Aurelia Butler

WARSAW (Reuters) – Poland’s central bank cut its main interest rate by 75 basis points to 6.00% on Wednesday, in a shock decision ahead of October elections that sent the zloty currency tumbling against the euro.A narrow majority of analysts polled by Reuters had expected a 25-bps cut, but markets and economists alike were blindsided by the scale of the easing delivered. The zloty plunged 1.5% to its weakest level since May and banking stocks dropped over 5%.The National Bank of Poland (NBP) said it took the decision because it expects inflation to return to target faster than originally expected.”In the Council’s assessment, recently incoming data point to a weaker demand pressure than previously expected, which will contribute to a faster return of inflation to the NBP inflation target,” it said in a statement.It said that the adjustment to interest rates would be “conducive to meeting the NBP inflation target in the medium term”.NBP Governor Adam Glapinski had previously signalled that a rate cut could come in September if inflation fell to single digits.While inflation continued to fall in August, it fell slightly short of this target, coming in at 10.1%, according to a flash estimate. Economists lined up to warn of the inflationary risks of such a drastic shift in monetary policy.”We have already said that it is too early for a rate cut, and certainly such an aggressive rate cut, when the prospects (of a slowdown) in inflation are still distant,” said Piotr Bielski, director of the economic analysis department of Santander (BME:SAN) Bank Polska.”I think that the market will be pricing in the risk of inflation becoming entrenched and in general this will make it difficult for inflation to return to the target.”J.P. Morgan analysts said in a note that it is appropriate for central banks to be cautious, given the significant uncertainty about inflation prospects in this cycle, not just in Poland but globally.”If cutting rates at this point was debatable, cutting in size is even more so,” they wrote. Wojciech Paczos, a research economist at Cardiff University, said that the move could have been influenced by political considerations, as parliamentary elections are scheduled for Oct. 15.”I assess that there is a risk of a trend reversal and new inflation increases, as well as a risk of reversing this decision after the elections and returning to interest rate hikes,” he wrote on X, formerly known as Twitter. “I estimate that this is a hundred percent political decision, not dictated by economic logic.”Glapinski is an ally of the ruling Law and Justice (PiS) party, with links to its leader Jaroslaw Kaczynski that go back decades.”The Monetary Policy Council makes decisions independently of the government. The composition of the council is diverse and is elected by various state institutions. The government has no say in council decisions. Thus, the allegations made by critics are unfounded,” the government spokesman said. More

OTTAWA (Reuters) -The Bank of Canada (BoC) on Wednesday held its key overnight interest rate at 5%, noting that the economy had entered a period of weaker growth, but said it could raise borrowing costs again should inflationary pressures persist.The central bank hiked rates by a quarter point in both June and July in a bid to tame stubbornly high inflation, which has remained above the bank’s 2% target for 27 months.Canada’s gross domestic product unexpectedly shrank an annualized 0.2% in the second quarter, a sign the economy could have already entered a recession. But inflation accelerated in July to 3.3% and core measures stayed at about 3.5%.”With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5%,” the bank said in a statement.The bank said it was prepared to hike rates further should inflationary pressures persist, but analysts said that the hawkish stance is not likely to mean more increases, at least not right away.”The Bank has certainly left the door ajar to the possibility of more hikes, but unless growth rebounds in Q3 – which we doubt – the BoC is likely done with rate hikes,” said Doug Porter, chief economist at BMO Capital Markets.The Canadian dollar was trading 0.1% lower at 1.3655 to the greenback, or 73.23 U.S. cents after touching a five-month low of 1.3676.The Canadian 2-year yield was trading 6.3 basis points further below its U.S. equivalent to a gap of 36.5 basis points in favor of the U.S. note.Money markets had seen a 14% chance for a hike on Wednesday. Thirty-one of 34 economists polled by Reuters between Aug. 24-30 expected no change to the central bank’s overnight rate at the meeting.”We don’t expect to see a quick turnaround in economic activities with growth expected to remain on the slow side in the third quarter,” said Andrew Kelvin, chief Canada strategist at TD Securities. “We expect they will also remain on hold in the October and December