Aurelia Butler

LONDON (Reuters) – The Bank of England is satisfied lenders have taken steps to ensure they are no longer “too big to fail” in any future crisis, it said on Friday, though it did find shortcomings at three leading banks.The BoE is aiming to stop banks from requiring taxpayers to bail them out, as happened in the 2007-09 global financial crisis. The central bank said it was satisfied overall that banks could be wound down safely while keeping vital services open, with shareholders and investors in line to bear the costs rather than taxpayers.In its first public assessment of how failing lenders could be dismantled in a crisis, the BoE said it had also identified “areas of further enhancement” for six companies.The three banks found to have shortcomings were Lloyds (LON:LLOY), Standard Chartered (OTC:SCBFF) and HSBC. All three were found not to have produced sufficient analysis of their liquidity needs were they to be wound down.Globe-spanning banks HSBC and Standard Chartered were also found to have failed to produced up-to-scratch restructuring plans.The central bank said the shortcomings identified would complicate its ability to undertake a resolution but it could still do so safely.In separate statements on Friday the three banks said they were making enhancements to address the issues identified and were improving their so-called resolution plans. “Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritise work on this issue,” said Dave Ramsden, the Bank of England’s deputy governor for markets and banking.The other lenders included in the review were Barclays (LON:BARC), NatWest, Nationwide, Santander (BME:SAN) UK and Virgin Money (LON:VM) UK.Analysts cautioned that it is unclear how well the plans would work if they ever had to be put into action.”Some will be sceptical as to whether the resolution framework would work exactly as intended in practice in the event of a failure of a high street lender, given the enormous losses it could result in for shareholders and debt investors,” said Goodbody banking analyst John Cronin.The BoE said it would repeat its assessment in 2024 and review progress made by the lenders every two years after that. The central bank has powers to force lenders to make structural changes if it feels there are barriers to fast and orderly closure.Publication of the review was delayed by a year to free up lenders to deal with the COVID-19 pandemic.In 2018 the U.S. Federal Reserve said that the U.S. arm of Barclays had shortcomings in its resolution plan, but not deficiencies that required a bigger capital buffer. More

The scale of the move has repercussions for the domestic economy as yen-based import prices are surging at a record annual pace, heaping pressure on household balance sheets.The Bank of Japan and the Japanese government on Friday gave a rare joint statement that they may intervene if weakness persists.So far the fallout from the weakening yen has been minimal for broader financial markets, but that could change if the sell-off accelerates.Below are key questions about what a sliding yen means for Japan’s economy and international markets:WHY IS THE YEN WEAK?The yen, the third most-traded currency globally, is now near 134 per dollar after starting 2022 at 115. With the dollar up 16% so far this year, the yen is on track for its biggest annual drop since 2013.The weakness primarily stems from widening interest rate differentials between Japan and elsewhere.While the rest of the world, led by the U.S. Federal Reserve, is raising rates aggressively to tame soaring inflation, the BOJ has doubled down on its easy policy stance. The gap between Japanese 10-year government bond yields and those in the United States is 279 basis points — a near 3-1/2-year high — while the gap with German yields is at 8-year highs.WILL AUTHORITIES INTERVENE?They certainly say they might.On Friday, Japan’s government and central bank said they were concerned by the recent sharp falls, the strongest warning to date that Tokyo could intervene.The yen quickly bounced away from its two-decade lows, but not everyone is convinced actual intervention is likely.Given the economy’s reliance on exports, Japan has historically focused on arresting sharp yen rises and taken a hands-off approach to yen weakness, which is more difficult because yen-buying requires Japan to draw on limited foreign reserves. The last time Japan intervened to support its currency was 1998, when the Asian financial crisis triggered rapid capital outflows from the region. Before that, Tokyo intervened to counter yen falls in 1991-1992.Currency intervention is costly and could easily fail given the difficulty of influencing the yen’s value in global foreign exchange markets.WHAT CAN STOP THE DECLINE?A marked improvement in growth prospects as the country reopens its borders post-COVID and higher inflation could alter the BOJ’s dovish stance. Japan’s core consumer prices in April were 2.1% higher than a year earlier, exceeding the BOJ’s 2% inflation target for the first time in seven years.”The yen’s fall could stop if the BOJ changes tack and becomes hawkish,” said Francesca Fornasari, head of currency solutions at Insight Investments.Any sign that rates outside of Japan are peaking might also prompt a relief rally. There are no signs of that yet though, with U.S. rates set to peak at 3.5% in mid-2023, according to futures markets.DOES A WEAKER YEN BOOST THE ECONOMY?The yen has weakened back towards recent 7-year lows versus the Chinese yuan and is hitting new multi-year lows against the Korean won and the Taiwanese dollar, which should provide some relief for Japan’s widening trade deficit.Some like John Vail, chief global strategist at Nikko Asset Management, say currency weakness is crucial for Japan’s economy to maintain its competitiveness as a secure source of supply-chain diversification. The yen’s decline also boosts the attractiveness of its stock market among foreign investors who consider it undervalued versus European and U.S. markets. Japanese stocks have outperformed rivals in 2022, although they are still down as investors globally dump riskier assets.WHAT DOES IT MEAN FOR FX MARKETS?The yen has long been the currency of choice for investors undertaking so-called carry trades, which involve borrowing in a low-yielding currency like the yen to invest in higher yielding currencies like U.S. or Canadian dollars.A strategy borrowing in yen and investing in an equal basket of U.S., Australian and Canadian dollars would have yielded 13% so far in 2022, according to Refinitiv data.But the speed of the yen’s drop and questions about policymaker intervention is fuelling unease among investors, especially with short bets against the yen near six-month highs.Further volatility and weakness could undermine its appeal as a funding currency.WHAT ABOUT DOMESTIC INVESTORS?The yen’s weakness puts Japanese investors in a bind. Yields are high and rising, which makes foreign bonds much more attractive. But that also means the cost of FX hedging is climbing. So Japanese investors can often only capture the higher yields if they buy foreign bonds unhedged. But with the yen at such depressed levels it is difficult for investors to stomach such currency risk, such as the yen appreciating. Even a modest move back to 115-120, where we were 4 months ago, would eat up years worth of yield advantage. More

