Aurelia Butler

FRANKFURT/AMSTERDAM (Reuters) – The European Central Bank may need to raise rates again in May to fight inflation, Dutch central bank chief Klaas Knot said, adding a powerful voice to the growing chorus of policymakers calling for tighter policy even after recent market turmoil.The ECB last week raised interest rates by 50 basis points to its highest level since late 2008 but made no commitment about future moves, worried that the recent global selloff in bank share could morph into a broader crisis. That would trip up what is already the fastest tightening cycle on record. But the central bank chiefs of Germany, Austria, Slovakia and Lithuania, among others, have now all said the ECB is not finished because inflation is far too high and could be more persistent than the central bank’s own projections. “I regard it unlikely that we would already be done by now,” Knot told Reuters in an interview. “It’s highly questionable whether maintaining rates only in mildly restrictive territory … would be enough to generate the immaculate disinflation that we probably all hope for.””I still think we need to make another step in May but I don’t know the size of that step,” Knot said separately in a news conference. The caveat to any rate hike plan is that financial market turbulence needs to dissipate, but Knot said Europe was “very, very far” from a financial crisis and an escalation of the turbulence was not his base scenario. The real problem is inflation, whose recent rapid falls may be masking that past energy prices have seeped into underlying price growth, making inflation more difficult to control.Once driven by energy, inflation is now domestic, fuelled by wages and demand for services, with pipeline pressures not yet showing a turnaround. “We should not let ourselves be lulled into comfort,” Knot said. “Our real inflation problem is core, which shows no sign of abating yet.”The ECB omitted its usual inflation risk assessment last week but Knot said that, to him, risks were “clearly” tilted to the upside. Wages are putting pressure on prices and the inflation projection assumed significant policy tightening, which has now largely been priced out by markets. Markets now see another 50 basis point increase in the ECB’s 3% deposit rate – half what they assumed just two weeks ago but a big change from the height of the recent market turmoil when investors bet that the ECB’s next move would be a cut.Knot said the turmoil that led to Credit Suisse’s takeover by UBS last weekend could still impact monetary policy if private sector funding costs stay elevated but this impact needs to have a “strong permanent character” to change the outlook. The good news is that wage deals for 2024 show a slowdown, suggesting that the ECB’s inflation-fighting credibility is intact and that instead of a wage-price spiral, the moderating growth in wages will eventually extinguish price growth. Rate hikes need to be complemented by a further reduction in ECB’s balance sheet, Knot said, because the 4 trillion euros’ worth of excess liquidity in the system is far too high, so the bank should step up the reduction of its bond portfolio.”If there is no additional turmoil in the coming weeks, then I think that we can gradually move toward a full stop of Asset Purchase Programme reinvestments, under the condition that it can be accomplished without creating undue turbulence in the euro area bond markets,” Knot said. For a Q&A with Knot, click here. (This story has been refiled to correct spelling of Knot’s first name) More

The Bank of England has increased interest rates by a quarter of a percentage point to 4.25 per cent, despite the turmoil that has engulfed banking in recent weeks.The rise, which was in line with economists’ forecasts, comes a day after the latest data showed that the annual rate of inflation jumped from 10.1 per cent to 10.4 per cent in February.It is the 11th consecutive increase from the Bank of England, which started raising rates in December 2021.The BoE said it judged UK banks to be “resilient” and “well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates”.It added it would “monitor closely” any effect market tensions might have on the credit conditions faced by households and businesses.Seven of the MPC’s nine members voted for the rate increase, arguing that the country’s stronger outlook for GDP and employment could “reinforce the persistence of higher costs in consumer prices”.But the BoE said that consumer price inflation was “still expected to fall significantly” in the second quarter of this year “to a lower rate than anticipated” last month. It said this was largely because of declines in energy prices and the UK government’s decision to maintain subsidies that reduce household energy bills for a further three months. February’s surprise rise in inflation was partly due to higher clothing and footwear prices that “tend to be volatile and could therefore prove less persistent”, said the BoE.The bank also suggested that it no longer expected a technical recession in the UK this year, adding that gross domestic product “was now expected to increase slightly in the second quarter”. By contrast, a month ago, it expected a 0.4 per cent decline. “GDP is still likely to have been broadly flat around the turn of the year,” it added.Both the European Central Bank and US Federal Reserve have also raised interest rates in the last week, despite the turmoil in the banking sector, which was partly triggered by tighter monetary policy.The pound edged higher against the dollar after the BoE announcement, extending earlier gains to trade 0.5 per cent higher on the day at $1.2323. Gilt yields also moved marginally higher, with the interest rate sensitive two-year yield rising by 0.02 percentage points to 3.38 per cent.The BoE noted that current market pricing implied one further rate increase by the end of the summer, with a peak a little above 4.5 per cent in August, “somewhat higher” than the expected peak when the MPC last met.Two external members of the committee, Swati Dhingra and Silvana Tenreyro, dissented from the decision, voting to leave interest rates unchanged at 4 per cent. More

