Aurelia Butler

(Reuters) -Britain became the first G7 economy to hike interest rates since the onset of the pandemic on Thursday, with the U.S. Federal Reserve also signalling plans to tighten in 2022 but the European Central Bank only slightly reining in stimulus.The different paths taken by major central banks underline deep uncertainties about how the fast-spreading Omicron variant will hit the global economy and their differing views on stubbornly high inflation and cross-border supply chain snags.They also reflect the uneven impact of the pandemic on the world’s top economies. Fed Chair Jerome Powell on Wednesday forecast the United States was heading towards full employment come what may – a far-off prospect for most European labour markets.Bank of England policymakers raised the benchmark Bank Rate to 0.25% from 0.1%, confounding economists’ expectations that it would stay on hold, saying that inflation was set to hit 6% in April, three times the BoE’s target level.”The Committee continues to judge that there are two-sided risks around the inflation outlook in the medium term, but that some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2% inflation target sustainably,” the UK central bank said.UK daily coronavirus infections are at their highest since the earliest days of the pandemic, forcing Prime Minister Boris Johnson this week to impose new restrictions.A first read-out of the UK Purchasing Managers’ Index (PMI) for December on Thursday showed Omicron had already hit British hospitality and travel firms – a day after data showed consumer price inflation at a decade-high.The ECB, which has undershot its inflation target for most of the past decade, meanwhile kept interest rates on hold and announced the end of its pandemic emergency asset-buying scheme next March.But the euro zone central bank promised copious support as needed via its long-running Asset Purchase Programme, confirmed its relaxed view on inflation and signalled that any exit from years of ultra-easy policy will be slow.”The Governing Council judges that the progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases over the coming quarters,” it said in a statement.The Bank of Japan is due to announce its policy on Friday. With consumer-level inflation remaining largely absent, only a slight reduction in corporate asset purchases is under discussion at its meeting.MAXIMUM EMPLOYMENTThe Fed on Wednesday doubled the pace at which it will cut bond purchases, while forecasts from its policymakers signalled as many as three interest rate increases next year.”The economy no longer needs increasing amounts of policy support,” Powell told a news conference. “In my view, we are making rapid progress toward maximum employment.”Even if the others are not hard on its heels, Powell and the Fed appear to have set the agenda for a tumultuous 2022 as central bankers chart their paths to the exit, albeit at dramatically different paces.”You saw it in his congressional remarks that were more about tightening sooner than it was about worrying about the health of the global economy,” said Vincent Reinhart, chief economist for Dreyfuss & Mellon. Norway’s central bank, which had hiked in September on the back of an economic rebound, went ahead with a further rise as expected and said more were likely to follow.Earlier on Thursday, the Swiss National Bank kept its ultra-loose stance in place with a policy rate locked in at -0.75%. Swiss inflation – while rising – is still seen much lower than elsewhere at just 1% next year, falling to 0.6% in 2023.”The SNB is maintaining its expansionary monetary policy,” it said in a statement. “It is thus ensuring price stability and supporting the Swiss economy in its recovery from the impact of the coronavirus pandemic.” More

The bank said it would continue to cut bond buys under its 1.85 trillion euro Pandemic Emergency Purchase Programme next quarter and will wind down the scheme as expected next March.It will ramp up bond buys under its longer-running but more rigid Asset Purchase Programme, however, keeping the ECB active in the market. The central bank for the euro zone has said it considers a spike in inflation to be temporary.It will buy 40 billion euros of bonds under the APP in the second quarter, 30 billion euros in the third quarter, then from October onwards, purchases will be maintained at 20 billion euros, for as long as necessary to reinforce the accommodative impact of its policy rates. “The Governing Council judges that the progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases over the coming quarters,” it said.Although analysts expect the ECB to cut its bond purchases in half by April from now, the effective cut is likely to be much smaller as fresh government issuance is expected to fall, so the ECB will continue to hoover up most of the new debt.Attention now turns to ECB President Christine Lagarde’s 1330 GMT news conference where she will unveil fresh economic forecasts. More