LONDON (Reuters) – The Bank of England looks set to raise interest rates next week for the fifth time since December, its steepest run of rate hikes in 25 years, and is likely to keep going in the coming months as inflation heads for double digits.While Britain is forecast to have the weakest economy in 2023 among the world’s big, rich nations, investors and most economists are predicting a quarter-point rate hike by the BoE next Thursday.That would take Bank Rate to 1.25%, its highest level since January 2009, when Britain’s economy was holed by the global financial crisis.While historically low, expectations for British borrowing costs over the next couple of years have risen sharply recently and they jumped again this week when the European Central Bank flagged rate hikes at its next two meetings, including a possible half percentage-point rise in September.Investors are betting on the BoE’s Monetary Policy Committee doubling Bank Rate to 2% by September and hitting 3% by March next year. Some economists are ramping up their forecasts too.Sanjay Raja at Deutsche Bank (ETR:DBKGn) said on Friday he now expected rates to peak at 2.5%, up from a previous call of 1.75%, starting with a 0.25% increase next week.”We don’t expect a unanimous decision, however. Instead, risks are skewed to a more split MPC, with at least three members on the committee looking for a bigger 50 basis-point move,” he said in a note to clients. “There’s also a possibility of an even messier vote, with one or two members looking for no change to the Bank Rate.”FIRST MOVERThe BoE was the first big central bank to start reversing its pandemic stimulus in December, before the U.S. Federal Reserve and others began to move to head off the jump in inflation caused by the reopening of the world economy after the coronavirus pandemic and then Russia’s invasion of Ukraine.But that did not stop British inflation hitting a 4-year high of 9% in April, almost five times the BoE’s 2% target.The BoE thinks inflation is set to surpass 10% later in 2022, when regulated energy tariffs are due to jump by a further 40%, and consumers have already reined in their spending while there are signs of a slowdown in the housing market.Governor Andrew Bailey said in April the BoE was walking a very tight line between tackling the surge in prices and causing a recession. But with wage deals starting to climb, the BoE’s priority is to show it means business on fighting inflation.A BoE survey published on Friday showed the public’s expectations for inflation in the year ahead at 4.6%, the highest in records going back to 1999.Since the central bank’s last meeting in May, finance minister Rishi Sunak has given more money to households to soften the cost-of-living squeeze, reducing the risks of a recession and potentially increasing inflation pressures.Billions of pounds of further support are expected from Sunak later this year as Prime Minister Boris Johnson fights for his political life after 41% of Conservative Party lawmakers voted to oust him on Monday.There is also the risk of an escalation in a post-Brexit trade dispute between Britain and the European Union which could also fan inflation.Paul Dales, an economist with Capital Economics, said investors were under-estimating the chance of a half-point rate hike by the BoE next week, especially if economic growth and labour market data due on Monday and Tuesday are strong.”Either way, we think it will be very close with the MPC either voting 5-4 for a 50 basis point hike or 5-4 for a 25 basis point hike,” he said in a note to clients.Markets on Friday were pricing in a 30% chance of a half-point move by the BoE on June 16. More

