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Colombia cuts rate 7th time but inflation now in target

July 28, 2017 by CentralBankNews   Comments (0)

    Colombia's central bank cut its benchmark rate for the seventh time to counter economic weakness and the risk of a further economic slowdown from continued low oil prices.
     The Central Bank of Colombia cut its key intervention rate by another 25 basis points to 5.50 percent, as expected, and has now cut it by 200 basis points this year and by 225 basis points since beginning on an easing cycle in December 2016.
      One member of the bank's board of directors voted to keep the rate steady while the other six members voted in favor of the rate cut. As in previous months, the central bank said the current real interest rate was contractionary.
      While the central bank has been trying to boost economic activity and reduce excess capacity in the economy by lowering rates, Colombia's inflation rate in June finally dropped into the central bank's target range for the first time since January 2015.
      Headline inflation eased to 3.99 percent from 4.37 percent in May, within the central bank's target range of 2 -4 percent. Analysts' inflation expectations for December 2017 and 2018 also fell further to 4.28 percent and 3.52 percent, respectively.
      In May the International Monetary Fund forecast end-2017 inflation of 4.1 percent compared with  end-2016 inflation of 5.75 percent.
      The fall in inflation has been helped by a slowdown in food prices and a relative stable exchange rate but the central bank cautioned that the decline in food prices may reverse in the second half of the year so inflation is forecast to increase slightly in the period.
      Colombia's peso was trading around 3,012 to the U.S. dollar today, down 0.3 percent this year.
      Colombia's economy shrank by 0.2 percent in the first quarter of this year from the previous quarter and the central bank said recent data suggested that output in the second quarter would be similar to the first quarter although domestic demand was "somewhat better" than three months ago.
      On an annual basis, Colombia's Gross Domestic Product rose 1.1 percent in the first quarter of this year, down from 1.6 percent in the previous quarter.
      The IMF has forecast 2.3 percent GDP growth this year, up from 2.0 percent in 2016.

     The Central Bank of Colombia issued the following statement:

"The Board of Directors of Banco de la República at today’s meeting decided to reduce the benchmark interest rate by 25 bp to 5.5%. For this decision, the Board mainly took into account the following aspects:
    • In June, annual consumer inflation stood at 3.99%, and the average of core inflation indicators posted at 5.09%. These figures are lower than those registered a month ago. Analysts’ inflation expectations to December 2017 and 2018 lowered, reaching 4.28% and 3.52%, respectively. Those embedded in public debt bonds recorded modest changes, and are slightly above 3.0% for 2018.
    • The effects of the strong transitory supply shocks that deviated inflation from its target continue to fade. This is suggested by the slowdown in the food CPI and the behavior of the prices which are more sensitive to the exchange rate. The average of core inflation indicators declined more slowly as a consequence of the indexation of prices and the effect of the transitory increase in indirect taxes.
    • The contribution of food CPI to the decline in annual inflation may reverse during the second half of this year. For this reason, forecasts indicate that annual inflation could increase slightly in that period.
    • Forecasts for the price of oil and the terms of trade for the rest of 2017 lowered, but continue to reflect increases versus the averages recorded in 2016. External demand remains weak, and its growth is expected to be somewhat higher than the figure registered a year ago. In the last month, country risk spreads were relatively stable, and the peso depreciated vis-à-vis the US dollar.
    • Recent figures of economic activity for the second quarter suggest that output would have grown at a low rate, similar to the one recorded in the first quarter. The dynamics of domestic demand would have been weak, although somewhat better than three months ago. Net exports would have been similar to those of the first quarter of 2017.
Based on this information, the Board considered the following factors for its decision:
    • The increasing weakness in economic activity and the risk of a slowdown beyond what is compatible with the deterioration in the dynamics of income due to the fall in oil prices. Recent indicators confirm an excess capacity of the economy, although its magnitude is highly uncertain.
    • Uncertainty about the pace of convergence of inflation to its 3.0% target. Indexation mechanisms and the persistence of inflation continue to be reflected on core inflation indicators, which exceed the inflation target (3.0%).
    • The current level of the real policy interest rate ex-ante is contractionary.
With this, the Board of Directors decided to reduce the benchmark interest rate by 25 bp. The decision to reduce the benchmark interest rate was approved by six (6) members of the Board. The remaining member voted not to modify the benchmark interest rate."