Investing.com — The Bank of England raised its key interest rate by another 25 basis points on Thursday to a new 15-year high of 4.25%, its latest step in a struggle to tame double-digit inflation in the U.K.Seven members of the nine-strong Monetary Policy Committee voted for the hike, with only two voting to keep the Bank rate at 4.0%. That’s marginally more clear-cut than the 6-3 split that economists had predicted beforehand.The Bank also warned that further rate increases could be necessary, even though it expects inflation to fall “sharply” in the second half of the year.”If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the Bank said with a nod to tight labor market conditions. The pound rose 0.5% against the dollar on the back of the news, while the benchmark FTSE 100 and FTSE Mid-Cap 250 indices weakened. The decision comes only a day after the Office for National Statistics said that inflation rose to 10.4% in February, as record food prices and robust wage growth more than offset the gradual unwinding of last year’s energy price spike. Governor Andrew Bailey had signaled after the last 50 basis point hike in February that the Bank might not tighten policy any further, and the Bank again tried to look through the latest upside surprise in inflation, saying that “it remains likely to fall sharply over the rest of the year.”At the same time, though, it revised up its expectations for the U.K. economy. The Bank sees growth of 0.4% in the second quarter now, having forecast a modest decline in its February assessment. That’s mainly due to fresh fiscal support measures unveiled in the government’s budget, a still-strong labor market, and the ongoing unwinding of the energy price spike. The move means that U.K. interest rates have risen by 4.15 percent since the Bank started tightening monetary policy in November 2021. However, the Bank rate remains more than 6 percentage points below the current CPI, ensuring that savings and debts are eroded by inflation.The Bank of England was the third central bank in Europe to raise interest rates on Thursday, after a 50 basis point hike from the Swiss National Bank and a 25 basis point hike in Norway. They come a day after the U.S. Federal Reserve raised the target range for Fed Funds by 25 basis points to 4.75%-5.0%.Frederik Ducrozet, an economist with Pictet Asset Management, said via Twitter that the move seemed a “dovish hike”, given its underlying assumption of falling inflation. He contrasted it with the markedly more hawkish 50 basis point hike announced earlier Thursday by the Swiss National Bank. More

The writer is governor of the Bank of KoreaMarch 24 marks the 13th anniversary of the Chiang Mai Initiative Multilateralisation (CMIM), a currency swap network designed to ensure financial stability among member states of the Association of Southeast Asian Nations, as well as China, Japan, and Korea. The devastating impact of the 1997 Asian financial crisis led to the establishment of a regional safety net to address short-term liquidity difficulties in the region and to serve as an alternative to the IMF.Since its inception, the CMIM’s lending capacity has doubled to $240bn, a significant number even when compared to the IMF’s $1tn in firepower. It has also added a crisis prevention facility and extended its lending programme maturities.But despite these impressive strides, the CMIM’s effectiveness has not been market-tested as member countries have not utilised it. This raises serious concerns about the network’s functionality. It is unfortunate that the CMIM has lagged behind the European Stability Mechanism, which was established two years later. The ESM was used several times to prevent contagion effects during the European debt crisis, and it has established a solid market-tested record. As a result, it is now a well-regarded regional financing arrangement, despite being a relative latecomer.Why doesn’t the CMIM inspire confidence in its effectiveness, unlike the ESM? The answer lies in the fact that it uses a pledge-based system that relies on bilateral swaps, which fundamentally limit the network’s ability to instil confidence during a crisis. The Covid-19 pandemic is a case in point, as it has affected not only swap-recipient countries but also swap-providing ones, potentially placing significant political burdens on the latter when they are providing funding.A new IMF policy states that money disbursed through bilateral swap arrangements may not qualify as foreign exchange reserves of swap-providing countries if it supports balance-of-payment needs in recipient countries. This reduces the swap-providing countries’ incentive to keep their pledges, as they would have to accept a decrease in their foreign reserves. In contrast, the ESM uses a funding system based on paid-in capital that provides greater assurance and stability during a crisis.To be more effective, the CMIM needs to transition from a pledge-based system to a fully-funded one. This would separate its balance sheet from those of its member countries, alleviate funding uncertainty, and increase its credibility during crises.As the region’s member countries lack convertible currencies, finding ways to recognise paid-in capital to the CMIM as foreign exchange reserves, similar to capital subscriptions at the IMF, is essential.Technological advances and interest in improving cross-border payment systems through central bank digital currencies also present opportunities to enhance the CMIM. Hong Kong, Singapore and other Asian economies are conducting CBDC pilot experiments, which have already demonstrated potential benefits in reducing cross-border transaction costs and settlement risks. However, further research is needed to ensure the system can function properly on a large scale, especially in times of crisis. If the liquidity provision mechanism can be programmed in advance by using the digital currencies of global and regional safety nets, such as the IMF and the CMIM, it can enhance the current cross-border CBDC platform.Asian policymakers have long sought to establish an effective regional safety net. Upgrading the CMIM to a new institutionalised fund system based on paid-in capital should be a top priority. Beyond their pledges, member countries need to have skin in the game. More