meetings.” Bank of Canada Governor Tiff Macklem will deliver a speech and hold a press conference to discuss the decision on Thursday.The BoC said that due to a recent increase in gasoline prices, which are higher than was assumed when it made its last round of economic forecasts in July, inflation would increase in the near term before easing again.On the other hand, interest rates at a 22-year high are restraining spending “among a wider range of borrowers,” and the economy “has entered a period of weaker growth, which is needed to relieve price pressures.” Inflation hit a four-decade high of 8.1% last year, and the BoC has hiked 10 times since March 2022 to try to get it back down to target. Liberal Prime Minister Justin Trudeau’s support has sagged amid high inflation as his Conservative rival, Pierre Poilievre, hammered him for fueling inflation with government spending and driving up rates during a housing crisis.”The Bank of Canada’s decision to maintain its overnight interest rate is welcome relief for Canadians,” Finance Minister Chrystia Freeland said in a statement. More

BENGALURU (Reuters) – The dollar’s strength will be difficult to overcome for most major currencies by year-end, according to a Reuters poll of forex strategists who said the risks to their greenback outlook were skewed to the upside.Backed by a strong economy and rising U.S. Treasury yields, some of the highest among developed economies, the dollar despite bouts of weakness has stayed resilient against most major currencies.Hitting a six-month peak as jitters over China and global growth weighed on risk appetite and expectations the U.S. Federal Reserve will hold interest rates higher for longer, the safe-haven dollar recovered almost all of its mid-year losses and is now up over 1% for the year.That strong performance has brought the long-held view of a weaker dollar in the short to medium term under review.A solid 81% majority of analysts, 43 of 53, who answered an additional question said the risk to their dollar outlook was to the upside, the Sept. 1-6 Reuters poll showed.”We think dollar strength has got further to run and will sustain over the next three months,” said Jane Foley, head of FX strategy at Rabobank.But the dollar was expected to have weakened modestly against most major currencies in a year, according to the median view of around 70 foreign exchange strategists, with the bulk of it coming next year as the first Fed interest rate cut comes closer.”In the next six to nine months, we are expecting the Fed to start to cut rates and it’s at that point where we think that the dollar will re-weaken again,” said Lee Hardman, senior currency analyst at MUFG.The euro, unable to make any significant headway over a deteriorating growth outlook and up only 0.13% for the year, was forecast to trade 1.7% higher at $1.09 in three months, largely unchanged from an August survey.It was forecast to have gained 2.7% to $1.10 and 4.6% to $1.12 in six and 12 months, respectively.The Japanese yen, already down over 11% for the year against the dollar, trading at 147/dollar on Wednesday, was forecast to pare back all of the current year’s losses and change hands at 132/dollar in the next 12 months.Sterling, already up nearly 3.5% in 2023 was forecast to gain another 3% to 1.29 per dollar in a year.Elsewhere, other Asian currencies stand to face significant friction in recouping losses for the year, according to the poll. Almost all were forecast to at best stay within a range or trade modestly higher against the dollar in coming months.In Latin America, the Brazilian real and the Mexican peso, up around 6% and 12% against the dollar, respectively, were expected to lose only slightly by end-year.The Argentine peso, however, down 50% for the year, could be heading for another major devaluation, and lose a further 17% by end-November, the poll found.(For other stories from the September Reuters foreign exchange poll:) More

(Reuters) -U.S. economic growth was modest amid a cooling labor market and slowing inflation pressures in July and August, a Federal Reserve report published on Wednesday showed, buttressing expectations that the central bank was either done, or close to being done, with interest rate increases. “Most Districts reported price growth slowed overall,” the Fed said in its latest “Beige Book” summary of surveys and interviews conducted across its 12 districts through Aug. 28. It added that “nearly all districts indicated businesses renewed their previously unfulfilled expectations that wage growth will slow broadly in the near term.” The U.S. central bank is widely expected to leave its benchmark overnight interest rate in the current 5.25%-5.50% range at the end of its Sept. 19-20 policy meeting, while leaving open the door to a final quarter-percentage-point hike before the end of the year. Financial markets are pricing about even