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This week in monetary policy: Hungary, Turkey, Egypt and Ukraine

April 20, 2015 by CentralBankNews   Comments (0)

    This week (April 20 through April 25) central banks from four countries or jurisdictions are scheduled to decide on monetary policy: Hungary, Turkey, Egypt and Ukraine.

    Following table includes the name of the country, its MSCI classification, the direction of the latest decision, the date the new policy decision will be announced, the current policy rate, and the rate one year ago.

COUNTRY MSCI  LATEST              DATE   CURRENT  RATE         1 YEAR AGO
HUNGARY EM CUT 21-Apr 1.95% 2.50%
TURKEY EM UNCH. 22-Apr 7.50% 10.00%
EGYPT EM UNCH. 23-Apr 8.75% 8.25%
UKRAINE FM RAISE 23-Apr 30.00% 9.50%


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China Easing to Combat "The Darkest Period" of 2015

April 19, 2015 by EconMatters   Comments (0)

By EconMatters

PBOC Easing

China is now firmly in stimulus mode when PBOC announced on Sunday to cut the reserve-requirement ratio by 1% to 18.5% effective April 20.  This is the second reduction this year and the largest since November 2008 during the global financial crisis. The reserve-requirement ratio represents the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves in cash.

The new 18.5% ratio required by China is still higher than the typical global standard and than the current 10% cap by the U.S. Federal Reserve.  The PBOC also announced an additional 100 bps cut for rural credit cooperatives and village banks, as well as a 200 basis point cut for the China Agricultural Development Bank.

Graphic Source: WSJ, Feb. 2015

 
1Q15 The Darkest Period

Bloomberg quoted Larry Hu, head of China economics at Macquarie in Hong Kong call 1Q15 the “darkest period” this year for China's economy.  GDP was 7% in Q1, the slowest since 2009, while industrial production in March rose at the slowest rate since November 2008, and inflation turned negative for the first time since 2009.

Hu now expects further easing with an interest-rate cut within a month (PBOC has already cut interest rates twice since November), increasing infrastructure spending and a relaxation of home-purchasing rules.

My connections in China and Hong Kong indicated that the new crackdown by Xi on corruption and state largess has put a fairly large portion of the nation's businesses (in mainland and Hong Kong) once catering to the 'elite' rich class in China out of commission. This is one of the major contributing factors to the nation's slowing growth.

$100 Billion Liqudity

WSJ estimated that the reduction in bank reserve-requirement-ratio could freed up more than $100 billion for China's banks to lend.  This suggests increasing liquidity compounding the social economic issue of wealth gap (which should be Beijing's primary concern), similar to the 3 QE programs by the U.S. Fed.

Shanghai Compositd Index 
Chart Source: Yahoo Finance
A Desperate Move

This latest move seems a pretty desperate quick fix to the pessimistic market sentiment as it came just 2 days after China relaxed the short-selling rules leading to its stock-index futures crashed almost 7% when many retail brokerage accounts of Chinese mom-and-pops rushing for the exit (5.75 million new broker accounts were opened by retail investors in Shanghai and Shenzhen during the month of March).  This is a firm indication of serious structural problems within China's economic and financial system.

Economists think this decision could be a prelude to more easing measures to counter further slowdown in growth this year, which could only lead to a bigger bubble, and a more disastrous crash somewhere down the road.    

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Slight Production Declines Hide Bigger Oil Storage Issues

April 17, 2015 by EconMatters   Comments (0)

By EconMatters

Storage Builds

Everyone this week focused on the slight production declines that this was a sign to go long oil, but what seemed to go under the radar was another build in both Cushing and the Gulf Coast storage hubs. Cushing added another 1.3 million barrels to weekly storage and stands at 61.5 million barrels. The Gulf Coast added another 600 thousand barrels to storage and stands at 237 million barrels. By comparison Cushing had 26.8 million barrels in storage this time last year, and the Gulf Coast had 207.2 million barrels in storage a year ago.

Refinery Utilization Rate 92%

This is with refineries operating at 92.3 percent of capacity which is robust and near the top end of this metric. We also have about 17.6 million more barrels of Gasoline in storage versus this time last year, and 17 million more barrels of Distillate stocks in storage this year versus last year.
Artificial Demand

Analysts have pointed out the increased demand for products, and this makes sense given lower prices, but the numbers are inflated because much of the demand is artificial by turning the oil into gasoline and distillates and just storing the products in another form of storage. It isn`t as if demand is so robust that we are lower in product inventories versus this time last year, in fact it is just the opposite.

