Economy

FRANKFURT (Reuters) -The European Central Bank should keep a leaner balance sheet and have banks borrow from it when they need cash, ECB board member Isabel Schnabel told Reuters, just as the debate heats up on how central banks should operate in a world of revived inflation.With the era of low inflation and zero interest rates now seemingly over, the ECB has to decide how it wants to supply euro zone banks with liquidity in the coming years – by lending to them or by buying bonds from them.Schnabel defended the case she first outlined in March for a system in which banks choose how much to borrow from the ECB. Her board colleague Philip Lane has meanwhile argued that the ECB should supply lenders with at least some of that cash via bond purchases or longer-term loans.She said her “demand-driven” approach fitted the euro zone, whose 20 countries vary in economic strength and have separate banking systems.”A demand-driven system is well-suited for a heterogeneous currency union that may be prone to fragmentation,” Schnabel said, referencing her March speech. “Such a system also likely limits the size of the central bank balance sheet.”She conceded, however, that “it could make sense to have a mix of different tools”, suggesting policymakers may be looking for a compromise in this complex yet crucial debate for the euro zone financial system.Schnabel argued that in this case longer-term loans are better than asset purchases because they reach deeper into the banking sector, while cash from bond purchases tends to concentrate around a limited number of larger entities.Policymakers from cash-rich northern euro zone countries are likely to back Schnabel’s view while those in the bloc’s south, which relies on the ECB’s bond purchases to a greater extent, are more likely to be in Lane’s camp.For now, however, the ECB will be mopping up cash it pumped into the banking system over the last decade as it tried to stimulate inflation and activity.A discussion paper published by top staff in Lane’s directorate said the ECB should more than halve its stock of bonds to 1.5 trillion euros ($1.63 trillion) by mid-2026 before resuming purchases to underpin banks’ lending to the economy.The authors found that banks extend more credit when they have these “non-borrowed reserves” than when they have to tap the central bank, and that owning too many bonds would be preferable for the ECB to getting rid of all them.Schnabel expressed a preference for letting banks choose, saying: “This would mean the size would not be determined by us, which is a good thing, because we don’t know precisely what the demand is.” She nevertheless estimated that the ECB’s balance sheet, currently 7 trillion euros, would remain at a minimum “around three times as large as before the global financial crisis”, when it just exceeded 1 trillion euros, as a result of so-called autonomous factors. These include demand for banknotes and government deposits. But the debate mattered only “far out in the future”, Schnabel said, because the ECB would have to shrink its balance sheet under all circumstances and it would end up “much smaller” than its current size.Policymakers are arguing the merits of two systems, one in which the ECB provides ample reserves to keep a “floor” under the money-market rate, like the U.S. Federal Reserve, and another where it lends to banks at a “ceiling” rate, like the Bank of England.A proponent of the latter option, Schnabel said any new auction of longer-term loans “would have to be offered at market rates” rather than at a subsidised rate as in the past decade, when such loans have been a mainstay of bank funding. ($1 = 0.9195 euros)(Writing By Francesco Canepa; Editing by Catherine Evans) More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.As our dinner ended at a chic Peruvian restaurant in Buenos Aires last month, my Irish uncles and cousins, in town for a family wedding, pulled out their phones. Shaking their heads in amazement, they photographed the mountain of Argentine pesos they had assembled to pay the $90 bill. I cringed.I understood the impulse: for tourists paying in cash, any large sum in Argentina requires a comically large wad of 1,000 peso notes, each worth about $1 — the result of the Argentine currency losing 98 per cent of its value against the dollar since 2017, when the 1,000 peso note was first released. I’ve seen many foreigners do the same since I moved here in June.But I was still embarrassed, not wanting to be seen laughing at this symptom of Argentina’s economic distress. The South American country is suffering its worst crisis in two decades, with annual inflation above 140 per cent and two-fifths of Argentines living in poverty. That’s the backdrop that propelled Javier Milei, an eccentric libertarian economist, to victory at recent presidential elections. He has pledged swingeing spending cuts and deregulation to reboot the economy.This year’s crisis is hardly the first. Stability has eluded Argentina for decades, thanks in part to politicians’ chronic overspending, financed intermittently by money printing and heavy borrowing, triggering inflation and defaults. On top of that, the outgoing government has built a labyrinth of tight economic restrictions, including currency, price and import controls.