Growth in UK economic activity has slowed to its weakest pace since February as the spread of the Omicron coronavirus variant hits consumer demand for travel and hospitality, a key survey showed on Thursday.The flash UK composite output index published by IHS Markit and the Chartered Institute of Procurement and Supply fell from 57.6 in November to 53.2 in December, dragged down by a sharp drop in service sector activity as new virus restrictions hit consumer confidence.Business confidence in the economic outlook also sank for a fourth consecutive month, with expectations for growth in the year ahead now at their lowest since October 2020 — weaker than during the depths of the first quarter lockdown, when the vaccination drive was getting under way.Chris Williamson, economist at IHS Markit, said there was a glimmer of good news from the manufacturing sector, where supply chain blockages had eased somewhat. However, the pace of growth was set to weaken heading into 2022, he added, with a “bigger uncertainty” over how far rising infection rates might exacerbate labour and supply shortages, renewing inflationary pressures. Gabriella Dickens, at the consultancy Pantheon Macroeconomics, said the data were “the clearest sign yet that the Omicron variant has set back the economic recovery”.Meanwhile, real time data showed the rapidly worsening outlook for the industries most directly affected by the surge in infections and the imposition of new restrictions.Figures from OpenTable, the online booking site, showed the number of seated diners at UK restaurants in the week to December 14 was barely changed from its level two years ago — the weakest showing since the hospitality sector reopened in May — whereas it was 15 per cent above its 2019 level in the late November week before news of the Omicron variant emerged.Some businesses suffering from a sudden stop in bookings may be ill-prepared to cope: an Office for National Statistics survey showed that 13 per cent of all businesses had no cash reserves in the week to December 12, the highest percentage reported since June 2020, with the proportion rising to almost one in five in the accommodation and food services sector.There are also some signs of consumer spending starting to soften in the most exposed sectors.

Airline spending was 39 per cent lower in the week to December 12 than in the equivalent week of 2019, compared with a shortfall of 20 per cent the previous month, according to Fable Data, a company that tracks bank transactions. There was also a similar slump in broader spending on international travel and tourism, although there was not yet any major change in spending on eating out, or on public transport and fuel, despite the renewal of work from home guidance.Paul Dales, at the consultancy Capital Economics, said that until the end of last week he had been predicting a drop of no more than 0.1 per cent in December’s gross domestic product due to Omicron — but that the rapid turn of events now made a fall of 0.5 to 1 per cent look likely.If the UK entered lockdown in the new year, GDP could fall at least 3 per cent, he added — with a more severe, protracted decline possible if the government failed to step up fiscal support. More

At a long-awaited meeting on post-pandemic strategy, officials in Frankfurt confirmed that their 1.85 trillion-euro ($2.1 trillion) pandemic measure would wind down as planned in March, but said that asset purchases under its older conventional program would rise to 40 billion euros a month starting in the second quarter. Policy makers will then taper to 30 billion euros in the following three-month period, before returning to the existing pace of 20 billion euros in October.  “Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic,” the ECB said in a statement. The decision is an acknowledgment that emergency policy settings must come to an end in the face of the euro area’s fastest inflation since the single currency was created and as economic output nears pre-crisis levels.But the move also takes into account the heightened uncertainty triggered by the resurgent pandemic, which is already weighing on the continent’s recovery and has halted economic growth in Germany.The ECB’s announcement follows Wednesday’s decision by the U.S. Federal Reserve to double the pace at which it tapers its own stimulus as it grapples with the biggest surge in consumer prices in three decades. The Bank of England was even more proactive on Thursday, unexpectedly becoming the first Group of Seven central bank to raise interest rates since the pandemic struck. Unlike the Fed, the ECB hasn’t so far abandoned its insistence that elevated price gains are transitory — driven by supply jams and soaring energy costs that will fade in 2022. Backing that view, IHS Markit said German inflation “might have peaked” as its latest gauge of activity showed Europe’s biggest economy stagnating in December.“The progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases over the coming quarters,” the ECB said. “But monetary accommodation is still needed for inflation to stabilize at the 2% inflation target over the medium term.”President Christine Lagarde will elaborate on the ECB’s decisions at a press conference at 2:30 p.m. in Frankfurt. The fresh macroeconomic projections she’ll be armed with will show consumer-price growth back below the central bank’s 2% target in 2023 and 2024, according to people familiar with the matter.That leaves the prospect of a hike in borrowing costs still some way off, with the benchmark deposit rate staying at -0.5%.©2021 Bloomberg L.P. More