Imports

The only reason total inventories didn’t have another 10 million build this past week was because imports were down 1.12 million barrels per day versus this same period last year. This would add an additional 7.9 million barrels to last week’s 1.3 million barrels build bringing the total to 9.2 million barrels. So the market got a respite this past week, but with OPEC and Saudi Production at record levels as witnessed by the latest readings, traders may not be able to rely on lower import numbers as the norm going forward into the summer driving season.
Oil Drawdowns

Moreover, despite lower import numbers and the refinery capacity utilization rate above 92% and a slight drop in US Production both Cushing and the Gulf Coast storage hubs both added oil to storage facilities. I am not sure we are out of the storage capacity constraints problem quite just yet! The Midwest corridor which fuels the Gulf Coast Refinery trade for exporting refined products to other countries is still building in storage despite the robust 92% utilization rate. We would expect oil drawdowns in this region given a 92% refinery run rate, so something to pay attention to going forward.

The Race

The race seems to be slight US Production declines (and we mean slight .02) versus rapidly filling storage facilities along the Midwest Corridor. Does it really matter if there are slight production declines but Cushing continues to add to storage facilities, and ramps up against capacity limits? 

The “Fundamentals” Don`t Matter in an ‘Electronic Market Place’

Of course none of this matters in the financial markets because anybody that participates regularly in financial markets understands that powerful players who have the ability to move markets will do whatever they want whenever they want until reality forces them to do otherwise, i.e., the fundamentals are so contrary to their market making movements that stronger forces take the other side or they finally throw in the towel and close their substantial positions.

Right around the April WTI Futures expiration last month in March some players decided they were going to make at least $15 dollars a barrel in Oil, that`s $15,000 per contract, consider WTI routinely trades 400,000 contracts on a daily basis, and you get the picture. This isn`t about oil fundamentals, the electronic oil markets are about one thing making money. And these players deemed they could make more money moving oil up than down in the given time frame. The fundamentals actually deteriorated in the oil storage metrics, Global Production remained at record levels, and China printed a (cough, cough) 7% GDP number.
Speculators

This is part of why oil will stay lower for longer because oil speculators will always keep prices above the fundamentals, this is how we got into the supply glut problem in the first place. Every time there is some slight Middle East disturbance which never affects actual overall supply in the market, or traders are pushing oil up along with equities, or some pipeline needs to be repaired, or the dollar is weak, or the Federal Reserve provides more stimulus, or Goldman puts out a bullish report on oil; prices ramp like no tomorrow. Even though none of these people actually use the commodity, they don`t ever take delivery, they just borrow using carry trades and click some buttons with the goal of making money like a Professional Gambler; all the time being completely divorced from the fundamentals of supply and demand in the marketplace!
US Producers Hang On

So every time speculators push the price up in oil, the producers can just go and hedge future production along the curve, and stay in business another year producing as much as they possibly can crank out into the market. Unfortunately for the OPEC players, getting rid of US Production isn`t as easy as they thought! These small producers just issue more shares, raise cash to fund their debt obligations, wait for an artificial speculative ramp in oil prices, and hedge some more production on the forward curve. Shoot reduce some overhead and costs, renegotiate some contracts, improve drilling efficiencies and there is no telling how long these small Producers can hang in there! This is why speculation in a long-oriented market which oil is by nature because of the synergistic ties to equities, financial markets in general, and oil being a needed commodity will always price ahead of the fundamentals.
The Oil Market should be a “Deliverable Market”

If the oil market was a deliverable market, supply and demand with regard to price in the futures market would be much more aligned, and this oil glut would never have occurred to this degree of market imbalance in the first place. Until price gets to a point and stays at a point for a significant length of time to put producers out of business altogether there will remain a supply and demand imbalance in the oil markets. I am afraid $60 oil isn`t low enough to put any large dent in the global production supply of oil coming to market, if anything it is bringing more supply to market as producers hang on by producing more oil to help mitigate lower prices. Producers need to be put out of business, and I am not just talking about US Shale producers. OPEC, Russia and the Global Oil supply chain got fat and happy on the BRIC Super growth cycle and $100 a barrel oil for a decade. The world just doesn’t need that much oil, China has run up against infrastructure constraints, real-estate bubbles, pollution problems and the law of large numbers – they are no longer building the equivalent of an entire small city every month.
7 Years of overpriced Oil Market

I imagine we will experience spikes in the oil market with lower highs until equilibrium between supply and demand becomes more balanced, but we are nowhere near there yet, speculators are just doing what they do today in the era of modern electronic markets. By my analysis prices have been well above the fundamentals of supply and demand since 2008 and the financial crisis, that`s 7 long years of a poorly priced asset compared with the underlying fundamentals of the commodity. Six months of lower prices isn’t going to fix the market imbalances, and the longer speculators push up the prices of oil on the latest headline, or players want to take a $15 a barrel piece out of the market and add it to their returns, this just prolongs the inevitable. The oil market remains an over supplied market.
Crazy Oil Economics

The five year averages for oil stored just in the US alone have been rising for over a decade, we have almost doubled our amount of oil stored. For example, in February of 2003 we had 270 million barrels in storage; today we have almost 500 million barrels in storage facilities not counting the Strategic Petroleum Reserves. Furthermore, prices were $33 a barrel in February 2003, welcome to the wonderful world of electronic markets. Accordingly in 12 years we have added 214 million barrels to storage facilities, and even after the 50% plus reduction in oil prices, the price of oil is still $24 a barrel higher today!
Efficient Market Hypothesis is a joke

Financial markets really have become complete mockeries of their intended and original purpose. Remember the original goal of the commodities futures market in the days of farmers hedging future production? They are so easily mispriced, and like the oil market can stay poorly priced for over a decade before the market fundamentals force the hand of speculators to adjust money flows. Speculators in the oil market are part of the reason the market is so poorly balanced today, and as long as 99.9% of all oil futures contracts never have to commit to actually taking delivery of the physical commodity, this market imbalance will remain for some time.