A former Nato chief is calling for the creation of an economic version of the Article 5 mutual defence pledge that defines the transatlantic military alliance in order to thwart commercial coercion by authoritarian states.Anders Fogh Rasmussen, the former Danish prime minister who served as Nato secretary-general from 2009 to 2014, will on Friday announce a plan for western allies and other democracies to respond more effectively to economic threats from countries such as China and Russia.“Our proposal is inspired by Nato’s Article 5, which states that a military attack on one ally is considered an attack on all,” Rasmussen wrote in a report co-authored with Ivo Daalder, former US ambassador to Nato. “The aim is to produce the same deterrence and solidarity in the economic realm among democracies that Nato produces in the security realm.“It’s time to tell the bullies that if they poke one of us in the eye, we’ll all poke back,” they added.The idea is being floated as western leaders prepare to gather this month in Spain for a Nato summit and in Germany for a G7 summit, where they will grapple with how best to confront economic warfare as well as traditional security threats.The urgency of tackling economic aggression from authoritarian nations has risen in the wake of China’s commercial confrontations with Australia and Lithuania, as well as Russia’s weaponisation of its natural resources in the stand-off with the west over Ukraine.Rasmussen and Daalder are proposing that an economic Article 5 commitment could be implemented through existing structures such as the G7, which has been reinvigorated along with Nato by the co-ordinated western response to the war in Ukraine. But the authors said other democracies would have to be “involved” and a standalone organisation may have to be set up to manage the new guarantee.

In an interview, Daalder said officials in US president Joe Biden’s administration had been consulted about the plan, including at the White House, Treasury and state departments, along with EU officials. While he acknowledged that as recently as last year such an idea would have been unlikely to go very far, he said the Russian invasion of Ukraine meant there was a greater understanding that “the world is changing”.Although the report does not spell out specific retaliatory measures that could be imposed on countries that are deemed responsible for economic coercion, Daalder said these could include sanctions, secondary sanctions, import tariffs and other measures.Even though such punitive actions could have negative economic spillovers on the countries imposing them and trigger a backlash from business, they might help concentrate supply chains in democracies, he said. “There are geostrategic interests . . . that may have to trump economic interests in a way that wasn’t probably true in the last 30 years, but needs to be true in the next,” he added. More

