Aurelia Butler

The European Central Bank has been clear over the past year that interest rates were only heading in one direction: up. This week that changed. The ECB raised rates by a quarter percentage point on Thursday, but it dropped guidance that borrowing costs would keep rising, just as the US Federal Reserve had done a day earlier.ECB president Christine Lagarde confirmed after the meeting that the rate-setters’ ninth-rise in a row could be the last, saying that at its next policy meeting in September the ECB could raise rates or pause. “It’s a decisive maybe,” Lagarde said, summing up its more neutral approach.On Wednesday, Fed chair Jay Powell had been similarly ambiguous. He said after its well-trailed quarter-point rate rise that, while it was “certainly possible” it would lift borrowing costs again in September, it was also “possible that we would choose to hold steady at that meeting”.Investors and analysts have taken the rhetorical shift as a clear signal that rates in both the US or the eurozone were now at — or close to — their peak. Konstantin Veit, a portfolio manager at bond investor Pimco, said: “Today’s meeting reiterates our view that, while the ECB might increase interest rates further, we feel it is approaching cruising altitude.”The data support the shift. Inflation has been falling for months on both sides of the Atlantic. In the US it hit 3 per cent in June, while it dropped to 5.5 per cent in the eurozone and a further dip is expected when price growth numbers for the bloc in July are released on Monday. “We are seeing clearer signals of the transmission mechanism working through the system in the euro area, as tightening continues to move through the credit channel into the real economy,” said Anna Stupnytska, global macro economist at investor Fidelity International.The single currency area’s economy is also weakening fast. Output has stagnated in the past two quarters and is expected to have grown at best tepidly in the second quarter when GDP figures are published on Monday. There are fears of further weakness in the third quarter after surveys of purchasing managers and banks this week pointed to a sharp downturn in private-sector activity. “Pipeline inflation is coming down, and eurozone GDP looks outright ugly now,” said Erik Nielsen, chief economic adviser at Italian bank UniCredit. “So, the sensible middle has finally lined up with the doves.”

The US economy is performing better. Fed staff on Wednesday ditched their forecast of a recession this year and US GDP outstripped expectations by growing 2.4 per cent on an annualised basis in the second quarter.Powell warned that US economic resilience may mean more tightening is needed to tame price growth, saying “stronger growth could lead over time to higher inflation”. Though he added: “We have covered a lot of ground and the full effects of our tightening have yet to be felt.”Lagarde said on Thursday that the ECB would “have an open mind” on whether more tightening is needed. “The burden of proof is going to be on the data,” she said, while raising the possibility of the ECB skipping a meeting before resuming rate rises later, as the Fed did last month.Much will hinge on consumer price growth figures for July and August, as well as on the ECB’s own forecasts for inflation due out directly after its meeting in September concludes. But Lagarde said it would also examine numbers on the labour market, investment and inflation expectations. Dirk Schumacher, an economist at French bank Natixis, forecast eurozone inflation would keep falling, making more rate rises unlikely. “I take at face value the ECB’s switch to an open-minded stance on whether it will hike rates again,” he said. Lagarde gave a balanced view on the inflation outlook. Russia’s withdrawal from a deal allowing Ukraine to export grain from its ports on the Black Sea could create “renewed upward pressures” on food prices, she warned, as could “the unfolding climate crisis”. Higher-than-expected growth in wages or profit margins could also keep inflation high.But she said the eurozone’s near-term economic outlook had “deteriorated, owing largely to weaker domestic demand”, adding this should reduce price pressures, especially if combined with falling energy prices.Claus Vistesen, an economist at consultants Pantheon Macroeconomics, said the shift was “hardly a surprise given how quickly they have tightened, and the flow of poor economic data in the past month”. But he said the potential for “nasty” second-quarter wage growth figures would still “offer the ECB hawks a final moment of glory in September before they are put back in their box”.Additional reporting by Colby Smith More