The VIX Setup and Equities Selloff Trade Examined (Video)

July 28, 2017 by EconMatters   Comments (0)

By EconMatters

We examine the market moves of the day that happened around 11:20 CST and provided some good price action and woke some traders out of their bored slumber this afternoon. The profit taking rotation out of the pricy tech darlings into the Dow Industrial more defensive blue chips, supported by a spike in the VIX, a flight to safety in Yen strengthening, a bid in Gold, all before some dip buying into earnings at the bell. I think we will get some more selling next week with Apple`s earnings, and start breaking some key technical support areas. The bulls became way too complacent, thinking they are guaranteed returns no matter what price levels just because volatility is so low, and no major risk factors are on the immediate horizon.

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Fiji maintains rate and accommodative policy stance

July 27, 2017 by CentralBankNews   Comments (0)

     Fiji's central bank kept its Overnight Policy Rate (OPR) at 0.50 percent, unchanged since October 2011, and said a continuation of the accommodative monetary policy stance reflects no "significant impending risks" to the bank's dual mandates of inflation and foreign reserves.
     Fiji's inflation rate fell to 2.0 percent in June from 2.5 percent in May and the Reserve Bank of Fiji (RBF) left its year-end projection at 3.0 percent.
     As part of the government's 2017/18 budget, there will be an increase in duties on alcohol, cigarettes and tobacco that is likely to push up prices in coming months but the central bank said this would largely be offset by lower prices of a few other categories.
     Fiji's foreign reserves rose to a record of $2.307 billion as of July 20 from $2.283 billion in June and are expected to rise further to $2.314 billion on July 28, the equivalent of 5.7 months of imports.
     "Looking ahead, foreign reserves are expected to remain adequate until the end of the year," the central bank's acting governor, Ariff Ali, said in a statement.
      The central bank also confirmed its 3.8 percent forecast for economic growth this year as strong performances by its tourism, electricity,  construction and sugar sectors are compensating for weak outcomes in mining and timber.
       In addition, the expansionary fiscal stance and incentives in the national budget "should augur well for growth in the near and medium terms," Ali added.
       Fiji's economy was hit hard last year by Tropical Cyclone Winston - the worst ever cyclone in the Southern Hemisphere - with growth slowing to 2.0 percent from 3.6 percent in 2015.


"The Reserve Bank of Fiji (RBF) Board met on 27 July 2017 and agreed to keep monetary policy unchanged by maintaining the Overnight Policy Rate at 0.5 percent.
The Acting Governor and Chairman of the Board, Mr Ariff Ali stated that, “the continuation of central bank’s accommodative stance reflects that the dual mandates of the Bank remain intact with no significant impending risks in the medium term.”
While certain policy measures announced in the National Budget, such as the duty increases on alcohol, cigarettes and tobacco and higher disposable incomes would likely push up prices in the coming months, this is expected to be largely offset by lower prices noted in a few major categories over the recent months. Annual inflation fell further to 2.0 percent in June, from 2.5 percent in May and from the high of 5.3 percent in June last year, led by lower food & non-alcoholic drinks and clothing & footwear prices. As a result, the year-end projection remains at 3.0 percent.
Foreign reserves rose in June 2017 to $2,283 million, sufficient to cover 5.7 months of retained imports of goods & non-factor services (MORI). On 20 July, foreign reserves reached another all- time high of $2,307 million and are expected to rise to a new high of $2,314 million (5.7 MORI) on 28 July. Looking ahead, foreign reserves are expected to remain adequate until the end of the year.
On the domestic economy, Mr Ali stated that, “despite the recent weak outcomes in the mining and timber industries, the upbeat performances in sectors such as tourism, electricity and construction, coupled with the turnaround noted in cane and sugar production, confirm the positive 3.8 percent growth outlook for 2017.Various partial indicators for consumption and investment point towards firm aggregate demand in the year to date. In addition, the expansionary fiscal stance and incentives announced in the 2017-18 National Budget should augur well for growth in the near and medium terms.
Internationally, the IMF has kept its global growth projection for 2017 and 2018 at 3.5 percent and 3.6 percent, respectively. Nonetheless, medium term risks to this growth outlook remain on the downside.
The Acting Governor concluded that the RBF will continue to monitor developments and risks to the global and domestic economic outlook and align monetary policy accordingly."