LONDON, March 23 (Reuters) – The Bank of England raised interest rates by a further quarter of a percentage point on Thursday and said it expects the surge in British inflation to cool faster than before, despite a surprise jump in price growth announced on Wednesday.Sounding more upbeat about the outlook for the country’s slow pace of economic growth, the BoE’s nine rate-setters voted 7-2 in favour of a 25 basis-point increase in Bank Rate to 4.25%.That was its 11th consecutive increase in borrowing costs which began in December 2021, although it was the smallest rise since June last year.Monetary Policy Committee members Swati Dhingra and Silvana Tenreyro voted to keep rates on hold while Catherine Mann, who has been the committee’s strongest advocate for raising rates in bigger steps, backed the relatively small 25 basis-point increase. The BoE – which is trying to reconcile a weak economic outlook and anxieties about global banks with stubbornly high inflation – kept unchanged its message that its MPC saw less urgency about maintaining its fast run of rate hikes.”The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation,” the BoE said.”If there were to be evidence of more persistent pressures, then further tightening of monetary policy would be required,” it added.BoE Governor Andrew Bailey and his colleagues last month dropped language saying that they were ready to act forcefully if the outlook suggested persistent inflationary pressures.In Thursday’s statement, the BoE said price growth remained on course to fall sharply in the April-June period of this year, despite inflation’s surprise jump to 10.4% in February.Inflation in the second quarter would be lower than the BoE forecast last month after finance minister Jeremy Hunt last week announced an extension of state subsidies to lower households’ utility bills, and international energy prices fell, it said.As recently as Tuesday – before the latest inflation data – investors were split 50-50 on whether the BoE would leave Bank Rate unchanged for the first time since November 2021 after the rescue of Credit Suisse and the collapse of Silicon Valley Bank.The BoE on Thursday noted “large and volatile moves” in financial markets around the world caused by the banking turmoil but said its Financial Policy Committee judged that Britain’s banking system remained resilient.”The MPC will continue to monitor closely any effect on the credit conditions faced by households and businesses, and hence the impact on the macroeconomic and inflation outlook,” it said.The European Central Bank last week stuck to its plans and raised rates by 50 basis points despite the Credit Suisse turmoil, a move repeated by the Swiss National Bank on Thursday as it warned that more hikes could not be ruled out.On Wednesday, the U.S. Federal Reserve raised its main interest rates by a quarter of a percentage point, and indicated it was on the verge of pausing further increases. The BoE predicted measures included in Hunt’s budget would speed up Britain’s sluggish economy and increase the level of gross domestic product by about 0.3% over the coming years.It said it expected GDP would grow slightly in the second quarter of 2023, an upgrade of its pre-budget forecasts made in February that the economy was on course to shrink by 0.4% during the April-June period.As well as the extended energy subsidies to households – which had originally been due to expire in April – the BoE now expects employment growth to be stronger than previously forecast.The BoE is worried about the strength of the labour market because pay growth, despite cooling a bit recently, is running far above its historical average and shortages of workers remain acute, all of which is inflationary.However, it said it expected wages to rise slightly less than it had previously forecast, as inflation expectations fell. The BoE was not due to hold a quarterly news conference by Bailey and other top officials on Thursday. Bailey is due to make a speech on Monday. The BoE was the first major central bank to start raising rates in December 2021 and until this week had seemed likely to join the Bank of Canada which this month stopped raising borrowing costs.Earlier on Thursday, before the rate decision, investors in rate futures markets were positioned for possibly two more 25-basis-point moves by the BoE by September after Thursday’s expected hike. More