Aurelia Butler

FRANKFURT (Reuters) -A big interest rate cut from the U.S. Federal Reserve on Wednesday raised bets on further policy easing at the European Central Bank in October but this is still not the most likely outcome given different economic realities.The ECB has already cut interest rates in June and earlier this month, and many at the bank have hinted at steady, quarterly rate cuts ahead to make sure inflation is defeated on a durable basis. While the Fed’s apparent rush lends some support to arguments that the ECB is falling behind the curve given rising recession risks, the fundamental economics have not changed overnight, so policy hawks on the Governing Council can make an argument for waiting until December. “That the ECB needs to cut in October because of what the Fed did is a ridiculous argument that wouldn’t fly on the Governing Council,” Dirk Schumacher, an economist at Natixis, said.”The only way to argue that is to say that it (the Fed cut) will change euro zone data and that may be the case but we haven’t seen it yet.”This is also reflected in market pricing, which now sees a 35% chance of a 25 basis point deposit rate cut in October, up from 30% a day ago, a small but still notable shift that leaves December as the most likely date for an ECB move. The ECB is likely to take it slower because it has a lot less to do. It has five, maybe six 25-basis-point cuts until it reaches a “neutral” interest rate level at around 2.0% or 2.25%, according to various estimates that include the ECB’s own.The Fed meanwhile has probably eight such reductions until then, so the world’s top two central banks might still reach their end point of policy easing at the same time. Then there are the fundamentals.Euro zone inflation, now at 2.2%, could tick up towards 2.5% by the end of the year and will likely come down only slowly to 2% by the final weeks of 2025 as entrenched wage pressures push up services costs. This is why conservative policymakers, or hawks in market jargon, have cautioned against moving too fast.Slovakia’s Peter Kazimir has already pushed back on October while influential rate setters Isabel Schnabel and Klaas Knot have both in the past made the arguments that quarterly moves to coincide with fresh projections made sense. “Inflation is currently not where we want it to be,” Bundesbank chief Joachim Nagel said on Wednesday.Conservatives, who drove a record string of rate hikes in 2022 and 2023 are still likely to be in a majority and that is why markets are not repricing ECB moves after the Fed decision.”Ultimately, the louder hawks should keep markets reluctant to price in more ECB easing, despite the Fed’s dovish influence,” ING’s Francesco Pesole said. Hawks argue that wage growth remains too quick for comfort.Labour costs rose by 4.7% in the second quarter, well above the 3% considered consistent with the ECB’s inflation target, and unions continue to demand big wage hikes to compensate for real income losses.The ECB also gets only few pieces of really relevant data in the four weeks until its Oct. 17 meeting.Wage and growth figures only come in the lead up to December, when new projections are also published. This leaves the ECB with second tier figures, such as survey data on lending and corporate intentions, to go by. These softer indicators would then have to show a big deterioration for policymakers to preempt their own projections with a rate cut. DOVES Still, policy doves, mostly from southern Europe, keep making the case for quicker policy easing. Mario Centeno, Portugal’s central bank chief and the most outspoken policy dove, argues that the growth outlook is deteriorating so quickly that the ECB could undershoot its inflation target unless it moves fast. “Given the position in which we are today, in the monetary policy cycle, we have really to minimize the risk of undershooting, because that’s the main risk,” Centeno told Politico.Doves argue that growth is faltering, industry is in recession, consumption is weak and people are boosting their savings, perhaps out of fear of an economic downturn. These factors are all deflationary and create downside risks for price growth.They also say that inflation will fall to target in September and, even if there is an uptick in the months ahead, the spectre of rampant inflation has been defeated, especially because energy prices remain muted. More

PRETORIA (Reuters) -South Africa’s central bank cut its main interest rate for the first time in more than four years on Thursday, as it said it saw inflation staying below the midpoint of its target range as far out as 2026.The South African Reserve Bank (SARB) lowered the repo rate by 25 basis points to 8.00%, as predicted by economists polled by Reuters.South Africa’s headline consumer inflation came in at 4.4% year-on-year in August, just below the 4.5% midpoint of the target range the central bank aims for.The rate cut follows the U.S. Federal Reserve’s decision on Wednesday to begin lowering rates, and makes South Africa the latest emerging market to embark on an easing cycle after early movers in Latin America and central Europe.Prior to Thursday’s cut, the SARB had kept the repo rate unchanged at seven policy meetings in a row. Before that it raised rates 10 times consecutively.For much of the past three years annual inflation has been near the top of the central bank’s target band or above it, averaging 5.9% in 2023 and 6.9% in 2022.But it dropped sharply in July and further in August. The SARB said on Thursday that it thought progress bringing down inflation would be sustained, “with inflation contained below the 4.5% midpoint of our range through to the end of the forecast horizon, in 2026″.On inflation expectations the bank noted they were slowly moving in the right direction, as shown in a recent quarterly survey.”As long as headline inflation stabilises at lower levels, we anticipate further progress in re-anchoring expectations around the middle of our target range,” the SARB said in a statement.Economic growth is expected to improve in the final two quarters of this year, bolstered by power utility Eskom suspending rolling power blackouts and higher consumer spending spurred by the government’s “two-pot” pension reform. The rand currency has also benefited from confidence linked to the formation of a coalition government following May’s election, when the African National Congress party lost its majority in parliament. More

