Aurelia Butler

When the first wave of the coronavirus pandemic hit in the spring of 2020 it provoked, along with lockdowns, a sudden financial crisis. It was a mercy for the global economy, however, that the banks at the bedrock of the monetary system were for the most part not involved. Instead the trouble was in the growing and poorly regulated “non-bank sector”, which the Bank for International Settlements estimates now accounts for nearly half of all financial assets. It is time for these shadow banks to step out of the shadows and be regulated more like their conventional peers.On Monday the BIS, the co-ordinating body of central banks, sensibly called for stricter regulation of the sector, which has become ever more fundamental to much of the basic operation of finance. The call should be heeded. Tougher rules on banks, introduced after the 2008 financial crisis, helped make the banking system more resilient — showing its worth during the turmoil in March 2020 — but it has also pushed some risk-taking into the “shadow banks”, such as bonds funds and private lenders. These non-banks can, however, exacerbate an economic downturn just like their more traditional cousins. Last year, open-ended bond funds faced a rush of redemptions, similar to a bank run. The funds offer complete liquidity for investors, allowing them to instantly receive the value of their investment back, but the funds themselves own more illiquid assets. With investors spooked by the pandemic, the funds were forced to sell their most liquid assets, often US Treasuries, at steep discounts to meet the redemptions. The fire sale of assets and the disorder in the world’s most important asset market was only halted when the US central bank, the Federal Reserve, stepped in as the “dealer of last resort”.As the BIS writes in its call for tighter regulation, it would be far better to address the causes of the problem at their root rather than relying on such ad hoc central bank interventions. If speculators believe that the central bank will ultimately step in at times of disarray then there will be less reason to manage the risks themselves. The need to stabilise the shadow banks through easy monetary policy could then conflict with other goals, such as taming inflation. The first step is to encourage more transparency, especially to make the links between the shadow banks and more normal banks clearer. It is essential for regulators to see the channels for financial contagion as well as the extent of “hidden leverage”. This will, eventually, need to be followed up by even more comprehensive disclosure requirements. The BIS similarly calls for the shadow banks to have, like regular banks, “countercyclical buffers” — in this case principally stocks of highly liquid reserves to meet redemptions in times of crisis. Ideally, the market would also provide more “discipline”. Small upsets in financial markets provide a salutary reminder to investors that prices can fall as well as rise. Indeed the “taper tantrum” of 2013, when the Federal Reserve began to reduce the pace of its asset purchases after the 2008 crisis, reminded investors that stock and bond prices do not inevitably rise.Policymakers, however, cannot choose the timing nor severity of such episodes. Nor should they deliberately engineer a downturn or credit scare themselves. A far better option is to follow the proposal set out by the BIS, by shining a light into the murky corners of the financial system, ensuring that what they find there is prepared for the next crisis. More

European Central Bank policymakers are reassessing the extent of their commitment to extra stimulus, reflecting rising doubts about how quickly inflation is expected to fall as the Omicron coronavirus variant fuels worries of further price rises.A trio of recent events has sown doubts in the minds of some rate-setters at the ECB, which has been forecasting for months that inflation would fall back below its target and justify the continuation of vast stimulus policies.The first was the surge in eurozone inflation to 4.9 per cent in November, well above the ECB’s 2 per cent target and a record since the euro was created two decades ago. This was followed by the emergence of a new coronavirus variant, which threatens to prolong the pandemic and with it the supply chain bottlenecks that have pushed up prices.Then late last week, the US Federal Reserve said it would accelerate the ending of its bond-buying programme to tackle inflation, putting pressure on the ECB to rein in its own asset purchase plans.Ahead of the ECB meeting next week, analysts worry that together they increase the chance of a “hawkish” shift by rate-setters to withdraw stimulus earlier than investors have been expecting, raising the odds of a sell-off in the eurozone government bond markets.“On Omicron, it’s clear that it will keep inflation up for longer because the disruption of supply chains will last longer,” said an ECB governing council member.“The pandemic has changed the structure of the economy, with more homeworking, a higher carbon price and a shift away from globalisation,” the council member continued. “Over the medium-term, inflation could be higher than our target and then we would have to act.”The central bank is expected to announce at its meeting next Thursday that it will stop new bond purchases in March under the €1.85tn emergency programme launched in response to the pandemic. But ECB policymakers could also delay a further decision on how many more bonds they would buy in 2022 until early next year.