The European Central Bank said it would scale back its crisis bond-buying in response to soaring inflation, but committed to continue asset purchases for at least 10 months and ruled out raising interest rates next year.The decision, which contrasts with a more aggressive withdrawal of crisis support by the US Federal Reserve and Bank of England this week, led to a fall in eurozone bond markets on Thursday as investors absorbed the ECB’s plan to sharply reduce its bond purchases in 2022.Christine Lagarde, ECB president, said the eurozone economy had recovered enough to allow a “step-by-step reduction in the pace of asset purchases”. But she added: “Monetary accommodation is still needed for inflation to stabilise at our 2 per cent inflation target over the medium term.” The central bank said its €1.85tn Pandemic Emergency Purchase Programme (PEPP), launched in 2021, would reduce net purchases next year and halt them altogether in March. But it cushioned the impact by announcing it would expand its older asset purchase programme (APP) from its monthly pace of €20bn, rising to €40bn in the second quarter and to €30bn in the third.The APP purchases would then continue at €20bn per month after October “for as long as necessary”, it said. The moves mean it will continue bond purchases at a rate well below the near-€90bn a month it operated for much of 2021. Amid so much uncertainty generated by the Omicron coronavirus variant, Lagarde said the ECB wanted to avoid a “brutal transition” to lower levels of purchases.There was opposition to the plan expressed by a few ECB governing council members, including Germany’s Jens Weidmann, who is stepping down as head of the Bundesbank at the end of the year. One of their criticisms was that the ECB was committing to maintain its stimulus for too long given the upside risks to inflation.Although the ECB sharply raised its forecast for inflation over the next few years, Lagarde said it was “really making progress” towards hitting its 2 per cent target over the medium term, even if it was “not quite” there yet.The ECB predicted inflation would increase from 2.6 per cent this year to 3.2 per cent next year. But it said price growth would then fall below its target to hit 1.8 per cent in 2023 and stay at that level in 2024.Carsten Brzeski, head of macro research at ING, called the ECB decision “a very cautious taper” that was in line with it stopping asset purchases next year and raising interest rates early in 2023.The price of eurozone government bonds, already on the back foot following the BoE’s decision to raise its policy rate earlier on Thursday, fell further following the ECB announcement. Germany’s 10-year yield climbed 0.03 percentage points to minus 0.34 per cent. Italian 10-year borrowing costs rose 0.06 percentage points higher at 0.97 per cent. Bond yields rise when their price falls.The move to halt the expansion of the ECB’s emergency bond purchase scheme was widely expected by analysts, despite a surge in coronavirus infections, as it reflects the recent rise in eurozone inflation to its highest-ever level of 4.9 per cent in November.

Even so, markets had expected slightly more bond buying in 2022 than the total implied by the ECB’s revised plans, according to Richard McGuire, Rabobank strategist. The sell-off in Italian bonds showed “how sensitised the market is to even modest adjustments in terms of expected ECB support”, he said.Frederik Ducrozet, strategist at Pictet Wealth Management, calculated the ECB was on track to buy about €480bn of bonds next year, covering about 80 per cent of net debt issuance by eurozone governments, vs more than 120 per cent in the past two years.“They are really buying more time to see if there will be second-round effects from higher inflation on wage negotiations. It is really all about that,” Ducrozet said.The euro rose 0.6 per cent against the dollar to $1.136, its highest point in more than two weeks.In a busy day for the central banks of developed economies, the Bank of England unexpectedly lifted borrowing costs by 15 basis points to 0.25 per cent, while Norway’s central bank raised interest rates in a widely expected move by 25bp to 0.5 per cent. The Swiss central bank, meanwhile, kept its main interest rate unchanged at minus 0.75 per cent.The ECB, which kept its deposit rate unchanged at minus 0.5 per cent, also extended plans to reinvest the proceeds of maturing bonds in the PEPP until at least the end of 2024. It said these reinvestments would be “adjusted flexibly across time, asset classes and jurisdictions at any time” to allow it to skew them towards Greek bonds, which it is otherwise prevented from buying because of their low credit rating. More

The Governing Council judges that the progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases over the coming quarters.But monetary accommodation is still needed for inflation to stabilise at the 2% inflation target over the medium term.In view of the current uncertainty, the Governing Council needs to maintain flexibility and optionality in the conduct of monetary policy.With this is mind, the Governing Council took the following decisions: Pandemic emergency purchase programme (PEPP) In the first quarter of 2022, the Governing Council expects to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) at a lower pace than in the previous quarter.It will discontinue net asset purchases under the PEPP at the end of March 2022.The Governing Council decided to extend the reinvestment horizon for the PEPP.It now intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024.In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made efforts to achieve the Governing Council’s goal more effective.Within our mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability.In particular, in the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time.This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout of the pandemic.Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.Asset purchase programme (APP) In line with a step-by-step reduction in asset purchases and to ensure that the monetary policy stance remains consistent with inflation stabilising at its target over the medium term, the Governing Council decided on a monthly net purchase pace of €40 billion in the second quarter and €30 billion in the third quarter under the asset purchase programme (APP).From October 2022 onwards, the Governing Council will maintain net asset purchases under the APP at a monthly pace of €20 billion for as long as necessary to reinforce the accommodative impact of its policy rates.The Governing Council expects net purchases to end shortly before it starts raising the key ECB interest rates.The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.Key ECB interest rates The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.In support of its symmetric 2% inflation target and in line with its monetary policy strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term.This may also imply a transitory period in which inflation is moderately above target.Refinancing operations The Governing Council will continue to monitor bank funding conditions and ensure that the maturing of TLTRO III operations does not hamper the smooth transmission of its monetary policy.The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance.As announced, it expects the special conditions applicable under TLTRO III to end in June next year.The Governing Council will also assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.*** The Governing Council stands ready to adjust all of its instruments, as appropriate and in either direction, to ensure that inflation stabilises at its 2% target over the medium term.The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today. ([email protected]; +49 69 7565 1244; Reuters Messaging: [email protected]) More