Turkey keeps rate, confirms it will keep tight stance

July 27, 2017 by CentralBankNews   Comments (0)

      Turkey's central bank kept its key short-term interest rates at their current level and confirmed its recent guidance that it will maintain will a tight monetary stance, and if necessary, tighten further if there is a risk of higher inflation.
     While the Central Bank of the Republic of Turkey (CBRT) has maintained its key one-week repurchase rate since hiking it by 50 basis points in November 2016, it has been tightening its policy stance by other means, such as raising other key rates, the rate it pays on local lenders' U.S dollar reserves and required reserve ratios in a bid to boost the value of the lira and slow down inflation.
     In April, for example, the CBRT raised its late liquidity lending rate for the third time this year. The rate, which is used by the central bank to provide a large portion of the funds that banks need, has been raised by 225 basis points so far this year.
      The benchmark one-week repo rate is currently at 8.0 percent.
      In today's policy statement, the CBRT reiterated its view from last month that economic activity was continuing to recover on improving domestic demand and exports were developing in a positive manner due to exports to the European Union.
     And while food prices and other improvements to cost factors should help lower inflation, the current rate of inflation still poses a risk to prices so the tight monetary policy stance will be kept.
      Turkey's inflation rate eased to 10.9 percent in June from 11.72 percent in May.
      In its latest quarterly inflation report from April the central bank raised its 2017 inflation forecast to 8.50 percent from 8.0 percent forecast in January. 
     By the end of 2018, inflation is seen falling to 6.4 percent, up from 6.8 percent previously seen, before stabilizing around the central bank's 5.0 percent target in the medium term.
      The central bank's third inflation report will be published Aug. 1.
      After falling sharply in the last two months of 2016, Turkey's lira has been firming in recent months after hitting a historic low of 3.87 to the U.S. dollar in late January, helped by the central bank's various tightening measures.
    Today the lira was trading at 3.53 to the dollar, unchanged since the start of this year.

     The Central Bank of the Republic of Turkey issued the following statement:

"The Monetary Policy Committee (the Committee) has decided to keep the short term interest rates constant at the following levels:

a) Overnight Interest Rates: Marginal Funding Rate at 9.25 percent and borrowing rate at 7.25 percent,
b) One-week repo rate at 8 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate at 0 percent, and lending rate at 12.25 percent.
Recently released data indicate an ongoing recovery in the economic activity. Domestic demand conditions have improved and demand from the European Union economies continues to contribute positively to exports. The economic activity is expected to maintain its strength due to the supportive measures and incentives provided recently. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.
Although recent improvements in cost factors and expected partial correction in food prices will contribute to disinflation, current elevated levels of inflation pose risks on the pricing behavior. Accordingly, the Committee decided to maintain the tight stance of monetary policy.
The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."

Brazil cuts rate 100 bps again, lowers inflation forecast

July 27, 2017 by CentralBankNews   Comments (0)

     Brazil's central bank cut its benchmark Selic rate by 100 basis points for the third time in a row and said a continuation of this pace of monetary easing in September would depend on how economic activity evolves, the balance of risks as well as inflation and inflation forecasts.
     The Central Bank of Brazil has now cut its rate by 500 basis points since beginning its easing campaign in October 2016 and by 450 basis points this year.
      Copom, the central bank's monetary committee, was unanimous in its decision and lowered its assumption for the Selic policy rate to end this year at 8.0 percent from the May forecast of 8.50 percent. As in May, Copom expects the Selic rate to remain at that level until the end of 2018.
    "Inflation developments remain favorable," the central bank said, adding disinflation is widespread and so far the short-run effects of uncertainty surrounding government reforms was neither inflationary, nor disinflationary.
     Today's one percentage point cut in the Selic rate comes after the central bank at its previous meeting in May said a smaller cut was likely appropriate in July.
      But Copom said economic conditions were continuing to allow for the same pace of easing as in May and April despite an increase in uncertainty as far as economic reforms.
      Copom's 2017 inflation forecast based on its weekly Focus survey dropped to 3.6 percent from May's forecast of 4.0 percent. For 2018 Copom forecast inflation of 4.3 percent as inflation expectations dropped to 3.3 percent this year and 4.2 percent next year.
     Brazil's inflation rate dropped to 3.0 percent in June from 3.6 percent in May for the lowest rate since April 2007 and at the lower boundary of its inflation target of 4.5 percent, plus/minus 1.5 percentage points.
     Brazil's real has been trending firmer this year after depreciating steadily the previous six years.
     The real was trading at 3.14 to the U.S. dollar today, up 3.8 percent this year.

