Aurelia Butler

WASHINGTON (Reuters) – A growing number of European Central Bank policymakers are calling for the bank to stop reinvesting cash into its largest bond buying scheme, to help trim its balance sheet as part of efforts to tackle inflation, sources with direct knowledge said.The ECB is still sitting on 3.2 trillion euros of mostly government bonds held in its Asset Purchases Programme, bought during the low-inflation era in the hope of lowering borrowing costs and thereby boosting economic growth. It is already letting 15 billion euros worth of these bonds expire each month.Earlier, Belgian central bank chief Pierre Wunsch told Reuters on the margins of the International Monetary Fund spring meeting in Washington that he favoured a full halt to reinvestments this year.Five other sources told Reuters that, notwithstanding recent turmoil in the bank sector, all reinvestments should end in the second half of the year because the balance-sheet reduction is moving too slowly given the priority of reining in inflation.None of the sources, who all asked not to be named, advocated outright sales of government or private debt, which could still happen later but was not part of any discussion now.An ECB spokesperson declined to comment.The sources said the ECB should not implement a hard stop, however, and could stay flexible to react to episodes like last month’s banking sector volatility. But when markets are calm, like now, the ECB should let all maturing debt expire, they said.The euro zone has fared well in the volatility, they argued, and the ECB still has its Transmission Protection Instrument, an untested bond-purchase scheme, at its disposal to deal with volatility.A halt to reinvestment could push borrowing costs up but with nominal yields well into positive territory now, demand for bonds is also up, and the sources said they saw no shortage of investor appetite.Martins Kazaks, Latvia’s central bank chief, took a more measured view, arguing that reinvestments should stop when market conditions allow but not necessarily on a set calendar.”We should accelerate quantitative tightening when we are confident that financial markets will be able to handle it,” Kazaks said. “I think shrinking the balance sheet is an important thing and if the financial conditions allow for that, we should do so.”The ECB has committed to the 15 billion figure until the end of the second quarter and said this decision will be up for review, likely at its June meeting.Redemptions fluctuate but about 148 billion euros’ worth of debt expires in the second half of the year, so a full reinvestment stop would see an extra 58 billion euros’ worth of maturities on top of the currently scheduled 15 billion euros per month.The sources said that once these reinvestments end, the next discussion would be about reinvestments in the 1.68 trillion euro Pandemic Emergency Purchase Programme, which are set to continue until the end of 2024. Ending these is more complicated because the ECB has the power to skew these purchases towards certain countries in case of market stress, so the portfolio is more actively used. More

One of the most influential US rate-setters has signalled his support for another rise in borrowing costs at the Federal Reserve’s next policy meeting in May, despite uncertainty over the fallout from the recent banking stress. Christopher Waller, a Fed governor, said in prepared remarks on Friday that the turmoil sparked by the failure of several midsized US lenders had not led to US borrowing conditions “significantly” tightening. With inflation, at 5 per cent, still “far above” the Fed’s 2 per cent target and the labour market remaining “strong and quite tight”, monetary policy needed “to be tightened further”, he said. “How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions,” Waller said. The comments come amid an ongoing debate about the US central bank’s next steps. Rate-setters are split on whether further policy action is warranted in order to push inflation back down to the 2 per cent target, or if the recent banking turmoil now means the central bank may not have to squeeze the economy as much. Policymakers this week appear to have coalesced around the need for another rate rise at the Fed’s next gathering in early May. Minutes published this week of the Fed’s most recent policy meeting — at which it ploughed ahead with a quarter-point rate rise despite having to step in roughly two weeks before to bolster the banking system after multiple lenders failed — suggested officials expected there to be some impact on economic activity, hiring and inflation. However, they concluded at the March meeting that the magnitude of that impact was highly uncertain.The Fed has raised rates aggressively over the past year to counter a surge in inflation to multi-decade highs. Price pressures have however fallen back in recent months. Several officials even considered forgoing a rate rise altogether, the account of the meeting showed. Fed staff also predicted a “mild recession” starting later this year before the economy recovers over the next two years.Waller, one of the most influential voices on the Fed’s board of governors, on Friday said the decision to follow through with a rate rise last month had been “validated”, but acknowledged that the recent turbulence “might have solidified and pulled forward factors that were already working to tighten lending conditions”.While a “significant tightening of credit conditions” would lessen the need for further rate rises, making such a judgment was “difficult, especially in real time”, he said.Most officials in March projected they would make one more quarter-point rise, which would push the federal funds rate from its current level of 4.75 to 5 per cent to a peak range of 5 to 5.25 per cent. Rates would stay at that level until the end of the year. In a moderated discussion that followed his remarks, Waller indicated that before the banking stress, he had been prepared to back more rate rises. Waller said he had been surprised by the strength of incoming data so far this year. Fresh inflation figures this week showed core consumer price growth, which strips out changes in volatile food and energy prices, still registered a strong 0.4 per cent monthly pace. The latest jobs data, published last week, showed the labour market remained strong. Waller said he stood ready to adjust his stance if lending conditions appeared to deteriorate more than expected and the trajectory of the economy changed materially.Retail sales data on Friday showed a larger decline than expected, at 1 per cent, as Americans pulled back on spending. However, year-ahead inflation expectations rose a full percentage point between March and April to 4.6 per cent, preliminary figures from the University of Michigan showed. More

