Aurelia Butler

Germany’s 10-year bond yield briefly rose after the hike but was last at 1.58%, unchanged from prior to the decision. The two-year yield, sensitive to interest rate expectations, was up 2 bps to 1.10%, similar to before the decision. Italian bond yields fell 1.5 bps to 3.8147. The closely-watched risk premium they pay over German peers was unchanged at 225 bps.Money markets moved to price in another 49 bps of rate hikes at the ECB’s October meeting, compared to around 50 bps before the decision. The euro briefly edged up but was last trading at around $1.0007, little changed from where it was trading just before the rate move. Euro zone bank stocks jumped and were up more than 1%, while the broader stock market wavered and was last down 0.1%. . More

KYIV (Reuters) -Ukraine’s central bank kept its main interest rate unchanged at 25% on Thursday, warning of high inflationary pressure and saying an extended full-scale war with Russia remained the key economic risk. Inflation rose to 22.2% year on year in July, reaching around 23% last month, though the growth in inflation was slightly slower than earlier forecast and inflation was set to remain under control, it said. The central bank was ready to step in to hike the rate if required and to deploy other measures to protect its international reserves and maintain control over inflation. “Inflationary pressure remains high,” it said. “Effects of the war, in particular the destruction of production facilities and disruption of logistics, still have a major impact on prices of almost all goods and services in the consumer basket,” it added. Buffeted by Russia’s Feb. 24 invasion, the government has forecast an economic contraction of 30-35% this year, while forecasts for gross domestic product in 2023 range from a further contraction of 0.4% to an expansion of 15.5%.The central bank saw no grounds to revise the current official exchange rate for the hryvnia, the national currency, Central Bank Deputy Governor Serhiy Nikolaychuk told reporters at a briefing. Ukrainian officials have estimated the country faces a $5 billion-a-month fiscal shortfall and outside financing has taken on vital significance for Kyiv as the war with Russia nears the seven-month mark. “Ongoing international support will enable the (National Bank of Ukraine) to maintain international reserves at a sufficient level in the coming years,” the central bank said. Ukraine turned to the International Monetary Fund for a new credit programme at the beginning of August. Nikolaychuk told reporters after the rate meeting that active consultations continued between Kyiv and the IMF. “We hope that as a result of these discussions, in the nearest future there will be official announcements on the formats of IMF support of Ukraine in (the current) conditions,” he said. President Volodymyr Zelenskiy said on Wednesday that Ukraine needed a “full-fledged” programme of IMF financing. More

The ECB lifted its deposit rate to 0.75% from zero and raised the main refinancing rate to 1.25%, their highest level since 2011, as inflation is becoming increasingly broad and was at risk of getting entrenched.”Over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations,” the ECB said in a statement.The move comes after weeks of canvassing by policymakers, with a seeming majority making the case for a 75 basis-point hike and a few policy doves trying to downgrade expectations.Markets, however, sided with the conservatives and priced in an 80% likelihood of a 75 basis-point move, even as economists polled by Reuters were more evenly split, showing only a slight majority expecting the larger move.The large hike comes as the ECB increased its own inflation forecasts and continues to see price growth well above its 2% target throughout its entire projection horizon.”ECB staff have significantly revised up their inflation projections and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024,” the ECB added.Conservatives feared that anything but an oversized move would signal that the ECB was not serious about its inflation-fighting mandate. That risked pushing up already high long-term inflation expectations, which would signal a loss of confidence in the ECB.Timid action would have also weakened the euro, boosting inflation through more expensive energy imports.Frontloading the rate hikes also allows the ECB to get most of the work done before the recession sets in.Attention now turns to ECB President Christine Lagarde’s 1245 GMT news conference. More

“It is possible that income from non-residents’ funds that we, for our part, have frozen” could be used to “compensate many investors”, Nabiullina said.Russia’s banking system has been hit hard by Western sanctions imposed after Moscow ordered tens of thousands of troops into Ukraine on Feb. 24.The central bank said earlier this week it planned to gradually limit access for non-qualified retail investors to foreign shares issued by companies from designated “unfriendly” countries. More