“This country is hopeless — I don’t care who is in power,” said Tomás, a plumber who saved my bathroom from flooding after a toilet malfunction last week. He cackled when I told him about the UK’s panic at its recent 6 per cent annual inflation.Tomás gets paid off the books, like almost half of Argentines, and has only been able to wrangle a 20 per cent rise this year, despite food and rent costs doubling, he said. Many Argentines have developed strategies for dealing with their unique economy. Taxi drivers give me tips on which fixed-income saving instruments will shield one from price rises. Generous shop assistants advise me to look elsewhere for somewhere that offers 12 monthly payments without interest — a popular scheme that allows buyers to afford goods, and keeps consumption up for retailers.Argentines know it’s better to splash any extra cash than hold on to pesos — particularly ahead of market-moving events such as elections — which is why Buenos Aires enjoys a booming restaurant scene as the economy crumbles. Others buy up non-perishable goods, such as cleaning products, and later trade them for food on online marketplaces.Up the economic ladder, advice differs. At a conference, one executive told me how he had skirted Argentina’s asset wealth tax, which exempts dollars stored in banks, but not those kept at home. “They count the dollars on December 31, so I drop them off around Christmas, and pick them up on January 2,” he said.For anyone in a privileged elite earning in dollars, there is a disjunction between the price of food and services (made ludicrously cheap by wide-ranging government subsidies and the peso’s decline) and that of goods (made expensive by protectionist policies). I paid $50 for the cheapest clothes horse I could find, and $70 for a T-shirt that disintegrated after three washes. But a subway ride costs eight cents, an upscale haircut around $8 and a lavish seven-course tasting menu comes to $50 a head. Change may be on its way. Milei has said he intends to stamp out inflation and deregulate the economy. Even if it goes well, he has warned any benefits will not be immediate — exchange controls are likely to remain for the foreseeable future and inflation may spiral even faster as he begins to unpick a web of price controls. Analysts say his austerity plan will inflict serious pain, particularly on Argentina’s working and middle classes.It looks as if for Tomás and most Argentines, things will keep getting worse before they have a chance at getting better. If my family visit again next year, there may well still be shocking sights to see in Buenos [email protected] More

Shipowners have called for more military protection on maritime routes in the Middle East after attacks by Iran-backed rebels in the Red Sea sparked fears of new disruptions to global trade, including of energy supplies. On Sunday, the Pentagon said a US warship and three commercial vessels had come under attack off the Yemeni coast, prompting concerns that Houthi rebels — who targeted Israeli ships last month — and their backers in Iran were widening their campaign in response to war in Gaza. Jakob Larsen, head of security at Bimco, which represents global shipowners, said the attacks showed that “more military resources” needed to be deployed.“When you see three ships attacked [on the same day] in the same geographic area that implies we are a bit short of resources,” Larsen said.On Monday, US national security adviser Jake Sullivan said the attacks were “totally unacceptable”, adding that the US was in talks with other countries about setting up a maritime task force to ensure “safe passage of ships in the Red Sea”. The new threat to shipping — which could affect trade in everything from crude oil to motor vehicles — comes not long after supply chains were upended by the Covid pandemic and Russia’s invasion of Ukraine, fanning inflation and cooling the global economy.Analysts said traders were now underestimating the threat of further disruption.“The oil market has become too complacent about risks that the Gaza conflict will expand regionally and threaten oil and gas infrastructure and shipping in the Red Sea and Gulf,” said Bob McNally, founder of Rapidan Energy and a former adviser to the George W Bush White House.Since 2019 Houthis and other suspected Iranian proxies have struck at multiple vessels in the Middle East, seizing oil tankers and mounting clandestine attacks using limpet mines attached to hulls.The latest attacks also add to concerns about the threat posed by Tehran to the Strait of Hormuz — the narrow waterway separating Iran from the Gulf states that is a chokepoint for oil and gas exports.McNally put the odds of a “material interruption in regional energy flows” as high as 30 per cent.