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Chile maintains rate, still keeping eye on high inflation

April 16, 2015 by CentralBankNews   Comments (0)

    Chile's central bank maintained its monetary policy rate at 3.0 percent, as expected, and said inflation remains high and it "will continue to monitor developments with particular attention."
    The Central Bank of Chile, which has kept rates steady this year after cutting them by 150 basis points last year to stimulate economic activity, acknowledged that total inflation in March turned out to be lower than expected but not the underlying inflation rate.
    Chile's consumer price inflation rate eased to 4.2 percent in March from 4.4 percent in February while the core inflation rate only declined to 5.5 percent from February's 5.7 percent.
    The central bank targets inflation of 3.0 percent within a tolerance range of 2.0 to 4.0 percent, and medium-term inflation expectations remain around 3.0 percent.
    "Future changes to the MPR will depend on the implications of the internal and external macroeconomic conditions on the prospects for inflation," the bank said.
    In its latest monetary policy report, the central bank raised its inflation forecast for this year to 3.6 percent from a previous estimate of 2.8 percent, and the core inflation forecast to 3.4 percent from 2.8 percent, with the depreciation of the peso the main reason for high inflation.
    The central bank maintained its forecast for Chile's economic growth this year in a range of 2.5 to 3.5 percent, saying the recovery should accelerate towards the end of the year.
    Chile's Gross Domestic Product expanded by 0.9 percent in the fourth quarter of 2014 from the third quarter for annual growth of 1.82 percent, up from 1.0 percent.
    The central bank said today recent data are consistent with its baseline policy report, and as expected, investments are less dynamic but the unemployment rate has falling slightly although job creation is low.
    The central bank also noted that prices of basic products were mixed, with prices of copper, petroleum and petroleum products rising.

    www.CentralBankNews.info

   
   

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Sri Lanka cuts rate 50 bps, to continue easy stance

April 16, 2015 by CentralBankNews   Comments (0)

    Sri Lanka's central bank cut its main policy rates by 50 basis points, a surprise to financial markets,  and said a "relaxed monetary policy stance will also be pursued in months to come until concerns over inconsistent behavior of market interest rates are addressed sufficiently to facility the economic growth further in a  low single digit inflation environment."
    The Central Bank of Sri Lanka, which had maintained rates since a cut in October 2013, said inflation is projected to remain in low mid-single digit levels this year but the current market interest rates are inconsistent with low inflation and investments needed to boost economic growth.
    "Therefore, there is a further leeway to continue relaxation of monetary policy," the central bank said in a statement on April 15, adding that it has a mix of monetary tools available to fine-tune its policy if there is any worrying impact from the rate cut on other economic variables.
    Sri Lanka's consumer price inflation rate fell to 0.1 percent in March from 0.6 percent in February while the Average Weighted Prime Lending Rate (AWPR) was 7.14 percent on April 10.
    The central bank cut the benchmark Standing Deposit Facility Rate (SDFR) to 6.0 percent from 6.50 percent and the Standing Lending Facility Rate (SLFR) to 7.50 percent from 8.0 percent.
    The decision by the central bank's board was taken while its governor, Arjuna Mahendran, is on leave during an investigation by a committee over allegations that one of his family members benefitted unduly from a sale of treasury bonds.

    The Central Bank of Sri Lanka issued the following statement:

"The Monetary Board at its regular meeting held on 11 April 2015 reviewed the current monetary policy stance and underlying macroeconomic conditions. Accordingly, the Monetary Board made following observations:
  •   Headline inflation, on a year-on-year (y-o-y) basis, declined to 0.1 per cent in March 2015 from 0.6 per cent in February 2015. Following the same trend, annual average inflation also declined to 2.5 per cent from 2.9 per cent recorded in the previous month. Significant decline in inflation in March 2015 reflects primarily the first round impact of downward price revisions of domestic energy prices as well as the administratively reduction in prices of a number of consumer items. Meanwhile, core inflation stood at 1.4 per cent on y-o-y basis and 3.0 per cent on annual average basis in March 2015.

  •   As expected, a sustained increase in credit granted by commercial banks to the private sector was observed in the past few months. The growth of the private sector credit rose to 12.6 per cent (y-o-y) or Rs. 24.5 billion in absolute terms in February 2015. Reflecting the developments in domestic credit, broad money (M2b) increased by 12.3 per cent (y-o-y) in February 2015, remaining well within the underlying monetary projections. 