TOKYO (Reuters) – One of Bank of Japan Governor Kazuo Ueda’s main challenges will be to phase out yield curve control (YCC), which has come under criticism for distorting markets by keeping long-term interest rates from rising.Under YCC, the BOJ targets short-term interest rates at -0.1% and the 10-year government bond yield around 0%. It also sets an allowance band of 0.5% above and below the yield target.Here is how Japan’s YCC works and its potential pitfalls.WHY YCC?After years of huge bond buying failed to fire up inflation, the BOJ cut short-term rates below zero in January 2016 to fend off an unwelcome yen rise. The move crushed yields across the curve, outraging financial institutions that saw returns on investment evaporate.To pull long-term rates back up, the BOJ adopted YCC eight months later by adding a 0% target for 10-year bond yields to its -0.1% short-term rate target.The idea was to control the shape of the yield curve to suppress short- to medium-term rates – which affect corporate borrowers – without depressing super-long yields too much and reducing returns for pension funds and life insurers.HOW DOES IT WORK?The BOJ chose a rate regime because it had reached the limit of quantitative easing, where it bought targeted amounts of bonds to push down yields, hoping to stoke inflation and economic activity.After the central bank had gobbled up half the bond market, it was hard to commit to buying at a set pace. YCC allowed the BOJ to buy only as much as needed to achieve its 0% yield target. The bank has tapered bond buying in times of market calm to lay the groundwork for an eventual end to ultra-easy policy.WHY THE TARGET BAND?As stubbornly low inflation forced the BOJ to maintain YCC longer than expected, bond yields began to hug tight ranges and trading volume dwindled.To address such side-effects, the BOJ said in July 2018 the 10-year yield could move 0.1% above or below zero.In March 2021, the bank widened the band to 0.25% in either direction to breathe life back into a market its buying had paralysed.Under attack from investors betting on a rate hike, the BOJ doubled the band in December last year to 0.5% above or below zero and ramped up bond buying to defend the ceiling.PITFALLS?YCC worked well when inflation was low and prospects for hitting the BOJ’s price target were slim, as investors could sit on a pile of government debt that ensured safe returns.That changed last year, when soaring commodity prices pushed inflation above the 2% target and gave investors reason to attack the yield cap.The BOJ ramped up buying, including through offers to buy unlimited amounts of bonds, to defend its yield cap.The move has been criticised by analysts for distorting market pricing and fuelling an unwelcome yen plunge that inflated the cost of raw material imports.WHAT NOW?Haunted by a history of political heat for dialling back stimulus prematurely, the BOJ wants to avoid raising rates until it is clear inflation will sustainably hit the bank’s 2% target, backed by higher wage growth.But BOJ policymakers also want to avoid a repeat of last year, when it was forced to buy bonds relentlessly to defend the yield cap.As such, the central bank could take steps to make YCC more sustainable, such as by allowing bond yields to rise more flexibly reflecting accelerating growth and inflation.The Nikkei newspaper said the BOJ will discuss allowing the 10-year yield to briefly breach its 0.5% cap, while taking steps to combat any abrupt spike in yields.Allowing long-term yields to rise more will take pressure off the BOJ to boost bond buying, and help prevent further unwelcome declines in the yen.But there is uncertainty on how successful the BOJ could be in relaxing its grip on yields, without causing huge market volatility.Ueda will likely frame any tweak to YCC as an attempt to make the BOJ’s ultra-loose policy more sustainable, rather than a prelude to a full-fledged interest rate hike cycle.Markets may not take it that way and start pricing in the chance of a slow but steady normlisation of the BOJ’s radical stimulus programme. More

SYDNEY (Reuters) – Asian stocks were off five-month highs and the yen extended a sharp rally on Friday with speculation that the Bank of Japan could take another small step toward dismantling its super-easy stimulus policies.The BOJ sets policy later in the session. The Nikkei newspaper reported, without citing sources, that policymakers will discuss tweaking the yield control policy to allow 10-year government bond yields above a 0.5% cap in some circumstances.The yield leapt to 0.505% in early trade. The yen had earlier jumped about 0.5% on the report, gaining even as the dollar rose elsewhere after strong U.S. economic data and a toned down outlook from the European Central Bank.The yen was holding about 0.5% higher at 138.83 per dollar in early trade, helped by Tokyo consumer prices rising slightly more than expected and as the risk of a policy surprise spooked short sellers.”I wouldn’t be running short into the BOJ,” said Westpac strategist Imre Speizer.”I think the idea is even a tiny tweak is a big deal for the BOJ. We’ll probably get a reaction either way.”MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4%. Japan’s Nikkei opened 1.4% lower though bank shares surged to an eight-year high on the prospect of rising interest income at lenders.”If the BOJ adjusts its yield curve control program, financial markets will likely take it as the start of a policy tightening cycle regardless of the BOJ’s rationale,” said Commonwealth Bank of Australia (OTC:CMWAY) strategist Kristina Clifton.”Under such scenario, we consider dollar/yen … can lose about two to four yen on the day.”A tweak would also cap what may prove a landmark week for central banks, with markets pricing a better-than-even chance that the Federal Reserve and ECB have made their final hikes of the cycle.On Thursday, the ECB raised rates by 25 basis points to a 23-year high, as expected, but President Christine Lagarde sent the euro tumbling with talk of a pause in September.”Do we have more ground to cover? At this point in time I wouldn’t say so,” Lagarde told reporters. The euro slid nearly 1% overnight and nursed losses at $1.0980 on Friday.On Wednesday, the Fed had also hiked by 25 bps and Chair Jerome Powell cheered investors when he said the central bank’s staff no longer forecast a recession.Further strong U.S. data, with better-than-expected second-quarter growth figures out overnight drove up longer-end Treasury yields and the U.S. dollar.Ten-year yields rose 16 basis points and broke above 4%. They were steady at 4.006% in Asia trade.S&P 500 futures tacked on 0.1% and Nasdaq 100 futures added 0.2%, helped by an after-market jump in shares of Intel (NASDAQ:INTC) which reported a surprise quarterly profit. Brent crude oil futures slipped slightly from three-month highs to $83.63 a barrel. More