BEIRUT (Reuters) – Five months after Lebanon’s draft IMF deal raised hopes it could finally pull together an economic reform plan to address its financial meltdown, political and financial elites are obstructing prospects of securing any rescue package.    Efforts to enact eight reforms sought by the IMF are going nowhere or falling short, hitting resistance from politicians who are shielding vested interests and dodging accountability.It means Lebanon will likely have little to present to the Fund’s annual board meeting in October to back its quest to unlock $3 billion in aid, and adds to doubts over whether the government will ever come up with a plan to address the crisis.     Last week, the IMF told the government that its only attempt so far at legislative reform to tackle the three-year economic crisis – amendments to the banking secrecy law – still retained “key deficiencies”, after MPs watered down the original text, according an IMF legal brief seen by Reuters.Adding to the dim outlook, a plan for plugging a hole in the national finances – some $72 billion and growing – faces objections, including banks that say it puts too much of the burden on them. The latest pushback came on Thursday from a group of business leaders and former officials who launched their own version of the recovery plan reflecting some of the banks’ concerns.Without such a plan, an early version of which was torpedoed by politicians and bankers in 2020, ordinary savers are paying the price, locked out of deposits in a frozen banking system where the value of their cash has plunged since 2019.”It’s clear that there’s no political will to reform,” said law-maker Ibrahim Mneimeh. “You can’t separate the politics from the economics – especially not in Lebanon.”The inaction adds to concerns the ruling elite – accused by the World Bank of deliberately orchestrating the crisis – will let it fester indefinitely.The crisis is fuelling poverty, a brain drain and a risk of instability in a country with a history of civil war.Despite the lack of progress, there is no suggestion the IMF will walk away. While the draft deal urges timely implementation of reforms, it sets no deadline.The government says it remains committed to the IMF track, seen as the only way out of a crisis rooted in years of corruption, waste and unsustainable financial policies.”MAGICAL” SOLUTIONS Some are pinning their hopes elsewhere, anticipating that unproven offshore gas fields may one day provide salvation, though these could take years to develop. The Iran-backed Hezbollah has said this is the only solution.Lebanese banks have also backed a proposal to use part of future oil and gas reserves to plug the financial gap, an idea experts on IMF thinking say would not be acceptable to the fund. “There is a belief in a magical solution – oil and gas,” said Camille Abousleiman, a finance lawyer and former minister. “This is no substitute for fundamental reform.”He cited vested interests and a lack of “ethical leadership” as causes of inaction by politicians, who managed to cling to power after the election despite the crisis.Meanwhile, dollar reserves representing what’s left of depositors’ funds are being depleted. The central bank said in June they had dropped $2.2 billion in 2022 to about $11 billion.The watered-down amendments to the banking secrecy law show the resistance to reform.An early draft allowed the lifting of banking secrecy to investigate “all financial crimes” but the version approved by parliament in July weakened it, allowing only some government bodies to lift it in cases of specific crimes. The IMF brief seen by Reuters suggested parliament reinstate the nixed clauses.DIVIDING LOSSES The dispute over how to distribute the financial sector losses remains a complication.The government plan, drawn up Deputy Prime Minister Saade Chami, aims to do this in a way that protects depositors and the state, writing off a chunk of central bank debt to commercial banks, which would shoulder big losses, echoing IMF principles.Under the alternative plan launched on Thursday by the Lebanese Economic Organizations, banks would bear responsibility but without pushing the sector towards bankruptcy, its chair, ex-minister Mohamed Choucair, said, local media reported.Four sources familiar with the plan said it would flip the hierarchy of claims.Lebanon has made almost no progress on the rest of the to-do list, which Chami had hoped would be completed by September so that the IMF board could be approached by October.The political calendar does not bode well. President Michel Aoun leaves office on Oct. 31 with no sign yet of agreement on who should replace him, while the government has been operating in a caretaker capacity since the May election due to divisions over a new cabinet. More