     The Central Bank of Brazil issued the following statement"

"The Copom unanimously decided to reduce the Selic rate by one percentage point, to 9.25 percent per year, without bias.
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 remains consistent with stabilization of the Brazilian economy in the short run and gradual recovery. The recent increase in uncertainty regarding the evolution of reforms and adjustments in the economy had a negative impact on confidence indices. However, available information suggests that the impact of this drop in confidence on economic activity has been limited so far;
The global outlook has been favorable, as global economic activity remains on a gradual recovery path, without pressuring financial conditions in developed economies. This has contributed to support risk appetite towards emerging economies. In addition, changes in economic policy in some central economies have become less likely;
Inflation developments remain favorable. Disinflation is widespread and includes IPCA components that are most sensitive to the business cycle and monetary policy. So far, the short-run effects of higher uncertainty regarding the evolution of reforms and adjustments in the economy have been neither inflationary nor disinflationary;
Inflation expectations collected by the Focus survey for 2017 and 2018 fell to around 3.3% and 4,2%, respectively. Expectations for 2019 are around 4.25%, and expectations for 2020 are around 4.00%; and
The Copom's inflation projections for 2017 and 2018 in the scenario with interest rate and exchange rate paths extracted from the Focus survey retreated to around 3.6% and 4.3%, respectively. This scenario assumes a path for the policy interest rate that ends 2017 at 8.0% and remains at that level until the end of 2018.
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 one percentage point, to 9.25 percent per year, without bias. The Committee judges that convergence of inflation to the 4.5% target over the relevant horizon for the conduct of monetary policy, which includes 2018, is compatible with the monetary easing process.
The Copom emphasizes that the extension of the monetary easing cycle will depend on cyclical factors and on estimates of the structural interest rate of the Brazilian economy. The Committee judges that the evolution of reforms and adjustments in the economy (especially those that pertain to fiscal and credit policies) is important for the reduction of estimates of the structural interest rate. The Committee will continue to reassess these estimates over time.
The Copom emphasizes that, despite the increase in uncertainty regarding the evolution of reforms and adjustments in the economy, the continuation of economic conditions so far has allowed the same pace of monetary easing at this meeting. Regarding the next Copom meeting, maintenance of this pace will depend on the continuation of conditions described in the Committee's baseline scenario and on estimates of the extension of the monetary easing cycle. The pace of easing 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), Anthero de Moraes Meirelles, Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Luiz Edson Feltrim, Otávio Ribeiro Damaso, Reinaldo Le Grazie, Sidnei Corrêa Marques, and Tiago Couto Berriel."

EIA Oil Report Analysis 7-26-2017 (Video)

July 27, 2017 by EconMatters   Comments (0)

By EconMatters

We discuss the EIA Oil Inventory Report in this video, focusing on the fundamentals of the oil market with the third stellar oil report in succession, what the drivers for the positive reports has been, and what will determine next week`s price action in the commodity. Still not a lot of sticky money in the oil market yet, or we would be much higher given the run of drawdowns! Commodities can be priced all over the place given the exact same fundamentals; and currently no long term investors really interested in the oil market just yet. Capital has just been shocked to even think of commodities as investable assets over the long haul, shoot the Wheat Market outperformed crude oil this year!

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US Fed maintains rate to ensure return to 2% inflation

July 26, 2017 by CentralBankNews   Comments (0)

     The U.S. Federal Reserve kept its benchmark federal funds rate at 1-1.25 percent and reiterated that its monetary policy stance remains accommodative to support further strengthening of the conditions in the labor market and thus a sustained return to 2 percent inflation.

      The Federal Open Market Committee issued the following statement:

     "Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell."

Georgia holds rate, confirms rate to fall to neutral level

July 26, 2017 by CentralBankNews   Comments (0)

     Georgia's central bank kept its benchmark refinancing rate unchanged at 7.0 percent for the second month in a row, reiterating it saw no need to tighten policy and "the policy rate is expected to decrease to its neutral level" as inflation is expected to decline in the second half of the year.
     In May the National Bank of Georgia (NBG) raised its rate for the second time this year - for total hikes of 50 basis points - but said then and in June that further rate increases were not expected as inflation was expected to decline to its target level in 2018 as temporary factors die out.
      Georgia's inflation rate rose to a 2017-high of 7.1 percent in June from 6.6 percent in May, in line with the central bank's forecast, with the increase in tobacco products and fuel contributing to 2.6 percentage points of the inflation rate.
      Inflation is expected to decline in second half of this year but still remain above the NBG's target before meeting the target next year. 
     This year NBG targets inflation of 4.0 percent, down from its 2016 target of 5.0 percent. For 2018 the NBG will lower the target further to 3.0 percent, the rate it considers the long-run rate.
      Georgia's economy performed better than expected in the first half of this year, helped by exports, tourism and remittances from abroad. However, domestic demand and overall economic activity are still below potential and is therefore not creating any demand side pressure on inflation, NBG said.
      Georgia's economy grew by an annual rate of 5.1 percent in the first quarter of this year, up from 2.8 percent in the previous quarter and 3.3 percent in the year ago quarter.
      The exchange rate of Georgia's lari has been firming steadily since mid-December 2016 and was trading around 2.4 to the U.S. dollar, up almost 11 percent this year.