TOKYO (Reuters) -The Bank of Japan is set to keep ultra-low interest rates on Friday but may make minor tweaks to extend the lifespan of its yield control policy, which is facing scrutiny amid prospects of sustained inflation.The Nikkei newspaper reported the central bank will maintain its 0.5% cap for the 10-year government bond yield, but discuss allowing long-term interest rates to rise above that level by a certain degree.The move would be intended to fix distortions caused in markets by the BOJ’s heavy bond buying, and accompanied by steps to combat any abrupt rise in long-term rates, the paper said without citing sources.The yen strengthened to around 138.83 against the dollar in Asia on Friday, while the 10-year Japanese government bond (JGB) yield rose above the 0.5% ceiling.”If the BOJ were to do as the Nikkei reports, it would essentially be eliminating the yield cap,” said Naoya Hasegawa, senior bond strategist at Okasan Securities.Under yield curve control (YCC), the BOJ guides the 10-year bond yield around 0% and sets an allowance band of 0.5% above and below that target.While inflation has held above the BOJ’s 2% target for more than a year, Governor Kazuo Ueda has vowed to keep ultra-loose policy until he is more convinced the economy can weather global headwinds and allow firms to keep hiking wages next year.At the two-day meeting ending on Friday, the BOJ is widely expected to maintain the 10-year yield target and a -0.1% target set for short-term interest rates.But sources have told Reuters the board may discuss making minor tweaks to the policy if the BOJ feels the cost of YCC is beginning to outweigh the benefits.With wages and inflation on the rise, markets have been rife with speculation Ueda will soon phase out the radical stimulus programme of his predecessor.Data released on Friday showed core consumer inflation in Japan’s capital slowed in July but remained well above the central bank’s 2% target, underscoring rising price pressure.The BOJ’s meeting comes after the Federal Reserve’s decision on Wednesday to raise interest rates, a move that further widens the interest rate gap between the United States and Japan.Any tweak to YCC could help prevent further declines in the yen, which would hurt households and retailers by pushing up the cost of food and fuel imports.Since introducing YCC in 2016, the BOJ had little trouble controlling bond yields when inflation remained well below its target. That changed last year, when soaring commodity prices pushed inflation above the 2% target and gave investors reason to attack the yield cap.After buying huge amounts of bonds to defend the then 0.25% ceiling, the BOJ last December widened the yield band and now allows the 10-year yield to rise by up to 0.5%.The BOJ’s quarterly growth and outlook report, due after the policy meeting, will offer clues on how convinced the central bankers are about prospects for durable inflation.Nodding to broadening price pressures, the board is likely to upgrade its inflation forecast for the year that began in April from the current projection of 1.8%.But the more important forecasts for fiscal 2024 and 2025 will likely remain largely unchanged from current projections, sources have said, reflecting uncertainty over the fallout from slowing global growth. The BOJ now expects core consumer inflation to hit 2.0% next year, before slowing to 1.6% in 2025.Governor Ueda is expected to hold a news conference after the policy meeting. More