Investors are lining up bets that the pound will fall further after a tough start to 2022 as a “dire” mix of towering inflation and slowing growth darkens the UK’s economic outlook.Wagers that sterling will fall are near their highest level in almost three years, according to Commodity Futures Trading Commission data, which track how speculative investors are positioned in futures contracts, a proxy for sentiment in the $6.6tn-a-day foreign currency market. Even as Boris Johnson survived a parliamentary confidence vote this week — potentially averting a period of political turmoil — markets are focused on the gloomy economic backdrop, say analysts, meaning the UK prime minister’s victory is unlikely to prompt a change in course for the currency.Sterling whipped back and forth around Monday’s vote, but on Thursday traded close to where it was against the US dollar a week ago at $1.254. It has shed 7 per cent this year against the dollar. Currency traders say the implications of Johnson’s win were muddied by uncertainty over who might have replaced him. At the same time, the political twists and turns largely remain a sideshow for a foreign exchange market focused on the potential for a UK recession later this year, which could halt the Bank of England’s efforts to tame inflation by raising interest rates.“The market is very bearish on sterling,” said Sam Lynton-Brown, head of developed markets strategy at BNP Paribas. “Domestic political uncertainty hasn’t been a big driver of the currency. So even if it alleviates, you shouldn’t expect the pound to recover. We still think it can weaken further.”The BoE has lifted interest rates four times since it began to tighten monetary policy in December — well ahead of counterparts such as the US Federal Reserve and the European Central Bank. Even so, the pound has lost ground against the euro and the dollar this year as investors begin to wonder how long borrowing costs can continue to rise with consumers facing an acute cost of living crisis.“By the time we get into the autumn in the UK, the impact on household incomes of inflation but also of higher rates will be so marked that the window of opportunity for the BoE to raise rates will be closing,” said Jane Foley, head of currency strategy at Rabobank. The problem of how to rein in inflation without choking off growth is not unique to the BoE. But some investors worry the UK’s dilemma is more acute than that faced by other big developed economies. The OECD on Wednesday forecast that the UK economy will grind to a halt next year, with only sanctions-hit Russia faring worse among G20 nations.“Even as inflation comes back down in other major economies, we are likely to have a more persistent problem in the UK,” said Mark Dowding, chief investment officer of BlueBay Asset Management. “A stagflationary environment will be pretty dire for all UK assets and for the pound,” he said, describing the blend of surging prices and slowing growth. “We could end up with a scenario where the pound is on its way to parity with both the euro and the dollar.”Recent comments from governor Andrew Bailey that the BoE is “helpless” to fight inflation have not helped, according to Dowding.“Even if they think that — they shouldn’t be telling everyone. It’s only going to push up inflation expectations even further,” he said.Lynton-Brown said stubbornly high inflation would hit foreign demand for UK government debt, which trades at some of the lowest inflation-adjusted yields in the world. Without persistent inflows into gilts to fund the UK’s current account deficit, the exchange rate would have to adjust lower, he said.

For some analysts, the gloom surrounding sterling could actually be a source of resilience in the short term. A global rebound in stock markets would likely boost the pound, which tends to move in tandem with riskier assets, as bearish investors exit their short positions, according to Nomura strategist Jordan Rochester.Investors might also embrace a renewed threat to Johnson’s position, betting that his successor would be less likely to inflame trade tensions with the EU by ditching the post-Brexit trade deal for Northern Ireland, he said.“The market has become so negative on politics in the UK that it tends to lean towards the positive if there’s any promise of change,” said Rochester. “But you have to be careful because we don’t know what a change of leadership means for policy, for spending, or for reform, because we don’t know who comes next.” “The next Tory leader might not be racing to tear up the Northern Ireland protocol, but you could also get an even harder Brexiter,” he added. More