    The National Bank of Georgia issued the following statement:

"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on 26th of July, 2017 and decided to keep the refinancing rate unchanged at 7 percent.
In the second quarter of 2017, the hike of inflation is in line with existing forecasts, according to which due to one-time, supply side factors, the inflation is expected to remain above the target rate for the remainder of the year. In June, the annual inflation rate has increased, reaching 7.1%. The price increase on Tobacco products and fuel has contributed by 2.6 percentage points. The increase in the inflation rate is temporary, it is expected inflation to start declining from the second half of the 2017 and with the after the impact of one-off factors will die out in the beginning of 2018 the inflation will converge to its target level. Thus, there is no need for further tightening of monetary policy. Given the absence of additional shocks in the medium term, the policy rate is expected to decrease to its neutral level.
In the first half of 2017, economic growth indicators reveal higher than expected growth, which can be attributed to the improvement of the external sector. In particular growth of exports of goods and services (tourism) should be noted, as well as the increase in remittances. Along with the rise of external inflows, consumption has increased, contributing to economic growth.Yet, domestic demand and overall economic activity are still below its potential level; thus, it does not create demand side pressure on inflation.
In the second quarter of 2017, the annual growth rate of the bank lending is around 15%. The growth of credit portfolio can be attributed to loans issued in the national currency, allowing price stability to be achieved with only moderate changes in the policy rate.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal to maintain financial and price stability.
The next meeting of the Monetary Policy Committee will be held on 6th of September, 2017"

Nigeria maintains rate to safeguard FX market stability

July 25, 2017 by CentralBankNews   Comments (0)

      Nigeria's central bank kept its monetary policy rate (MPR) at 14.0 percent "to safeguard the stability achieved in the foreign exchange market, and to allow time for past policies to work through the economy."
     The Central Bank of Nigeria (CBN), which has maintained its rate since raising it by 200 basis points in July 2016, said its monetary policy committee was faced with the choice of either keeping the rate steady or easing its policy based on a fragile economic recovery that could "relapse int a more protracted recession if strong and bold monetary and fiscal policies are not activated immediately to sustain it."
     However, the central bank also noted the implications of continued U.S. monetary policy normalization and a strong U.S. dollar, a weak recovery of commodity prices and the uncertainty of U.S. fiscal policy.
     Six of the committee's members in attendance voted to maintain the MPR rate, along with other key rates, while two members wanted to cut the rate, arguing this would signal a sensitivity to growth and employment concerns by encouraging the flow of credit and reduce the cost of debt service, which is crowding out government expenditure.
     The MPC said it was not "unmindful" of the high cost of capital and its implications for the "still ailing economy, which arguably necessitates and accommodating monetary policy stance."
     But it added the risks from an easing would upstage the "modest stability" achieved in the foreign exchange market, lead to a possible exit of foreign portfolio investors, reignite inflation following the 2017 budget and further pull down real interest rates into negative territory.
     Nigeria's inflation rate eased to 16.1 percent in June, the fifth consecutive month of decline from 18.72 percent in January, partly due to the relative stability in the foreign exchange market from the central bank's improved management that has promoted increased inflows.
     But CBN said inflation still has a strong base effect that is expected to wane by August and remains concerned about the "unabating pressure from food inflation" though it is hopeful that this would dampen in the third quarter as harvests are brought in.
     It is noted the impact of high energy and transportation costs as well as other infrastructural constraints on consumer prices and expressed hope the government would fast-track reforms.
      Nigeria has been suffering from a shortage of U.S. dollars since the fall in crude oil prices in 2014 and has only recently been easing some of the restrictions and capital controls that were imposed in 2015 to shore up the naira's exchange rate.
     The central bank operates a series of exchange rates in addition to the official rate, which has been largely unchanged around 315 to the U.S. dollar since August 2016. In June 2016 the CBN removed a 197 naira peg to the dollar, which then led to a 30 percent drop in its value.
      In recent months the CBN has been pumping dollars into the market to narrow the spread between the official naira rate and black market rates along with other regulatory steps. Last month, for example, the CBN introduced a new spread limit on interbank transactions and allowed traders to buy hard currency from each other without its prior approval.
     "Against this backdrop, the Committee reiterated its commitment to sustain and deepen flexibility in the foreign exchange market to further enhance foreign exchange flow in the economy," it said.
    In June total foreign exchange flows through the central bank rose by 35.41 percent from May while outflows fell by 12.73 percent due to reduced interventions so positive net flows helped improve gross external reserves to US$30.3 billion end-June from $29.81 billion end May.