WASHINGTON (Reuters) – Africa is facing a severe financing squeeze that, on the back of a series of unprecedented shocks, is disrupting economic growth and endangering its long-term development, the International Monetary Fund’s (IMF) top official for the region said.Sub-Saharan Africa was only beginning to recover from the COVID-19 pandemic’s economic fallout when Russia’s invasion of Ukraine roiled capital and commodity markets, drove up inflation and paved the way for higher interest rates around the world. Abebe Selassie, director of the IMF’s African Department, said in an interview with Reuters that any one of those shocks would have been historic on their own. “And they’ve been layered in a region, which has limited resilience … So, yeah, it is very problematic,” he said.The Fund published its Regional Economic Outlook for Sub-Saharan Africa on Friday during the IMF and World Bank spring meetings in Washington. In the report, it forecast that regional growth will slow for the second year in a row to 3.6% this year from 3.9% in 2022, before rebounding to 4.2% next year.A tightening of global monetary policy to rein in inflation has led to higher interest rates, raising Africa’s borrowing costs on both domestic and international markets. Sovereign debt spreads for the region have climbed to three times the emerging market average, leaving Africa’s frontier market countries cut off from international capital markets since early 2022.Two countries – Zambia and Ghana – have already defaulted on their sovereign debt since the start of the pandemic. A Group of 20-backed initiative aimed at assisting with debt restructuring is plagued by delays and has so far failed to provide relief.The U.S. dollar’s effective exchange rate, meanwhile, reached a 20-year high last year, driving up the cost of servicing existing dollar-denominated debt, the IMF report said.This occurred amid a drop in Chinese bilateral funding – a key source of critical infrastructure financing – and a long-term decline in traditional development finance. “All of the key sources of financing of deficits – both the current account and the fiscal deficit – really are now very curtailed,” Selassie said. URGENT HELP NEEDEDSelassie said the IMF and World Bank would seek to step up to fill the gap, but they will need help. “Honestly, this is also a time when other bilateral creditors need to come forward,” he said. Failure to act could hamper African governments’ ability to address an ongoing cost-of-living crisis and potentially force them to reduce resources for health, education and infrastructure.Longer term, Africa is faced with a gaping shortfall in funding for climate adaptation. While wealthy countries are beginning to mobilise resources, Selassie said Africa, which has done little to cause climate change but is disproportionately impacted by it, must not be hobbled by more onerous debt.”For the poorest countries, the most fragile countries, it is really, really important that we lower the weighted average cost of financing they face big time,” he said. “What has transpired over the last 15 to 20 years clearly has not been ideal.” More

(Reuters) – Despite a year of aggressive rate increases U.S. central bankers “haven’t made much progress” in returning inflation to their 2% target and need to move interest rates higher still, Federal Reserve Governor Christopher Waller said on Friday.Important measures of underlying inflation have “basically moved sideways with no apparent downward movement,” Waller said in remarks that continue the Fed’s steady discounting of the immediate economic risks posed by recent bank failures.Though Waller said it remains unclear whether bank stress would lead to an unexpected tightening of lending and credit and slow the economy more than needed, the apparent stability in financial markets showed the Fed was right to raise rates at its last meeting and keep the focus of monetary policy on fighting inflation. “Monetary policy needs to be tightened further. How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions,” Waller said in remarks prepared for delivery at the Graybar National Training Conference in San Antonio, Texas.BANKING SYSTEM STABLE Since the failure of Silicon Valley Bank on March 10, the Fed has been studying financial and credit markets to see if contagion was taking hold. So far, Waller said it appeared that emergency steps taken since then “appear to have been successful in providing stability to the banking system,” a conclusion that appears broadly shared by U.S. central bankers.That has left the Fed free to set monetary policy based on the behavior of the economy and inflation, with a further quarter percentage point increase in the target federal funds rate expected at the upcoming May 2-3 meeting. That would lift the fed funds rate to a range of 5.00% to 5.25%.So far, Waller said, he sees both the economy and inflation remaining stronger than he expected.”Economic output and employment are continuing to grow at a solid pace while inflation remains much too high,” Waller said, noting that investors should not expect rates to fall any time soon.”Monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate,” he said. More