Wage growth is slowing fast; a new variant is ripping through your capital city, shuttering restaurants and other venues in its wake; and inflation is rising due to supply chain and energy pressures.So what do you do if you’re a central bank? Raise rates of course!Just in from the Bank of England’s Monetary Policy Committee:At its meeting ending on 15 December 2021, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.15 percentage points, to 0.25%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £875 billion, and so the total target stock of asset purchases at £895 billion.The hike comes after several members of the MPC seemed to suggest that they would stand pat due to Omicron, including Michael Saunders, who is viewed as one of the committee’s hawks. Since Saunders made those remarks earlier in the month we’ve seen Covid cases surge to hit a record high on Wednesday, with the Omicron variant not even the dominant strain (yet) in most parts of the UK.You might recall MP Pat McFadden labelling the Bank an “unreliable boyfriend” for wishy-washiness in the past. Well, here we go again.We’re also not convinced there’s an economic argument either. The Bank’s justification is built around an idea that raising rates will keep inflation expectations anchored around its 2 per cent target — something of a jump down from the latest print of 5.1 per cent. How a 15-basis-point hike will do that in the face of a Covid-induced supply side shock that will put further pressure on the cost of consumer goods, we’re not sure. What we’re more certain of is that the latest surge in cases is likely to hit demand for services, and rate hike won’t help that one iota. More

The Bank of England has raised interest rates from 0.1 per cent to 0.25 per cent in its first increase in more than three years, saying that the risks of inflation required it to take pre-emptive action even as the UK is engulfed by the Omicron wave of coronavirus.Surprising financial markets on Thursday for the second consecutive month and voting 8-1 in favour of higher interest rates, the bank’s Monetary Policy Committee decided it could no longer wait before seeking to cool spending in the economy. The BoE said that the strength in the labour market and signs that inflation was becoming more persistent were enough to require an immediate tightening of monetary policy in order to bring inflation down in the medium term. Further “modest” rises in interest rates would still be needed in the months ahead, the MPC said, to keep inflation under control and bring it down to the BoE’s 2 per cent target. The pound climbed following the BoE decision, gaining 0.8 per cent against the dollar to trade at $1.337, its strongest level in three weeks.The MPC said that the Omicron wave of coronavirus would knock the economy at the end of this year and in the first quarter of 2022, but the effects of the new variant on inflation were unclear.Justifying its decision, the majority on the MPC said: “The labour market was tight and had continued to tighten, and there were some signs of greater persistence in domestic cost and price pressures. “Although the Omicron variant was likely to weigh on near-term activity, its impact on medium-term inflationary pressures was unclear at this stage,” it said.With the BoE’s peak inflation forecast rising from around 5 per cent in April 2022 to a new forecast of about 6 per cent, the vast majority of the MPC felt they had to take immediate action to stop inflation becoming entrenched in companies’ pricing policies and wage demands.The majority on the MPC said there was some value in waiting longer to see the impact of the Omicron variant, but this was outweighed in their thinking by “a strong case for tightening monetary policy now, given the strength of current underlying inflationary pressures and in order to maintain price stability in the medium term”.

It added that there were likely to be more interest rate rises to come although these would not be rapid. “The committee continued to judge that there were two-sided risks around the inflation outlook in the medium term, but that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the 2 per cent inflation target sustainably,” the MPC said. Mohamed El-Erian, president of Queens’ College, Cambridge university, praised the BoE’s early rate rise as a move to quell inflationary pressures that had become persistent and showed that “among central banks, the BoE has been ahead in understanding inflation dynamics and their implications for policy”.The MPC voted unanimously to end its quantitative easing programme as planned at the end of this month, having accumulated created £895bn to purchase mostly UK government bonds. More