    The Central Bank of Nigeria released the following statement:

The Monetary Policy Committee met on the 24th and 25th of July 2017, against the backdrop of a relatively improving global economy. However, protectionism in trade and immigration; fragilities in the financial markets, remain the key risks to global economic stability.
On the domestic front, the economy is on a path to moderate recovery with a positive short- to medium-term outlook, premised largely on fiscal stimulus and a stable naira exchange rate. Inflation expectations also appear sufficiently anchored with the current stance of monetary policy.
In attendance were 8 out of 12 members of the Committee. The Committee examined the global and domestic economic and financial environments in the first half of 2017 and the outlook for the rest of the year.

External Developments
The momentum witnessed in the global economy in Q1 2017 continued through the second quarter, driven by a generally accommodative monetary policy stance in most advanced economies, moderation in energy prices and improved global demand. The emerging markets and developing economies, are experiencing positive spillovers from somewhat improved commodity prices and developments in the advanced economies. The growth prospects for this group of countries in 2017 are expected to rise to about 4.6 per cent from 4.3 per cent in 2016.
Complemented by the momentum in other blocks and a potential positive prospect for expansion in world trade, the IMF in its July edition of the World Economic Outlook (WEO) projected global output growth in 2017 at 3.5 per cent from 3.1 per cent in 2016.

The MPC, however, noted some headwinds confronting the optimistic outlook to global growth arising mainly from receding market expectations of expansionary U.S. fiscal policy, weaker than expected growth in the U.K due to difficult BREXIT negotiations and geo-political risks associated with the forthcoming German general elections. In addition, the Committee noted the downward trend in global inflation after earlier indications of an uptick as the U.S. continues to build up inventories in shale oil, while emerging economies such as Brazil, Russia and South Africa witness strong economic headwinds leading to sharp downturn in output.

Domestic Output Developments
Data from the National Bureau of Statistics (NBS) showed that the contraction in the economy moderated to 0.52 per cent in Q1 2017 from 1.30 per cent in Q4 2016. The data further revealed that fifteen economic activities recorded positive growth in Q1 2017, showing strong signs of recovery. The Purchasing Managers Index (PMI) for manufacturing and non-manufacturing activities stood at 52.9 and 54.2 index points in May and June 2017, respectively from 52.7 and 52.5 index points in May 2017, indicating an expansion for the third consecutive month. Similarly, the Composite Index of Economic Activities (CIEA) rose from 55.85 to 59.50 index points between April and June 2017. The Committee noted the continuous positive effects of improved foreign exchange management on the performance of manufacturing and other economic activities. Non-oil real GDP grew by 0.72 per cent in Q1 2017, reflecting growth in the agricultural sector by 0.77 per cent in the same period. Provisional data also showed that the external sector remained resilient in Q2 2017, as the overall Balance of Payments (BOP) position recorded a surplus of US$0.65 billion, equivalent to 0.8 per cent of GDP. The Committee hopes that the implementation of the 2017 budget and the Economic Recovery & Growth Plan (ERGP) will further strengthen growth and stimulate employment.

Developments in Money and Prices

The Committee noted that money supply (M2) contracted by 7.33 per cent in June 2017, annualized to a contraction of 14.66 per cent, in contrast to the provisional growth benchmark of 10.29 per cent expansion for 2017. The development in M2 reflected a contraction of 7.45 per cent in net foreign assets (NFA) in June 2017. Similarly, M1 contracted by 7.98 and 10.70 per cent in May and June 2017, respectively, consistent with the directive of the MPC that expansion in narrow money should be controlled. On the other hand, net domestic credit (NDC) grew modestly by 1.02 per cent in June 2017, (annualized at 2.04 per cent), driven mainly by net credit to government, which grew by 5.91 per cent. Credit to the private sector, however, declined relative to end-December 2016 by 0.02 per cent. The MPC noted the widening fiscal deficit of N2.51 trillion in the first half of 2017 and the growing level of government indebtedness and expressed concern about the likely crowding out effect on private sector investment. The constrained growth in the monetary aggregates provides evidence of weak financial intermediation in the banking system arising from the constraints imposed by developments in the macroeconomy.