  •   The external sector remained resilient with foreign currency inflows from export proceeds, workersremittances, and tourist earnings as well as inflows to the government securities and portfolio investments supporting maintenance of the exchange rate against US Dollar without an unhealthy volatility on the strength of official foreign reserves increasing from US dollars 6.8 billion as at end March 2015 to US dollars 7.0 billion at present. The official reserves are projected to strengthen further with the proceeds pending from the currency swap arrangement between Sri Lanka and India and other identified regular investment inflows to a level of official reserves comfortable for supporting the exchange rate stability in the immediate future. Overall, the outlook in the balance of payments in 2015 remains favourable with continued inflows expected from current account related transactions, significantly lower expenditure on petroleum imports and receipts to the government, the banking sector and other private corporates.

  •   Current behaviour of market interest rates is viewed to be inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year. Inflation is projected to remain at low mid-single digit level in 2015. Therefore, there is a further leeway to continue relaxation of monetary policy, primarily through a reduction in policy interest rates of the Central Bank to encourage economic activities by enhanced credit flows and investments due to lower cost of funds and behaviour of market interest rates consistent with economic growth outlook. If any of subsequent interim effects of further monetary relaxation are found to be of concern over other economic variables, a mix of other monetary policy tools is available to fine- tune such effects towards achievement of current objectives of the monetary policy.

    Taking the above observations into consideration, the Monetary Board decided to reduce the policy interest rates by 50 basis points. Accordingly, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank are reduced to 6.00 per cent and 7.50 per cent, respectively, with effect from today (15 April 2015). The monetary policy tool primarily adopted by the Monetary Board will continue to be the policy interest rates announced to the market with the support of other monetary policy tools. The relaxed monetary policy stance will also be pursued in months to come until concerns over inconsistent behaviour of market interest rates are addressed sufficiently to facilitate the economic growth further in a low single digit inflation environment.

    The date for the release of the next regular statement on monetary policy would be announced in due course. "

     www.CentralBankNews.info

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More Thoughts on the Current Oil Market

April 16, 2015 by EconMatters   Comments (0)

By EconMatters

WTI surged to close at $56.01 a barrel on Wednesday, while Brent closed at $62.86 after the US crude oil inventories showed a 'less-than-expected increase'. The latest weekly inventory (week ending April 10) from EIA showed an increase of 1.3 million barrels, much less than the 10.9 million barrels of build from the previous week. The report also showed that total motor gasoline inventories decreased by 2.1 million barrels, while distillate stockpiles rose by 2.0 million barrels.

Chart Source: Nasdaq.com Apr. 15, 2015


Inventory Build Is A Buy Signal?

I'm not sure exactly when and how market players started equating a 'less-than-expected oil inventory build' with a buy signal. This to me merely suggests a slowdown of crude oil production increase, hardly a reason to buy up the market.

Furthermore, the inventory build in distillate, which is used primarily in industrial activities, seems like a sign of weaker broader U.S. economy, which could mean the gasoline inventory would start to build again.

Shale Output To See Its First Decline in 4 Years

Indeed, the U.S. shale oil industry is starting to feel the pinch from lower oil price, down ~60% since 2H14.  Another EIA report already predicted U.S. shale will see its first monthly production drop in 4 years this May.

Among the five major U.S. shale oil regions, the Niobrara formation, northeast of Denver CO, will lead the month-over-month decline, followed by the Eagle Ford shale in Texas and the Bakken formation in North Dakota, while output from the Permian in Texas and the Utica in Ohio is expected to rise in May.

Oil rig count has been dropping like a rock since 2H14 when oil market turned bearish , and it looks like well inventory has been sufficiently depleted to finally make a dent on production.  

% Change Since January 3, 2014
Chart Source: BofA via Business Insider, April 14, 2015

Shale Drillers Are More Resilient Than Expected

However, the advance in oilfield and oil and gas upstream technology has brought tremendous increase in productivity and efficiency in the U.S. shale industry, which means shale drillers, now in survival mode, are more resilient than most people (including Saudi) originally thought.  If oil prices stabilize at or above current levels, expect drillers to move in again, rig count and production would quickly recover.    

OPEC Still Flooding The Market

So overall, the signs are mixed in the U.S. oil market.  Outside of U.S., geopolitical tension is still high in the Middle East -- escalating fighting in Yemen, and Iran nuclear deal is still pending.  Meanwhile, almost like repenting the oil geopolitical premium put on by a Saudi-led campaign of air strikes against Iran-allied Houthi rebels at Yemen, OPEC pumped 31.02 million barrels per day in March, near a two-year high, pressuring any positive sign from demand or anywhere, for that matter.  In a way, Saudi is trying to delay or put a stop to the ongoing energy switch and substitute due to decades of high oil prices.  

