both 2018 and 2019. This scenario assumes a path for the policy interest rate that ends 2018 at 6.75%, and 2019 at 8.0%.
The Committee emphasizes that its baseline scenario involves risks in both directions. On the one hand, the combination of (i) possible second-round effects of the favorable food price shock and of low current levels of industrial goods inflation, and (ii) the possible propagation through inertial mechanisms of low inflation levels may lead to a lower-than-expected prospective inflation trajectory. On the other hand, (iii) frustration of expectations regarding the continuation of reforms and necessary adjustments in the Brazilian economy may affect risk premia and increase the path for inflation over the relevant horizon for the conduct of monetary policy. This risk intensifies in the case of (iv) a reversal of the current benign global outlook for emerging economies.
Taking into account the baseline scenario, the balance of risks, and the wide array of available information, the Copom unanimously decided to reduce the Selic rate by 0.25 percentage point, to 6.75 percent per year. The Committee judges that this decision is consistent with convergence of inflation to target over the relevant horizon for the conduct of monetary policy, which includes 2018 and, with smaller and gradually increasing weight, 2019.
The Committee judges that economic conditions prescribe accommodative monetary policy, i.e., interest rates below the structural level.
The Copom emphasizes that the evolution of reforms and necessary adjustments in the Brazilian economy contributes to the reduction of its structural interest rate. The Committee will continue to reassess estimates of this rate over time.
The evolution of the baseline scenario, in line with expectations, and the stage of the monetary easing cycle made it appropriate to reduce the Selic rate by 0.25 percentage point at this Copom meeting. Regarding the next meeting, provided the Committee's baseline scenario evolves as expected, at this time the Copom views the interruption of the monetary easing process as more appropriate. This view regarding the next Copom meeting might change in favor of an additional moderate monetary easing, if the Committee's baseline scenario or balance of risks change. The Copom emphasizes that the next steps in the conduct of monetary policy will continue to depend on the evolution of economic activity, the balance of risks, possible reassessments of the extension of the cycle, and on inflation forecasts and expectations.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza, Reinaldo Le Grazie, Sidnei Corrêa Marques e Tiago Couto Berriel."