The Fed slashed borrowing costs to a range of 4.75% to 5.0% on Wednesday and indicated that it would announce further cuts this year, signaling the beginning to an easing cycle aimed at shoring up the economy following a prolonged battle against surging inflation. Rates had previously been at a more than two-decade high for over a year.Speaking to reporters at a Bitcoin bar in New York City following the decision, Trump said the reduction, which was the Fed’s first since 2020, shows that “the economy would be very bad, or they’re playing politics, one or the other.” He added it was a “big cut.”At a closely-watched press conference, Fed Chair Jerome Powell downplayed concerns about a recession, pointing to resilient economic growth, cooling price gains and a “solid” labor market.”The US economy is in a good place and our decision today is designed to keep it there,” Powell said.He also stressed that the Fed was only carrying out a “recalibration” of its rate policy and is not instituting a “new pace” of cuts. He added that the rate-setting Federal Open Market Committee (FOMC) was not in a “rush” to slash borrowing costs.Along with the drawdown, an updated “dot plot” of officials’ policy forecasts indicated that policymakers now expect the benchmark fed funds rate to dip to 4.25% to 4.5% by the end of 2024. This would suggest either another jumbo half-point rate cut or two smaller quarter-point cuts at the Fed’s two remaining gatherings this year.Powell, who was nominated to his current position by Trump in 2017 and is a registered Republican, also responded to claims that the 50-basis point cut was politically motivated. He said the FOMC only concerns itself with doing “the right thing […] for the people we serve.””[W]e do that, and we make a decision as a group, and then we announce it. And that’s always what it is. It’s never about anything else. Nothing else is discussed,” Powell said.Powell was a target of criticism during Trump’s previous term in the White House, particularly after the then-President called on the Fed to cut rates during a time of rising global trade tensions. In one instance, Trump lashed out at Powell, questioning whether he was a “bigger enemy” to the US than Chinese President Xi Jinping.Brad Case, Chief Economist at Middleburg Communities, suggested that other Republicans would rally to support Trump’s claim, and potentially encourage some GOP members in Congress to purpose legislation reducing the Fed’s independence.For its part, the Fed has said that it was created as an independent and non-partisan central bank — a position that Powell reiterated again on Wednesday.”Our job is to support the economy on behalf of the American people. And if we get it right, this will benefit the American people significantly. So this really concentrates the mind,” Powell said. “And, you know, it’s something we all take very, very seriously. We don’t put up any other filters. I think if you start doing that, I don’t know where you stop.”Elsewhere, Kamala Harris, Trump’s Democratic rival in November’s all-important presidential election, called the rate cuts “welcome news for Americans who have borne the brunt of high prices.”Recent polls have pointed to inflation, which has moderated in the US after a post-pandemic surge, as one of the major financial concerns for voters prior to the vote. More

LONDON (Reuters) – The Bank of England kept interest rates at 5.0% on Thursday, saying it would be careful about future cuts, and also held off from running down its bond holdings at a faster pace, avoiding extra budget strains for finance minister Rachel Reeves.      The Monetary Policy Committee voted 8-1 to keep rates on hold. Only external member Swati Dhingra voted for a further quarter-point rate cut after the BoE last month delivered its first reduction to borrowing costs since 2020.Economists polled by Reuters had forecast a 7-2 vote for a hold after last month’s tight 5-4 decision to cut rates from their previous 16-year high.Sterling briefly jumped above $1.33 to its highest since March 2022, and investors scaled back bets on further Bank Rate cuts.On Wednesday, the U.S. Federal Reserve cut rates by a larger than expected 0.5 percentage points, reflecting the Fed’s confidence that inflation pressures are cooling.BoE Governor Andrew Bailey struck a more cautious tone as wage growth looked set to remain too high for comfort and policymakers remained divided over how fast long-term inflation pressures were fading.”It’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much,” he said.Investors think the BoE will cut rates at a somewhat slower rate than the Fed.”Clearly, the Bank’s relative caution stands in some contrast to the Fed’s strong start to its easing cycle,” said Luke Bartholomew, Deputy Chief Economist at fund manager abrdn.”Underlying inflation pressures in the UK remain elevated, while the labour market is sending quite mixed messages about the health of the economy,” he added.The BoE said inflation was likely to rise to around 2.5% by the year’s end from 2.2% in the most recent data, moving further away from its 2% target but by less than a previous forecast for an increase to around 2.75%. Lower oil prices contributed to the change.BoE staff also estimated that unemployment had probably risen more in recent quarters than suggested by official data, which has suffered from very low response rates.After Thursday’s announcement, investors no longer fully priced two rate cuts by the end of 2024, as they had done earlier in the day, and they expected the BoE to cut rates in quarter-point steps four or five more times by June.By contrast, they see around seven such cuts in the U.S. QT CONTINUESThe MPC voted 9-0 to maintain the pace of its programme for reducing its stockpile of British government bonds purchased in past attempts to stimulate the economy.The 100 billion-pound pace of quantitative tightening over the coming 12 months will be the same as over the past year, in line with most market expectations.Some investors had predicted an acceleration of QT, as the BoE holds 87 billion pounds of gilts that are due to mature naturally over the next year, leaving just 13 billion pounds for active gilt sales at the current pace.Lawmakers and think tanks have criticised QT because it brings forward losses sustained by the BoE, which purchased gilts in past years at much higher prices than their current sale value. Those losses are underwritten by the taxpayer.The BoE also makes losses from paying interest on the reserves it issued to finance the purchases of gilts, which now far outstrips the returns generated by the bonds.Many economists think finance minister Rachel Reeves  will change Britain’s fiscal rules to exclude the impact from QT in her inaugural budget on Oct. 30 – something that could give her several billion pounds of extra fiscal space.James Sproule, UK chief economist at Swedish bank Handelsbanken, said the lower level of active sales compared with the previous year would help Reeves as it would reduce compensation due to the BoE.($1 = 0.7515 pounds) More