Dovish rate-setters at the European Central Bank are leaving their meeting in Amsterdam disgruntled, after record inflation forced them into making concessions on the pace of interest rate rises over the coming months. “My impression is everybody lost,” one dovish governing council member said of Thursday’s decision. That saw the ECB signalling it was likely to raise its benchmark deposit rate above zero by the autumn — faster than investors expected — to tackle inflation which at 8.1 per cent is now four times the bank’s 2 per cent target.The council member said the ECB had achieved the worst possible outcome; government borrowing costs went higher, particularly for weaker southern European countries like Italy, while the euro fell almost 1 per cent against the dollar — fuelling more inflationary pressure by raising the cost of imports. The dovish rate-setter added: “This is not what you want.”The council’s more upbeat hawks see things differently. “It went well. We finally decided to take action on inflation, so I am very satisfied,” said one rate-setter from this camp. In fact the deal, which was drawn up by ECB chief economist Philip Lane, meant both sides made concessions. After dining together on Wednesday evening beneath Rembrandt’s painting of The Night Watch in the Rijksmuseum with the Dutch king and queen, Willem-Alexander and Máxima, prime minister Mark Rutte and finance minister Sigrid Kaag, the council gathered again on Thursday to unanimously support the compromise.The hawks agreed to back down on their push for the central bank to end its eight-year experiment with negative rates in one go next month via an aggressive half percentage point increase in the deposit rate from a current level of minus 0.5 per cent.Instead, the ECB said it intended to raise rates by 25 basis points in July. But in return the hawks won a commitment that the ECB would raise rates by “a larger increment” in September, as long as the inflation outlook “persists or deteriorates”. Given that inflationary pressures are likely to keep rising for several months, most investors assume this means a 50bp rate rise is highly likely in three months’ time.In a sign of how the hawks now feel more in the ascendancy, several said they still had not entirely given up on the possibility of a 50bp rise in July, especially if eurozone inflation overshoots expectations again when new data comes out at the end of this month. The ECB declined to comment.Germany’s central bank underlined the hawkish shift by announcing on Friday it had more than doubled its forecast for inflation in the country this year from its December projection to 7.75 per cent – the highest level in at least 40 years. It also slashed its 2022 growth forecast for Germany by more than half to 1.9 per cent and said inflation would remain above growth for the next three years. “Euro area inflation rates won’t fall by themselves,” said Bundesbank president Joachim Nagel, stressing the need for “resolute action”. Government borrowing costs rose in response to this week’s hawkish shift. Germany’s 10-year bond yield climbed 0.08 percentage points to 1.43 per cent. Riskier debt sold off more sharply, with Italy’s 10-year yield up 0.24 percentage points to 3.61 per cent.Some investors were disappointed that the ECB did not provide a clearer commitment to launching a new bond-buying scheme if needed to avert a fresh debt crisis among highly indebted southern European countries, such as Italy. The issue was discussed at this week’s meeting and council members agreed that ECB president Christine Lagarde would use her press conference on Thursday to emphasise their willingness to launch a new instrument at short notice if needed to “fight fragmentation” in eurozone bond markets, according to one person involved in the discussions. A severe “fragmentation” in member states’ borrowing costs would mark a return to the days before the ECB began buying bonds in 2014 — a time when the threat of a debt crisis in more vulnerable member states risked triggering a break-up of the currency area. But most council members agreed there was no point trying to design a new instrument to tackle this risk until it materialised, because it could be blocked by the ECB’s own lawyers for not being “proportionate” or attract a challenge in Germany’s constitutional court.Battle lines are already being drawn over the next contentious issue: how soon to start shrinking the ECB’s balance sheet. At the moment, the plan is to keep on reinvesting the proceeds of its €4.9tn portfolio of securities as they mature. The hawks want that to stop sooner rather than later, following the lead set by the US Federal Reserve and Bank of England.

Analysts say it will become increasingly difficult for the ECB justify keeping its balance sheet static when it is also trying to tame record inflation by raising rates. Katharina Utermöhl, senior Europe economist at Allianz, said that, if high inflation warranted rate rises, then “a shortening of the reinvestment horizon” also appeared necessary.Some council members think that as the ECB raises its deposit rate, it risks lifting short-term borrowing costs above long-term rates, especially if it keeps longer-term yields suppressed by reinvesting the proceeds of maturing bonds. This could create an inverted yield curve, with short-term borrowing costs higher than longer-term ones, making life difficult for banks that aim to borrow short and lend long — and earn a profit on the difference. The risk of yield curve inversion could put pressure on the ECB to start shrinking its balance sheet even before the end of this year.But other rate-setters said there would be many factors determining when to start shrinking the ECB balance sheet — a process known as quantitative tightening — including the pace of inflation, the state of the economy and overall government debt levels. “I don’t think we will see this happen any time soon,” said the dovish council member. More

Your browser does not support playing this file but you can still download the MP3 file to play locally.US consumer prices are set to have registered another large monthly advance, the European Central Bank has paved the way for a series of rate rises, and China is offering coronavirus vaccine insurance in an effort to win over scepticsand boost the vaccination rate. Mentioned in this podcast:ECB plans quarter-percentage point rate rise in July as ultra-loose policy endsChina offers Covid vaccine insurance to win over jab scepticsThe FT News Briefing is produced by Fiona Symon, Sonja Hutson and Marc Filippino. The show’s editor is Jess Smith. Additional help by Peter Barber, Michael Lello, David da Silva and Gavin Kallmann. The show’s theme song is by Metaphor Music. Topher Forhecz is the FT’s executive producer. The FT’s global head of audio is Cheryl Brumley.Read a transcript of this episode on FT.com See acast.com/privacy for privacy and opt-out information.Transcripts are not currently available for all podcasts, view our accessibility guide. More