“While neither Tehran nor Washington may desire a direct conflict, they also may not be able to avoid unintended clashes or arrest upwardly spiralling tit-for-tat attacks.” About 40 per cent of seaborne oil trade passes through the Strait of Hormuz daily, alongside liquefied natural gas shipments from Qatar, which have helped Europe to replace Russian gas.The Red Sea route itself carries almost a tenth of seaborne-traded oil supplies, according to the US Energy Information Administration, and is also a conduit for goods from Asia. The Bab el-Mandeb Strait, separating the Gulf of Aden from the Red Sea, is even narrower — and more vulnerable to attack — than the Strait of Hormuz. “The Red Sea route matters,” said Henning Gloystein at consultancy Eurasia Group. “It matters even more for the Europeans who get all their Middle Eastern oil and LNG through the Red Sea.”A satellite image shows the ‘Galaxy Leader’, an Israeli cargo vessel captured last month by Houthi rebels, off the port of As-Salif, Yemen, in the Red Sea More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is professor of economics and political science at the University of California, BerkeleyCentral bank digital currencies are the bad idea that won’t go away. There are simpler, more straightforward ways of solving the problems that CBDCs are deemed to address. Yet upwards of 130 countries worldwide are exploring the currencies. If you are in search of a bandwagon effect, this is it.CBDCs’ proponents champion them on financial inclusion grounds, as a way of providing digital financial services to the unbanked. Yet countries such as India have shown that there are more practical ways to do this. Provide residents with a unique digital identifier, mandate the banks to provide low-cost, no-frills accounts, and install a system to facilitate interbank transactions through mobile phones. Voilà: problem solved.Some will object that the payments rails provided by banks are inefficient. Transferring funds between banks can be costly and time consuming, especially where data systems are antiquated and banks have market power. But if this is the problem, then the solution is to open up the market to nonbank payments providers, giving them access to the central bank’s real-time gross-settlement system. Enhanced competition will encourage banks to update their technologies, including by adopting the new standard for messaging on the interbank Swift system known as ISO 20022.Costs and delays in completing payments are especially onerous in the cross-border context. It is here that entities such as the Bank for International Settlements’ innovation hub have concentrated their efforts, experimenting with so-called mBridges — electronic platforms on which licensed dealers would exchange the CBDCs of different countries for one another. But while the technical solution is reasonably straightforward, its governance is not. To make this platform operational, multiple governments and central banks would have to agree on who to license as authorised CBDC dealers. Regulators would have to oversee their dealings, ensuring that their inventories of the relevant CBDCs were adequate. Central banks would have to stand ready to act as liquidity providers of last resort. All this would require the equivalent of the Basel Committee on Banking Supervision, but on steroids.The alternative is to allow the most important CBDCs to circulate outside the issuing countries, much as the majority of large-denomination dollar currency notes currently circulate outside the US. If everyone around the world could hold a Federal Reserve CBDC in their digital wallet and use it for transactions, there would be no need for an mBridge. But central banks are aware that de facto dollarisation, since that’s what we’re talking about here, has a downside, namely loss of monetary autonomy. Except in extreme cases where the authorities have already lost control of monetary policy — Argentina? — they will be understandably reluctant to permit this.Fortunately, again there are more direct ways of addressing the problem. One is by linking instant payments systems across countries. India has linked its Unified Payments Interface to Singapore’s real-time payments system, PayNow, enabling individuals in the two countries to directly transfer and receive funds from one another. Other countries have established similar agreements and are working to “multilateralise” their bilateral payment-systems links through what is known as Project Nexus.And progress is not limited to banks and banking systems. Western Union has experimented with blockchain as a way of bringing down the cost of remittances. The Japanese transfer service provider SBI Remit is using the blockchain technology of the US-based company Ripple to increase the speed and reduce the cost of remittances.Officials may worry that, because network effects are strong, a big bank, or even more worryingly a bigtech platform like Amazon or Alibaba, could come to dominate payments. They might then use that dominance to exclude competitors, and even cause the central bank to lose control of the financial system. This fear, of losing control to Alipay and WeChatPay was evidently a motivation for China piloting its CBDC, starting in 2020. But the more straightforward solution is to regulate these platforms’ payment activities, just as their marketing and advertising practices must be regulated to ensure fair access for competitors. China has taken this approach as well, fining companies for violations of consumer protection and anti-monopoly laws. These efforts have been more consequential than its issuance of what remains a little-used CBDC. More