LONDON (Reuters) – Sri Lanka reached a draft deal with creditors to restructure $12.5 billion of international bonds, it said on Thursday, in a major boost to the island nation’s fragile recovery just two days before its presidential election. The country defaulted on its foreign debt for the first time ever in May 2022, engulfed in a severe crisis and buckling under its high debt burden and dwindling foreign exchange reserves.The agreement comes after Sri Lanka began a third round of formal debt restructuring talks with bondholders last week. The country had to renegotiate parts of a previous draft deal, which it announced in July, after objections from the International Monetary Fund and official creditors. Getting sign off from both is a prerequisite to executing the deal. It also finalized a preliminary deal to restructure $3.3 billion in debt with China Development Bank, one of Beijing’s two main trade policy banks.”Sri Lanka now expects to receive formal confirmation from IMF staff that the Agreement in Principle and the Local Option, taken together, are fully consistent with the parameters of Sri Lanka’s IMF-supported Program,” the Sri Lankan government said in a statement. “Sri Lanka will continue to work with the OCC and its secretariat to secure confirmation of compliance of the Agreement in Principle and the Local Option with the Comparability of Treatment principle,” it added, referring to the Official Creditor Committee.Once Sri Lanka gets the formal sign-off from both parties, it said it would commit “its best efforts to expedite the implementation of the restructuring in respect of the bonds.”President Ranil Wickremesinghe said the IMF is likely to visit Sri Lanka two weeks after the election. Its international bond prices rallied as much as 2 cents by 1004 GMT to bid between 53.3-54.5 cents on the dollar, Tradeweb data showed. But the country’s tight presidential race on Saturday cast some doubt over the fate of the final deal, as two front-runners have expressed interest in changing some terms of the country’s IMF bailout, which could also impact restructuring efforts. REVISED TERMSThe latest draft agreement raised the GDP thresholds under which bondholders would get bigger payments under so-called macro-linked bonds. The previous agreement would have triggered at a GDP of $92 billion-$100 billion, while Thursday’s agreement increased those targets to $94 billion-$107 billion. It also lowered some of the coupon payments. But the haircut on the nominal amount of existing bonds is 27% under the new deal, from 28% under the agreement announced in July.In a nod to its local investor base holding international bonds, the proposal offers those an option to swap into a mix of U.S. dollar denominated bond and local currency bonds. It would also allow the government to pay local holders in Sri Lankan rupee if it is unable to make a payment in dollars.The new deal also included a number of other clauses, giving bondholders the option to change the law underpinning them from New York to Briatin or Delaware. Lawmakers in the U.S. state of New York, whose laws cover a vast chunk of international emerging market debt issuance, have mooted a controversial bill that would make significant changes to debt restructuring and bondholder rights. Sri Lanka’s leaders hailed the agreements as major steps forward in the country’s efforts to emerge from more than two years of debt default. “With this Sri Lanka will be officially out of temporary moratorium of servicing foreign debt,” Foreign Minister Ali Sabry said in a post on X. “In other-words as some people have referred, out of bankruptcy!”Spokespersons for the Paris Club Secretariat, which handles communications for Official Creditors, the IMF and the Local Consortium of Sri Lanka did not immediately respond to a request for comment. The Steering committee of the Ad Hoc Group of Bondholders declined to comment. More