odds that the Fed’s rate-hike campaign, begun 18 months ago, is over. Fed officials are, however, keeping their options open. They believe that the 5.25 percentage points of rate hikes delivered since March 2022 are slowing the economy, capping job growth and most importantly slowing inflation, which soared to a 40-year high last year. Data since the last Fed rate hike six weeks ago has tended to support that view, with the economy adding an average of 150,000 jobs per month over the last three months, down sharply from the prior three months. Inflation, as gauged by the Fed’s preferred measure, was 3.3% in July, down from 7% last summer. That’s why even a hawkish policymaker like Fed Governor Christopher Waller was able to say that the central bank has time to take in new data before it decides whether it has to raise rates again, or can hold them at current levels. Earlier on Wednesday, Boston Fed President Susan Collins also said the central bank has the space to be patient, while acknowledging that inflation pressures, though easing, still remain too high. Collins, however, added that she did not believe a “significant slowdown is required” to get inflation down and “price stability is achievable with an orderly slowdown and only a modest unemployment rate increase – ideally preserving some of the favorable labor supply dynamics.”Still, prices continue to rise faster than the Fed’s 2% goal, employers are adding many more than the monthly 100,000 jobs needed to meet population growth, and economic output appears to be far outpacing the less-than-2% annual growth rate Fed officials say is sustainable in the long run.Many of the Fed’s 12 regional banks found that amid decelerating price pressures, the ebbing was most notable in goods-centric parts of the economy, according to the latest Beige Book report.CONSUMERS TURN TO BORROWINGThe report also flagged some fraying around the edges of the consumer sector, noting that a rising number of households had exhausted savings built up during the coronavirus pandemic and were turning more to borrowing. At the same time, the report found evidence more households were struggling to manage debt. The New York Fed district said migrants were putting strains on the local safety net. The report said “housing affordability, homelessness, and food insecurity continued to challenge communities” in the San Francisco Fed district, adding that “temporary housing shelters and food banks saw increased demand in recent weeks, especially from older adults.”The report noted that housing remains an issue and that the supply for single-family homes “remained constrained.” Home building was picking up, the Fed said, but building affordable properties is being strained by high financing costs and rising insurance premiums. More

The report’s recommendations include getting the region’s macroeconomic framework in shape, investing better in infrastructure, and strengthening political parties. But they vary depending on the specific country.The Group of 30’s think tank working group on Latin America said the region suffers a “governance deficit” that will require “deep and ambitious” political reforms, including at the center of government and legislative power.”Latin America may be trapped in an unhealthy equilibrium, where lack of trust hinders the performance of government institutions, and poor performance in turn explains low trust,” said the working group’s report.Frustrated and apathetic voters are the “predictable consequences” of the reality across Latam in which governments often lack the legislative strength to deliver on promised reforms.The way out is through strengthening of political parties, and “skilful political entrepreneurs” who could gather enough support to update electoral rules “to ensure governments will be able to secure the majorities needed to govern.”SIMILAR PROBLEMS, DIFFERENT ROOTSIn all, the report identifies four types of barriers to growth across the region’s largest economies:Argentina, Ecuador, and Venezuela have macroeconomic instability and have suffered through hyperinflation and debt sustainability problems.”Little or no sustained growth can be expected until fiscal, debt, and -in some cases- inflation problems are addressed” by the three, the report concludes.Even with a backdrop of macro stability, Chile, Colombia, Peru and Uruguay have seen a decline in growth, and the report recommends further diversifying those economies “and developing new sectors with high growth potential.”Mexico and Brazil are treated individually, with the former locked in a “growth paradox” where decades of macroeconomic stability and a sophisticated manufacturing sector have not yielded economic growth.In Brazil, “political challenges, including inequality, populism, and polarization, hinder the necessary fiscal adjustments.”The working group agreed there is no one action that could unlock output across the region, as even the countries that have a strong macro setup are suffering stagnant growth.Andres Velasco, project director of the G30 Working Group on Latin America, said “the opportunities are obvious” for the region as Latam can provide the world with water, food and clean energy.”The West needs countries with which they can build supply chains that are not politically contentious and Latin America -or much of the region at least- has a historic closeness with the West,” he said.”The opportunities are there. The question is, are we going to seize them? The evidence so far is that we’re not doing everything we need to seize them.” More