TOKYO (Reuters) – Core inflation in Japan’s capital slowed in July but remained well above the central bank’s 2% target, data showed on Friday, keeping pressure on policymakers to dial back ultra-loose monetary policy.The data for Tokyo, which is seen as a leading indicator of nationwide trends, comes ahead of the Bank of Japan’s closely watched policy decision due later in the day.The Tokyo core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 3.0% in July from a year earlier, compared with a median market forecast for a 2.9% gain.While the gain was slower than a 3.2% rise in June, Tokyo core inflation stayed above the central bank’s 2% target for the 14th straight month.An index that strips away both fresh food and fuel costs, which is closely watched by the BOJ as a better gauge of broad price trends, rose 4.0% in July from a year earlier, accelerating from a 3.8% gain in June, the data showed.The increase was driven mostly by stubbornly high food prices in a sign of the strain households are feeling from rising living costs, the data showed.The dollar dipped slightly to around 139.03 yen after the release of the Tokyo inflation data.At the two-day meeting ending on Friday, the BOJ is set to keep ultra-low interest rates but may make minor tweaks to extend the lifespan of its yield control policy.The Nikkei newspaper reported earlier on Friday the central bank will maintain its 0.5% cap for the 10-year government bond yield, but discuss allowing long-term interest rates to rise above that level by a certain degree. More

BEIJING/HONG KONG (Reuters) – Cola Yao earns 40% less than last year promoting credit cards for a Chinese state-owned bank, so she buys fewer clothes, less make-up and has cancelled her child’s summer swimming classes.”The cut is severely affecting my life in every aspect,” said Yao.The unexpected austerity comes on the back of China’s slowing economy, complicating efforts for Communist Party leaders who pledged this week to boost workers’ incomes to revive household consumption, a major policy goal. Financial firms and their regulators have cut salaries and bonuses after China’s top graft-busting watchdog vowed to eliminate “Western-style hedonism” in the $57 trillion sector.And, some indebted local governments have cut civil servants’ pay. Some hospitals and schools, as well as some private businesses facing a drop in sales, have done the same.It is unclear how many Chinese have had their pay cut this year, but economists warn the high-profile examples are further weighing on already fragile consumer confidence, raising risks of a self-feeding deflationary spiral in the world’s second-largest economy.”Wage cuts will intensify deflationary risks and reduce willingness to spend,” said Zhaopeng Xing, ANZ’s senior China strategist.While Chinese still earned 6.8% more on average in the first half of this year than in the same period of 2022, at 11,300 yuan ($1,580) per month, there is little optimism that pace can be maintained.The Economist Intelligence Unit’s Xu Tianchen said that increase was likely driven by rural migrant workers returning to factories after COVID-19 lockdowns, which compensates for subdued pay growth in white-collar jobs.A survey by recruiter Zhaopin showed average wages offered for new jobs in 38 major cities dropped 0.7% in the second quarter from the same period of 2022, having grown only 0.9% in the first quarter.In the first six months, total household disposable income, which includes wages and other sources of revenue, rose 5.8%, barely surpassing 5.5% growth in economic output.To fix one of China’s key structural weaknesses, which is that household consumption contributes much less to its economic output than in most other countries, disposable income needs to rise much faster than overall economic growth, analysts say.For most of the past four decades it was the other way around.WEAK BARGAINING POWERUnilateral wage cuts are illegal in China, but complex salary structures offer ways around that.Yao’s monthly earnings dropped to 6,000 yuan because her employer in the eastern city of Hefei raised her performance goals, linked to usage of the credit cards she sells.Shao, who sold make-up in the eastern city of Suzhou and only gave her surname for privacy reasons, had a choice to leave her company or accept a 50% wage cut. She chose the former, but her colleagues took the hit and also face delayed paycheques.”Workers are pressed not only by the company, but also by the labour market. Their bargaining power … is weakened so they tend to accept wage cuts,” said Aidan Chau, researcher at Hong Kong-based rights group China Labour Bulletin. State institutions typically keep base salaries untouched but reduce various allowances, public sector workers say.A Shanghai doctor surnamed Xu said his public hospital cancelled quarterly bonuses and asked staff to do more overtime.Xu, who works at a public hospital, saw his pay drop 20% over the last two years.”The hospital said they have no money,” he said.While he’s not struggling financially, the extra work affects his social life so he spends less going out.Frugality is becoming endemic. Retail sales in China have yet to return to their pre-pandemic trend and households prefer to save.New household bank deposits in January-June rose 15% to 12 trillion yuan, equivalent to more than 50% of the total retail sales for the period.Analysts call it a symptom of financial insecurity among consumers. “If weak confidence becomes entrenched, it could be self-fulfilling and derail the recovery,” said Xiangrong Yu, China chief economist at Citi. More