Headline inflation (year-on-year) declined for the fifth consecutive month in June 2017, to 16.10 per cent from 16.25 per cent in May, and 18.72 per cent in January 2017. Core inflation moderated to 12.50 per cent in June from 13.00 per cent in May 2017 while the food index rose marginally to 19.91 per cent in June from 19.27 per cent in May 2017. This development was traced to intermittent attacks by herdsmen on farming communities, sporadic terrorist attacks in the North-East and other seasonal farming effects. The Committee was particularly concerned about the unabating pressure from food inflation but hopeful that the situation will dampen in the third quarter as harvests begin to manifest.

The Committee also attributed the moderation in inflation to be partly due to the effects of the relative stability in the foreign exchange market, stemming from improved management, which promoted increased inflows. Against this backdrop, the Committee reiterated its commitment to sustain and deepen flexibility in the foreign exchange market to further enhance foreign exchange flow in the economy. The Committee, however, noted the protracted effects of high energy and transportation costs as well as other infrastructural constraints on consumer price developments and expressed hope that government will fast-track its reform agenda to address these legacy issues. The Committee noted that while responding to the current tight monetary policy stance, inflation still had a strong base effect which is expected to wane by August 2017.

Money market interest rates moved in tandem with the high level of liquidity in the banking system. The interbank call rate opened at 16.13 per cent on May 25, 2017 and closed at 4.43 per cent on June 29, 2017. However, the average inter-bank call rate during the period stood at 12.49 per cent. The movement in the net liquidity position reflected the effects of OMO, foreign exchange interventions, statutory allocation to state and local governments, and maturity of CBN Bills.
The Committee noted the improvements in the equities segment of the capital market as the All-Share Index (ASI) rose by 33.33 per cent from 25,516.34 on March 31, 2017, to 34,020.37 on July 21, 2017. Similarly, Market Capitalization (MC) rose by 32.84 per cent from N8.83 trillion to N11.73 trillion during the same period. Relative to end- December 2016, capital market indices rose by 26.59 and 26.81 per cent, respectively, reflecting growing investor confidence due to improvements in foreign exchange management. The Committee however, noted the seeming bubble in the capital market and cautioned on the utilization of the inflows.

Total foreign exchange inflows through the Central Bank of Nigeria (CBN) increased by 35.41 per cent in June 2017 compared with the previous month. Total outflows, on the other hand, decreased by 12.73 per cent during the same period, as a result of reduced CBN intervention in the interbank foreign exchange market, which also reduced TSA (dollar) payments balances by 61.4 per cent in the period under review. The positive net flows resulted in an improvement of gross external reserves to $30.30 billion at end-June 2017, compared with $29.81 billion at end-May 2017.

The Committee noted the emerging convergence between the bureau-de-change (BDC) and Nigeria Autonomous Foreign Exchange (NAFEX) segment rates and the stability of the average naira exchange rate at the inter-bank segment of the foreign exchange market during the review period.

2.0. Overall Outlook and Risks

Available forecasts of key macroeconomic indicators point to a fragile economic recovery in the second quarter of the year. The Committee cautioned that this recovery could relapse in a more protracted recession if strong and bold monetary and fiscal policies are not activated immediately to sustain it. Thus, the expected fiscal stimulus and non-oil federal receipts, as well as improvements in economy-wide non-oil exports, especially agriculture, manufacturing, services and light industries, all expected to drive the growth impetus for the rest of the year must be pursued relentlessly. The Committee expects that timely implementation of the 2017 Budget, improved management of foreign exchange, as well as security gains across the country, especially, in the Niger Delta and North Eastern axis, should be firmly anchored, to enhance confidence and sustainability of economic recovery.
The Committee identified the downside risks to this outlook to include weak financial intermediation, poorly targeted fiscal stimulus and absence of structural programme implementation.

3.0. The Considerations of the Committee
Notwithstanding the improved outlook for growth, the Committee assessed the implications of the uncertainties arising from the continued normalization of monetary policy by the US Fed and the implications of a strong dollar, the weak recovery of commodity prices, and the uncertainty of US fiscal policy. The Committee similarly evaluated other challenges confronting the domestic economy and the opportunities for achieving economic growth and price stability in 2017.