Iran Could Replace U.S. Shale Cutback

The production cutback by U.S. shale could be interpreted as a positive sign for oil prices in the short term, but the loss from U.S. shale could easily be offset by the increase in Iranian oil export since Iran nuclear deal is expected to have a formalized plan by mid-year.

China Sputters

For the longest time, China's has been one popular excuse cited by Oil Bulls.  Yes, China was on its way to replace the U.S. as the world's largest oil consuming nation, but the growth engine is now sputtering which was confirmed when China saw its economic growth slow to 1.3% in 1Q15, compared with growth of 1.5% in the previous three quarters.  

$900 Bn Wealth Transfer by Cheap Oil 


Lower energy prices means lower energy costs for the net oil importing countries while many oil exporting countries inside and outside OPEC are hurting. The IMF estimated in December that the oil price crash could bring in 0.7% GDP growth worldwide. Bloomberg crunched the numbers and came up with a map (above) so we know who gets what and how much.  According to Bloomberg,

Net oil importers like the U.S., Europe, and Asia are getting a nearly $900 billion economic stimulus from cheaper oil prices.  The Middle East and Russia are the ones getting stuck with the bill.  

In other words, cheaper oil has initiated a wealth transfer effect of about $900 billion a year between net oil importers and oil exporters reversing decades of historical trend.  The U.S. along gets $180 billion, and Europe and Asia (i.e. China) are even bigger beneficiaries of this wealth transfer by cheap oil.    

Lower for Longer?

So in the grand scheme of things, I agree that oil prices, just like rig count, should become 'lower for longer" until a supply or demand shock triggered by, for example, another financial crisis, or shale oil becomes depleted / dried-up (shale typically has accelerated declining production curve, so this scenario is quite plausible). Nevertheless, the wild card would be the OPEC meeting this June amid mounting pressures for some kind of coordinated production cut.      

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Poland maintains rate, sees continued deflation

April 15, 2015 by CentralBankNews   Comments (0)

    Poland's central bank maintained its monetary policy reference rate at 1.50 percent, as expected, saying deflation will continue in coming quarters due to the sharp fall in commodity prices but stable economic growth, low interest rates, a good situation in the labor market and an expected recovery in the euro area should limit the risk of inflation remaining below target in the medium term.
    The National Bank of Poland (NBP), which said it was concluding its monetary easing cycle when it cut the policy rate by 50 basis points last month, added that there was no demand pressure in the economy right now and combined with low commodity prices and very low inflation expectations, this was contributing to a continuation of deflation.
   In February Poland's consumer prices fell by 1.6 percent, the eight consecutive month of deflation, and the steepest drop in at least 30 years due to the fall in fuel and food costs.
    But economic growth remains stable, the NBP said, with Gross Domestic Product in the first quarter of this year probably slightly higher than the fourth quarter of last year as domestic demand continues to rise, fueled by good financial conditions and an improving labour market.
    Poland's GDP expanded by 0.7 percent in the fourth quarter from the third quarter of 2014 for annual growth of 3.1 percent, down from 3.3 percent. The unemployment rate eased to 11.7 percent in March from 12.0 percent in February and January.
    Last month the NBP forecast 2015 inflation of minus 1.0 to 0.0 percent and 2016 inflation of minus 0.1 percent to 1.8 percent. The NBP targets inflation at midpoint of 2.5 percent, within a tolerance range of 1.5 to 3.5 percent. Inflation has been below its lower bound since February 2013.

    The National Bank of Poland issued the following statement:


"The Council decided to keep the NBP interest rates unchanged at:
reference rate 1.50% on an annual basis; lombard rate 2.50% on an annual basis;
deposit rate 0.50% on an annual basis;
rediscount rate 1.75% on an annual basis.

Growth of global economic activity remains moderate, with a slight acceleration expected in 2015. In the euro area economic growth remains slow compared to other developed economies, although incoming information signals gradual improvement of economic conditions. In the United States, despite the recent deterioration of some indicators, recovery is expected to continue. In turn, economic outlook for Poland’s eastern trading partners, i.e. Russia and Ukraine, remains unfavourable.

After a sharp and long-lasting fall, global commodity prices have stabilised recently. This has weakened disinflationary forces in many countries. However, global price growth remains very low, and in the majority of European economies it is negative. In these conditions, major central banks are keeping interest rates close to zero and the ECB has launched government bond purchases. This has contributed to some strengthening of the zloty.

In Poland, economic activity remains stable, with GDP growth in 2015 Q1 probably slightly higher than in 2014 Q4. Rising domestic demand fuelled by improving labour market situation, good financial condition of enterprises and stable expansion in lending, remains the main driver of economic growth. In turn, the relatively low, although accelerating, growth in demand on the part of Poland’s main trading partners and the continued uncertainty about the prospects for demand are factors limiting economic activity in Poland.