ORLANDO, Florida (Reuters) – Engineering a soft landing is hard. But if you zoom out from the strictest definition of the term, the U.S. Federal Reserve has managed it more often than is generally believed.Admittedly, by the textbook definition of raising interest rates to cool an overheating economy or inflation without triggering a recession, the Fed has only achieved that once in its history. That was in the mid-1990s, when the U.S. economy avoided recession after the Alan Greenspan Fed doubled interest rates to 6% between February 1994 and February 1995. The latest U.S. inflation and job market data this week sparked a tangible burst of optimism that the Fed, under the stewardship of Jerome Powell, might emulate that rare feat. GRAPHIC – US interest rate & recessions To be fair to the Fed, it probably is more art than science, with luck playing a bigger part than skill. What Milton Friedman called the “long and variable lags” between monetary policy decisions and their effects on the economy can be anywhere from six months to two years. That’s a big window.In a paper earlier this year, former Fed Vice Chair Alan Binder – who was in situ during that fabled 1994-95 soft landing – said that it is “difficult, maybe impossible” to predict the timing of policy changes on the real economy.Blinder posits that the soft landing parameters of avoiding recession completely are too narrow. He argues that if GDP declines by less than 1% or there is no recession determined by the National Bureau of Economic Research for at least a year after a Fed tightening cycle, that is a “softish” landing. By this definition, Blinder reckons that five of the 11 Fed tightening cycles since 1965 were followed by soft landings to varying degrees, and the 1990-91 recession was due to Saddam Hussein and Iraq’s invasion of Kuwait, not Alan Greenspan.Of the five hard landings, two were not a result of Fed monetary policy: the Great Recession of 2008-09 was because the financial system imploded, and the 2020 recession was a consequence of the global COVID-19 pandemic.That leaves three recessions – 1973-75, 1980 and 1981-82 – that can fairly be considered hard landings and a direct result of high interest rates. It’s no coincidence that they followed what were by far the three most aggressive tightening cycles. GRAPHIC – Past 11 Fed tightening cycles – hard or soft landings?https://fingfx.thomsonreuters.com/gfx/mkt/dwpkdjlnxvm/Blinder1.jpg COMING DOWN FASTAs Blinder says, the landing largely depends on how high the ‘plane’ is flying before it starts its descent. To extend the analogy further, Powell and his colleagues are flying blind now, given the fog created by post-COVID pandemic supply chain disruptions, and food and energy shocks.”To achieve another soft landing under these circumstances, the Fed will have to be skillful indeed,” Blinder concludes.Paul McCulley, adjunct professor at Georgetown University and former chief economist at bond giant Pimco, reckons the Fed is at the end of its cycle even though inflation remains well above the central bank’s 2% target. He draws parallels with the end of the 1994-95 hiking cycle, particularly Greenspan’s remarks in February 1995 that the Fed could keep rates on hold or even cut them, “despite adverse price data”, if there were signs that underlying inflation pressures were cooling.The Fed cut rates five months later and the rest is soft landing history.”Knowing when to declare enough is enough is critical, to abort a self-feeding dynamic of negative macro animal spirits,” McCulley said.In a paper last year analyzing 70 tightening cycles between 1980 and 2019 across 19 advanced and six emerging economies, the Bank for International Settlements used even looser definitions for hard and soft landings. A hard landing is a recession – two consecutive quarters of negative GDP growth – within three years of the interest rate peak; otherwise, it is a soft landing, the BIS wrote.The tightening cycles were defined as at least three consecutive quarters, ending with the policy rate at its peak.Of these 70 episodes, 41 ended with a hard landing and 29 with a soft landing. All else equal, larger rate hikes spread over a longer period are more likely to be associated with hard landings, and front-loaded tightening cycles tend to be followed more frequently by soft landings, the BIS found.Maybe the Fed does have a fighting chance this time around.The nature of the landing, however, is surely subjective. A short and shallow recession – a “softish” landing – will be little comfort to the potential millions of newly unemployed and their families.”Restraining demand is just a euphemism for creating a recession and raising unemployment,” notes Phil Suttle, founder of consultancy Suttle Economics. “We will have a recession, the only question is how severe.” GRAPHIC – US interest rate & unemploymenthttps://fingfx.thomsonreuters.com/gfx/mkt/gkvlwjaewpb/FedFundsUnemployment.jpg (The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever; Editing by Emelia Sithole-Matarise) More