By Abigail Summerville, Anirban Sen and Deborah Mary SophiaNEW YORK (Reuters) – Private equity firm Roark Capital agreed on Thursday to buy Subway, in a deal that people familiar with the matter said values the U.S. sandwich chain at up to $9.55 billion, including debt, subject to targets in its financial performance. The deal marks the conclusion of a drawn-out auction that started in February and attracted interest from several private equity firms. Reuters reported on Tuesday on a so-called earn-out agreement that was key to Roark clinching a deal for Subway. For the full deal price to be paid, Subway’s cash flow would need to reach certain milestones over a period spanning two or more years after the deal closes, according to the sources. Without the earn-out, the deal is worth $8.95 billion, the sources said. Earn-out structures, while uncommon in the consumer and retail sector, are increasing in frequency in a challenging market for mergers and acquisitions as a way to reconcile price differences.The sources said the arrangement helped bridge a gap in the valuation expectations between Roark and the DeLuca and Buck families that own Subway, which started up nearly 60 years ago in Connecticut.The families were hoping to fetch more than $10 billion for Subway based on its strong brand and international growth, but the private equity firms countered it was worth less because they deemed its U.S. business saturated.Roark prevailed over a rival bidding group led by buyout firms TDR Capital and Sycamore Partners, whose final offer was for $8.75 billion including an earn-out, and $8.25 billion without, the sources said.Roark, which owns other restaurant operators and franchises, including rival sandwich chain Jimmy John’s, will pay Subway’s owners a break-up fee equivalent to 4% of the deal’s value should antitrust regulators thwart the deal, one of the sources said. The deal contact allows for 12 months for the transaction to be completed, according to the sources. Roark took the view that the restaurant market is too fragmented for the deal to raise competition concerns, the sources added.Jimmy John’s has more than 2,600 restaurants in 43 U.S. states. Subway has more than 37,000 restaurants in over 100 countries.Roark and Subway, which announced the deal on Thursday, declined to comment on the terms. Roark currently controls Inspire Brands, the owner of restaurant chains including Jimmy John’s, Arby’s, Baskin-Robbins and Buffalo Wild Wings. Its experience of helping restaurant brands grow will be helpful, “especially in the U.S. market where it remains well below the peak it hit a few years ago”, said Neil Saunders, managing director of market research firm GlobalData.REVAMPING OPERATIONSTax considerations were part of the calculus to sell Subway. This is because the estate of co-founder Peter Buck, who passed away in 2021, donated his 50% stake in the privately-held company to his philanthropic foundation under the terms of his will. This offers a shield from taxes on the sale of the stake. Founded in 1965 by 17-year-old Fred DeLuca and his family friend Buck, Subway has been owned by the founding families since its first restaurant opened as “Pete’s Super Submarines” in Bridgeport, Connecticut.The Milford, Connecticut-based company has been revamping its operations to deal with outdated decor and $5 deals on foot-long sandwiches that eroded franchisees’ profits. In 2021, the chain launched a menu overhaul and splashy marketing campaign as it embarked on a turnaround plan that has helped sales grow.Subway, which has closed thousands of U.S. locations since 2016, said a year ago that it wants to shift away from its current base of small franchisees that own just one or two shops, which tend to be family-run and sometimes barely scrape by.The company saw a 9.85% increase in same-store sales in the first half of 2023. Its 12-month earnings before interest, taxes, depreciation and amortization are around $800 million, according to the sources. JPMorgan Chase (NYSE:JPM) and law firm Sullivan & Cromwell LLP advised Subway. Paul, Weiss, Rifkind, Wharton & Garrison LLP advised Roark Capital, while Morgan Stanley co-led the acquisition financing with Barclays Plc. More