Amid moderate growth in demand and gradual improvement in labour market conditions, there is no demand pressure in the economy, and nominal wage growth remains moderate. Combined with low commodity prices, this is contributing to continuing deflation, both in terms of consumer and producer prices. Alongside that, inflation expectations continue to be very low.

In the opinion of the Council, in the coming quarters price growth will remain negative, mainly due to the previously observed sharp fall in commodity prices. At the same time, the adjustment of monetary policy in March with continuing stable economic growth, an expected recovery in the euro area and good situation in the domestic labour market reduce the risk of inflation remaining below the target in the medium term. Therefore, the Council decided to keep NBP interest rates unchanged."

    www.CentralBankNews.info

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Canada holds rate, risks to inflation roughly balanced

April 15, 2015 by CentralBankNews   Comments (0)

    Canada's central bank maintained its target for the overnight rate at 0.75 percent, as widely expected, saying the "risks to the outlook for inflation are now roughly balanced," a slight chance in wording from last month when it said the risks around inflation were "more balanced" following the surprise 25 basis points rate cut in January.
    The Bank of Canada (BOC) said the negative impact of the decline in oil prices on economic activity was now appearing even sooner than it expected in January though looking at the next two years the overall drag on the economy will be the same.
     The forecast for economic growth this year was trimmed to 1.9 percent from January's forecast of 2.1 percent, mainly because investments will be lower, but for 2016 the growth estimate was revised up to 2.5 percent from 2.4 percent as exports jump. For 2017 the BOC forecast 2.0 percent growth.
    "The Canadian economy is estimated to have stalled in the first quarter of 2015," said the BOC, adding that the shift toward stronger non-energy exports, rising investment and improving labor markets was fueled by easier financial conditions and improving U.S. demand.
    With the effects of the oil price shock waning, Canada's economic growth is projected to rebound in the second quarter of this year. In the fourth quarter of 2014 Gross Domestic Product rose an annual 2.63 percent.
    The BOC's forecast for 2015 is more pessimistic than that from the International Monetary Fund, which this week cut its 2015 growth forecast to 2.2 percent from its January forecast of 2.3 percent. However, for 2016 the BOC is more optimistic as the IMF only forecast growth of 2.0 percent, down from its January forecast of 2.1 percent.
    Exports from Canada's manufacturing sector - such as aircraft, machinery and pharmaceuticals - are benefitting from the decline in the Canadian dollar against the U.S. dollar. However, the flip side of a lower Canadian dollar is that it costs more to borrow in U.S. dollars, hitting investments.
    The Canadian dollar, known as the loonie, tumbled against the U.S. dollar in the second half of last year, not only reflecting the strength of the U.S. economy, but also confirming the Canadian currency's historical relationship with oil prices.
    In its monetary policy report, the BOC said the Canadian dollar was assumed to be close to its recent average level of 79 cents over the projection horizon compared with 86 cents assumed in January. Today the loonie was at 80 U.S. cents compared with 86 cents at the start of the year.

     Weak economic activity in the first three months of this year has widened the economy's output gap, putting additional downward pressure on inflation. However, the expected recovery in growth means the output gap will be back in line with the forecast so the effect on core inflation from the lower dollar and the output gap will continue to offset each other, the BOC said.
     In February Canada's headline inflation rate was unchanged at 1.0 percent but as the economy reaches full capacity around the end of 2016, the BOC expects total and core inflation to be close to its 2.0 percent target. Total consumer price inflation is forecast to reach 1.4 percent by the fourth quarter of this year and then 2.0 percent by the end of 2016.  
   
    The Bank of Canada issued the following statement:

"The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.
Total CPI inflation is at 1 per cent, reflecting the drop in consumer energy prices. Core inflation has remained close to 2 per cent in recent months, as the temporary effects of sector-specific factors and pass-through of the lower Canadian dollar have offset the disinflationary forces from slack in the economy.
The Bank expects global growth to strengthen and average 3 1/2 per cent per year over 2015-17, in line with the projection in the January Monetary Policy Report (MPR). This is in part because many central banks have eased monetary policies in recent months to counter persistent slack and low inflation, as well as the effect of lower commodity prices in some cases. At the same time, economies continue to adjust to lower oil prices, which have fluctuated at or below levels assumed in the January MPR. Strong growth in the United States is expected to resume in the second quarter of 2015 after a weak first quarter.
The Canadian economy is estimated to have stalled in the first quarter of 2015. The Bank’s assessment is that the impact of the oil price shock on growth will be more front-loaded than predicted in January, but not larger. The ultimate size of this impact will need to be monitored closely. Underneath the effects of the oil price shock, the natural sequence of stronger non-energy exports, increasing investment, and improving labour markets is progressing. This sequence will be bolstered by the considerable easing in financial conditions that has occurred and by improving U.S. demand. As the impact of the oil shock on growth starts to dissipate, this natural sequence is expected to re-emerge as the dominant trend around mid-year. Real GDP growth is projected to rebound in the second quarter and subsequently strengthen to average about 2 1/2 per cent on a quarterly basis until the middle of 2016. The Bank expects real GDP growth of 1.9 per cent in 2015, 2.5 per cent in 2016, and 2.0 per cent in 2017.
The very weak first quarter has led to a widening of Canada’s output gap and additional downward pressure on projected inflation. However, the anticipated recovery in growth means that the output gap will be back in line with its previous trajectory later this year. Consequently, the effects on core inflation of the lower dollar and the output gap will continue to offset each other. As the economy reaches and remains at full capacity around the end of 2016, both total and core inflation are projected to be close to 2 per cent on a sustained basis.
Risks to the outlook for inflation are now roughly balanced and risks to financial stability appear to be evolving as expected. The Bank judges that the current degree of monetary policy stimulus remains appropriate and therefore is maintaining the target for the overnight rate at 3/4 per cent."