“I would be very uncomfortable committing to anything beyond the end of the second quarter of next year,” said a second council member. “Markets are just going to have to live with that.”A third council member said a delay to its decision on future bond purchases was possible “depending on the pandemic and new data in the next two weeks”.The ECB has bought more than €2.1tn of bonds over the past two years, soaking up more than the total net issuance of eurozone governments in an effort to keep borrowing costs low.But analysts at UniCredit calculated that this could change next year, even though eurozone governments are expected to raise less debt, unless the central bank doubles the amount of bonds it buys under an earlier asset purchase programme to €40bn a month from April until the end of 2022.By continuing large-scale bond-buying next year, the ECB would be a significant outlier compared with other central banks that planned to halt asset purchases soon, including the Fed and Bank of England. The Bank of Canada has already done so.Consensus is growing on the ECB council that there is little extra benefit from increasing the monthly flow of asset purchases in terms of boosting inflation, according to two of its members. “There is no point expanding the asset purchase programme after March,” said one.Analysts think the ECB could commit to an extra “envelope” of bond purchases after March next year. But they said its decision was complicated by the fact that it was almost certain to raise its 2022 inflation forecast to well above 2 per cent next week, making it harder to justify a commitment to keep buying large amounts of bonds. “Upside surprises have been sizeable on inflation and the revision to the ECB’s 2022 forecasts will be one of the highest ever in the history of these forecasts,” said Frederik Ducrozet, strategist at Pictet Wealth Management. He expects the central bank to raise its forecast for inflation next year from 1.7 per cent to 2.7 per cent. Reinhard Cluse, economist at UBS said: “The upcoming meeting is potentially one of the most difficult ones for the governing council in recent times, given the contrasting pressures on its inflation mandate. Government bonds in the periphery countries of southern Europe “appear vulnerable to a shift in ECB communication”, he added.Christine Lagarde, ECB president, said last week that the bank was “very unlikely” to raise its deposit rate from minus 0.5 per cent next year, because it still expected inflation to fall below its target by 2023.Despite Lagarde’s comments, markets are still pricing in a 0.1 per cent ECB rate increase at the end of next year, though a month earlier investors were betting on two rate rises in 2022. “They’ve laboured that message so much that it’s finally getting through,” said Antoine Bouvet, rates strategist at ING. “Part of the reason it’s been so difficult is because of the Fed, whose influence leaks through into eurozone rate pricing.”The ECB has committed not to raise rates until it stops asset purchases, which economists say is unlikely before 2023, even if it keeps reinvesting the proceeds of maturing bonds long after that. “They could conclude asset purchases by mid-2023 and then it is feasible to see a first rate rise in late 2023,” said Katharina Utermöhl, economist at Allianz. 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A proposed EU law that would allow swift retaliation against countries such as China and Russia over economic sanctions faces resistance from some member states.The anti-coercion instrument would give the European Commission sweeping powers to impose tariffs and quotas, restrict intellectual property protection and even lock countries out of EU financial markets.But some countries fear the regulation could breach World Trade Organization rules, increase protectionism and damage a fragile trading system.The plan must be backed by a majority of EU member states as well as by the European Parliament before it can come into force. A draft proposal seen by the Financial Times, to be endorsed by the commission on Wednesday, says the instrument would deter countries from targeting member states.Officials said it could be used in the dispute between China and Lithuania, which says Beijing has blocked all imports because of its policy on Taiwan. Lithuania allowed a Taiwanese Representative Office to open in November; China considers Taiwan as part of its territory. Under the new law, the commission would be able to respond swiftly. If talks with the other country did not solve the issue, it could, with member state approval, take 12 possible countermeasures. These include levying tariffs; banning chemical imports; suspending science co-operation; and “the imposition of restrictions for banking, insurance, access to Union capital markets and other financial services activities”. The measures could be taken against companies or individuals. The commission’s proposal defines economic coercion as “seeking to pressure the union or a member state into making a particular policy choice by applying, or threatening to apply, measures affecting trade and investment”.“There is an ongoing and significant use of economic coercion by third countries that threatens to undermine the rights and interests of the union and member states,” it adds.Using trade policy rather than foreign policy gives the commission more leeway. The regulation and any action taken under it only requires a qualified majority among member states to become law, rather than unanimity, which is necessary for foreign policy tools. Possible triggers would have included Russia’s boycott of EU produce in 2014 after the bloc first imposed sanctions over the downing of a Malaysia Airlines flight over Ukraine.The commission also cited as a trigger an effective ban by Indonesia on EU spirit imports in 2019, in response to action the EU had taken to tackle palm oil production causing deforestation. However, several member states believe the WTO is more effective than unilateral action. Sweden, the Czech Republic and Estonia have all questioned the need for the plan, while Finland and Italy are sceptical, according to diplomats.