The Committee expressed satisfaction with the gradual but consistent decline in inflationary pressures in the domestic economy, noting its substantial base effect, continuous improvements in the naira exchange rate across all segments of the foreign exchange market, and considerable signs of improved investments inflows. The Committee welcomed the move by the fiscal authorities to engage the services of asset-tracing experts to investigate the tax payment status of 150 firms and individuals in an effort to close some of the loopholes in tax collection, towards improving government revenue. However, the Committee expressed concern about the slow implementation of the 2017 Budget and called on the relevant authorities to ensure timely implementation, especially, of the capital portion in order to realize the objectives of the Economic Recovery and Growth Plan. 

The MPC believes that at this point, developments in the macroeconomy suggest two policy options for the Committee: to hold or to ease the stance of monetary policy.
Against the backdrop of the outlook for the domestic and global economy; the enthusiasm around the base-effect which reduced inflationary pressures and the continuous relative stability in the naira exchange rate, there is need to maintain cautious optimism, given the potential ramification of a major deviation from the existing policy path. The Committee is not unmindful of the high cost of capital and its implications on the still ailing economy, which arguably necessitates an accommodating monetary policy stance. The MPC also noted the liquidity surfeit in the banking system and the continuous weakness in financial intermediation, but agreed on the need to support growth without jeopardizing price stability or upsetting other recovering macroeconomic indicators, particularly the relative stability in the foreign exchange market.
The MPC thinks that easing at this point would signal the Committee’s sensitivity to growth and employment concerns by encouraging the flow of credit to the real economy. It would also promote policy consistency and credibility of its decisions. Also, the Committee observed that easing at this time would reduce the cost of debt service, which is actually crowding out government expenditure. The risks to easing however, would show in terms of upstaging the modest stability achieved in the foreign exchange market, the possible exit of foreign portfolio investors as well as a resurgence of inflation following the intensified implementation of the 2017 budget in the course of the year. The Committee also reasoned that easing would further pull the real interest rate down into negative territory.
The argument for holding is largely premised on the need to safeguard the stability achieved in the foreign exchange market, and to allow time for past policies to work through the economy. Specifically, the MPC considered the high banking system liquidity level; the need to continue to attract foreign investment inflow to support the foreign exchange market and economic activity; the expansive outlook for fiscal policy in the rest of the year; the prospective election related spending which could cause a jump in system liquidity, etc.

The MPC expressed concern over the increasing fiscal deficit estimated at N2.51 trillion in the first half of 2017 and the crowding out effect of high government borrowing. While urging fiscal restraint to check the growing deficit, the Committee welcomed the proposal by government to issue sovereign-backed promissory notes of about N3.4 trillion for the settlement of accumulated local debt and contractors arrears. The Committee, however, advised the Management of the Bank to monitor the release process of the promissory notes to avoid an excessive injection of liquidity into the system thereby offsetting the gains so far achieved in inflation and exchange rate stability.

On the outlook for financial system stability, the Committee noted that, in spite of the resilience of the banking sector, the prolonged weak macroeconomic environment has continued to impact negatively on the sector’s stability. The MPC reiterated its call on the Bank to sustain its intensive surveillance of deposit money banksactivities for the purpose of promptly identifying and addressing vulnerabilities. The Committee also called on the DMBs to support economic recovery and growth by extending reasonably priced credit to the private sector.

4.0. The Committee’s Decisions
In consideration of the headwinds confronting the domestic economy and the uncertainties in the global environment, the Committee decided by a vote of 6 to 2 to retain the Monetary Policy Rate (MPR) at 14.0 per cent alongside all other policy parameters. Consequently, 6 members voted to retain the MPR and all other parameters at their current levels while two members voted to ease the stance of monetary policy. In summary, the MPC decided to:

(i) Retain the MPR at 14 per cent; 
(ii) Retain the CRR at 22.5 per cent; 
(iii) Retain the Liquidity Ratio at 30.00 per cent; and
(iv) Retain the Asymmetric corridor at +200 and -500 basis points around the MPR. "


Options Pinning and Other Edge Creating Games in Financial Markets

July 25, 2017 by EconMatters   Comments (0)

By EconMatters

We discuss the idea of Options Pinning in this video spurred on by a viewer e-mail, and talk about some of the other games that occur in financial markets with regards to the derivatives market which has continued to gain in overall volume and size over the last 15 years. When in doubt follow the money, if there is money to be made, edge creation strategies are sure to follow! I am sure if you go to your local dog track there are edge creating strategies operating in the background, human beings are always trying to create an edge. It seems this phenomenon is probably genetically encased in our evolutionary DNA from a strategically significant strategy tool.

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