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ECB maintains rates, lower euro FX helps ease risks

April 15, 2015 by CentralBankNews   Comments (0)

    The European Central Bank (ECB) maintained its key interest rates, including the benchmark refinancing rate at 0.05 percent and a negative deposit rate of minus 0.20 percent, and said data to March continued to point toward further positive economic momentum since the end of last year.
    The ECB, which embarked on full-blown quantitative easing on March 9 by starting its monthly purchases of 60 billion euros, added that the risks surrounding the economic outlook remain on the downside but had become more balanced due to its monetary policy, "the fall in oil prices and the lower euro exchange rate."
    ECB President Mario Draghi's characterization of the risks facing the troubled euro area as more balanced is a slightly more upbeat view than in March when he said the risks had diminished following the recent easing by the ECB and the fall in oil prices.
    Last month Draghi said exports from the euro area "should benefit from improvements in price competitiveness and from the global recovery," but today he was much more direct when speaking about the depreciation of the euro, saying "demand for euro area exports should benefit from improvements in price competitiveness."
    The euro has been depreciating against the rising U.S. dollar since May 2014 and hit lows just below 1.05 in mid-March from around 1.40 before rebounding slightly in growing optimism over the prospects that the euro area exports and thus growth would benefit from the low euro.
    Today it was quoted at 1.066 to the dollar, down 11 percent this year.
    The euro area's Gross Domestic Product expanded by 0.3 percent in the fourth quarter of 2014 from the third quarter for a 0.9 percent increase from the fourth quarter of 2014, up from a 0.8 percent expansion in the third quarter of 2014. Unemployment was unchanged at 11.4 percent in February and January, a marginal improvement from 11.5 percent in the previous six months straight.
    Consumer price inflation in March was minus 0.1 percent, an improvement from minus 0.3 percent in February and minus 0.6 percent in January.

    The European Central Bank issued the following introductory statement to its press conference by its president, Mario Draghi"

"Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference.
Based on our regular economic and monetary analyses, and in line with our forward guidance, we decided to keep the key ECB interest rates unchanged. 
As regards non-standard monetary policy measures, on 9 March we started purchasing euro-denominated public sector securities as part of our expanded asset purchase programme, which also comprises purchases of asset-backed securities and covered bonds. Purchases are intended to run until the end of September 2016 and, in any case, until we see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term. When carrying out its assessment, the Governing Council will follow its monetary policy strategy and concentrate on trends in inflation, looking through unexpected outcomes in measured inflation in either direction if judged to be transient and to have no implication for the medium-term outlook for price stability. 
The implementation of our asset purchase programmes is proceeding smoothly, with volumes in line with the announced figure of €60 billion of securities per month. In addition, there is clear evidence that the monetary policy measures we have put in place are effective. Financial market conditions and the cost of external finance for the private sector have eased considerably over the past months and borrowing conditions for firms and households have improved notably, with a pick-up in the demand for credit. 
Looking ahead, our focus will be on the full implementation of our monetary policy measures. Through these measures, we will contribute to a further improvement in the economic outlook, a reduction in economic slack and a recovery in money and credit growth. Together, such developments will lead to a sustained return of inflation towards a level below, but close to, 2% over the medium term and will underpin the firm anchoring of medium to long-term inflation expectations. 
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP in the euro area rose by 0.3%, quarter on quarter, in the last quarter of 2014. Domestic demand, especially private consumption, continued to be the main driver behind the ongoing recovery. The latest economic indicators, including survey data up to March, suggest that the euro area economy has gained further momentum since the end of 2014. Looking ahead, we expect the economic recovery to broaden and strengthen gradually. Domestic demand should be further supported by ongoing improvements in financial conditions, as well as by the progress made with fiscal consolidation and structural reforms. Moreover, the lower level of the price of oil should continue to support households’ real disposable income and corporate profitability and, therefore, private consumption and investment. Furthermore, demand for euro area exports should benefit from improvements in price competitiveness. However, the euro area recovery is likely to continue to be dampened by the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms.
While remaining on the downside, the risks surrounding the economic outlook for the euro area have become more balanced on account of the recent monetary policy decisions, the fall in oil prices and the lower euro exchange rate.
According to Eurostat’s flash estimate, euro area annual HICP inflation was -0.1% in March 2015, up from -0.3% in February and -0.6% in January. This pattern largely reflects an increase in oil prices in euro terms since mid-January. On the basis of the information available and current oil futures prices, annual HICP inflation is expected to remain very low or still negative in the months ahead. Supported by the favourable impact of our monetary policy measures on aggregate demand, the impact of the lower euro exchange rate and the assumption of base effects and somewhat higher oil prices in the years ahead, inflation rates are expected to increase later in 2015 and to pick up further during 2016 and 2017. 
The Governing Council will continue to monitor closely the risks to the outlook for price developments over the medium term. In this context, we will focus in particular on the pass-through of our monetary policy measures, as well as on geopolitical, exchange rate and energy price developments.
Turning to the monetary analysis, recent data confirm the gradual increase in underlying growth in broad money (M3). The annual growth rate of M3 increased to 4.0% in February 2015, up from 3.7% in January. Annual growth in M3 continues to be supported by its most liquid components, with the narrow monetary aggregate M1 growing at an annual rate of 9.1% in February.
Loan dynamics also gradually improved further. The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) was -0.4% in February, after -0.9% in January, continuing its gradual recovery from a trough of -3.2% in February 2014. In this respect, the April 2015 bank lending survey confirms that improvements in lending conditions support a further recovery in loan growth, in particular for firms. Despite these improvements, the dynamics of loans to non-financial corporations remain subdued and continue to reflect the lagged relationship with the business cycle, credit risk, credit supply factors and the ongoing adjustment of financial and non-financial sector balance sheets. The annual growth rate of loans to households (adjusted for loan sales and securitisation) increased further to 1.0% in February 2015, after 0.9% in January. The monetary policy measures we have put in place should support further improvements both in borrowing costs for firms and households and in credit flows across the euro area.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirms the need to implement firmly the Governing Council’s recent decisions. The full implementation of all our monetary policy measures will provide the necessary support to the euro area recovery and bring inflation rates towards levels below, but close to, 2% in the medium term.
Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance contributes to supporting economic activity. However, in order to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively. Given continued high structural unemployment and low potential output growth in the euro area, the ongoing cyclical recovery should be supported by effective supply-side measures. In particular, in order to increase investment, boost job creation and raise productivity, both the implementation of product and labour market reforms and actions to improve the business environment for firms need to gain momentum in several countries. A swift and effective implementation of these reforms will not only lead to higher sustainable growth in the euro area but will also raise expectations of permanently higher incomes and encourage both households to expand consumption and firms to increase investment today, thus reinforcing the current economic recovery. Fiscal policies should support the economic recovery while remaining in compliance with the Stability and Growth Pact. Full and consistent implementation of the Pact is key for confidence in our fiscal framework. In view of the necessity to step up structural reform efforts in a number of countries, it is also important that the macroeconomic imbalance procedure is implemented effectively in order to address the excessive imbalances as identified in individual Member States.

We are now at your disposal for questions."

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Namibia holds rate, still concerned over luxury imports

April 15, 2015 by CentralBankNews   Comments (0)

    Namibia's central bank maintained its benchmark repo rate at 6.25 percent while assessing the impact of the February rate cut, but remains concerned over the high growth in installment credit that is being used by households to finance the import of unproductive luxury goods and thus putting additional pressure on the country's international reserves.
    The Bank of Namibia, which raised its rate by 25 basis points on Feb. 18 following rate rises totaling 50 points in 2014, welcomed a recent decline in the growth of household overdraft loans.
   However, it noted that installment credit to households was up by 18.7 percent on average over the last six months to February, only slightly down from an 18.9 percent rise in the second half of 2014.
    Namibia's stock of foreign reserves declined to 15.7 billion Namibian dollars as of April 10 from N$16.0 billion at the end of January, but the central bank said this remained "adequate" to maintain the currency's one-to-one link to the South African rand.
    "The MPC, however, remains concerned that the growing import bill is unsustainable; particularly the increase importation of unproductive goods, such as luxury vehicles," the bank said.
   Namibia's current account deficit widened to N$9.6 billion in 2014 from 5.0 billion the previous year, rising to 6.7 percent of Gross Domestic Product from 4.0 percent in 2014, due to high imports.
    Economic growth looks to have improved during the first two months of the year, driven by robust public and private construction, strong sales in wholesale and retail trade, and growth in diamond mining and manufacturing.
    The central bank confirmed its forecast for 2015 growth of 5.6 percent, up from 2014's 5.3 percent.
    Namibia's inflation rate continued to decline to 3.4 percent in March from 3.6 percent in February, mainly due to lower increases in transport prices along with housing, water, electricity and other fuel.
    "Overall annual inflation is, however, expected to remain stable," the central bank said.
   
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