Several others, such as Germany, Denmark and Ireland, are waiting till they have seen the proposal before they endorse it.Japan has made a public objection, saying the instrument could break WTO rules, a concern shared by some EU capitals.Estonia, in response to a consultation, demanded that “the proposed instrument must be fully in line with WTO rules”. The commission should also assess “the possibility of exacerbating trade disputes, of inviting retaliation on the part of our trading partners, and of harmful effects on the rules-based multilateral trading system, in addition to the cumulative negative effect on the EU’s openness in terms of trade”.Sweden and the Czech Republic, in a joint submission to the commission, said any retaliation should be “a last resort”. They also warned that such moves could cause the EU more harm than good by hitting its own businesses. “It is crucial that member states are fully engaged in the decision-making,” they said.The US also had concerns, diplomats said. Washington declined to comment. More

TOKYO (Reuters) – Japan’s household spending posted an annual drop for the third straight month in October, though the pace of decline slowed, as consumer sentiment struggled to stage a convincing recovery after coronavirus curbs ended.The world’s third-largest economy has lagged other nations in its recovery from the health crisis, mostly due to sluggish consumption. Analysts expect consumer sentiment to pick up this quarter as local COVID-19 infections fell.Household spending fell 0.6% in October from a year earlier, after a 1.9% decline in September and a 3.0% drop in August, government data showed, matching the median market forecast in a Reuters poll.The figures highlighted that consumers’ mood was still cautious even after state of emergency curbs to contain the virus ended in September, said Takeshi Minami, chief economist at Norinchukin Research Institute.”This was a weak result,” he said. “It feels like spending is slowly picking up but not in one go.”The month-on-month figures were positive, posting a seasonally adjusted 3.4% rise, slightly weaker than a forecast of a 3.6% gain and slowing from a 5.0% month-on-month increase in September.On a year-on-year basis, spending on overnight stays and eating out continued to decline, though the drop was smaller than in the prior month, while that on transportation rose.Policymakers are hoping a rebound in domestic demand will support the economy as manufacturers navigate a global chip shortage and are hit by surging raw material prices.The Japanese government unveiled a $490 billion spending package last month as it seeks to put its economy firmly on a recovery track, going against a global trend of unwinding crisis-mode stimulus.Spending will likely benefit from the government’s plan to restart a domestic tourism campaign, which could push up the gross domestic product by about 1% next year, said Minami.If the campaign would be restarted early next year, it would most likely boost second-quarter spending, Minami said, adding that growth was quite good in the fourth quarter last year when the government was also subsidising domestic travelBut the economy was not expected to see any major boost from cash handouts for households with children, he added, as the money was likely to be added to savings.Separate data on Tuesday showed inflation-adjusted real wages slumped 0.7% year-on-year in October, falling for the second straight month and boding ill for a sustainable recovery of consumer sentiment. More