SINGAPORE (Reuters) – The dollar regained some ground on Tuesday and hovered near a one-week high against major peers, while bitcoin extended its momentum on optimism that U.S. regulators could soon approve exchange-traded spot bitcoin funds.The greenback rose marginally against the yen in early Asia trade to 147.23, helped by a slowdown in core consumer inflation in Tokyo that put downward pressure on the Japanese currency.The euro, meanwhile, languished near a three-week low hit on Monday and last traded $1.0840, while the dollar index stood near a more than one-week high and was last at 103.59.Analysts say the greenback’s move higher was in part due to a reversal of its heavy selloff in recent weeks, which saw the dollar index falling some 3% in November, its steepest monthly decline in a year.”I think it’s maybe just a little bit of a reassessment as to the U.S. dollar having fallen too far, and too fast,” said Sean Callow, a senior currency strategist at Westpac.A slew of U.S. economic indicators due this week, including November’s non-manufacturing ISM figures out later on Tuesday and the closely-watched nonfarm payrolls report at the end of the week, will provide further clarity on the future path of interest rates. Traders have all but priced in a rate cut from the Federal Reserve by the first half of next year.”The Fed will be reactive to the hard data and not anticipatory of it. So as long as the activity data deteriorates and inflation retreats, convergence toward lower yields will resume,” said Thierry Wizman, Macquarie’s global FX and interest rates strategist.Elsewhere, sterling rose 0.08% to $1.2642, but was some distance away from its recent three-month high, while the New Zealand dollar similarly edged away from a four-month high and last traded $0.6173.The Australian dollar steadied at $0.6620 ahead of a rate decision from the Reserve Bank of Australia later on Tuesday, amid expectations the central bank will keep rates on hold.In cryptocurrencies, bitcoin last stood at $41,873, not far from the previous session’s peak of $42,404, its highest level since April 2022. The world’s largest cryptocurrency has charged roughly 153% higher this year on U.S. rate cut expectations and bets that American regulators will soon approve exchange-traded spot bitcoin funds (ETFs), opening the bitcoin market to millions more investors.”$40,000 has acted like a magnet since Bitcoin finally broke through $30,000 in late October. It was only a matter of time before the next round number succumbed as enthusiasm about a spot ETF reaches fever pitch,” said crypto-services firm Nexo co-founder Antoni Trenchev. More

After one of the toughest years for China’s economy and its investors, the country’s central bank governor had a sobering message: there may be more pain to come.Speaking to bankers in Hong Kong last week, Pan Gongsheng warned that the country’s economy was embarking on a “long and difficult journey” away from its traditional growth engines of property and infrastructure investment.Pan’s comments point to the principal challenges facing Chinese policymakers as they prepare for the central economic work conference expected this month. The annual policy-setting meeting will send a signal to investors about how much help the government is prepared to offer to the world’s second-largest economy.Even as Beijing tries to focus policies away from investment in infrastructure and property, investors are seeking indications of how it plans to arrest a liquidity crisis among developers and how far policymakers intend to support struggling local governments.Analysts are also seeking hints of the Communist party’s target for gross domestic product growth in 2024, which will dictate levels of fiscal and other support for the economy. This year, the target was 5 per cent, its lowest in years.“I think the market is expecting signals for more support measures,” said Fred Neumann, chief Asia economist at HSBC. “Is there going to be more fiscal stimulus in the pipeline? What’s the thinking around monetary easing? Because there is a sense that without further policy support, the economy will struggle to reach 5 per cent next year organically.”You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.After a solid first quarter, investor and consumer confidence has wavered, as not only property but China’s export earnings have disappointed.In response, policymakers have released a series of policies. In October the central bank for the first time pledged to resolve default risks for large property groups and “stabilise expectations” for the sector. Last month the PBoC and other regulators urged state-owned lenders to “meet the reasonable financing needs” of private-sector developers and to treat them the same as state-owned ones when issuing mortgages to homebuyers.Other reports said regulators were considering a “white list” of developers eligible for bank loans, debt and equity funding. People familiar with the matter said some state banks, at the behest of regulators, had started summoning some private developers to provide “verbal” pledges of credit support.Coupled with this are what policymakers are calling the “three major projects”: the renovation of “urban villages”, construction of “social housing” and some public infrastructure spending. Analysts said these programmes would boost the construction industry and developers, especially if they involved buying up incomplete or unsold homes.“Those initiatives could be used to provide a backdoor bailout to developers,” said Gavekal Dragonomics analysts Rosealea Yao and Xiaoxi Zhang in a report.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Economists believe these measures, coupled with others announced by the government, such as a Rmb1tn ($140bn) central government bond issue, are meant to strengthen the economy going into the new year.Now the focus is turning to what will come in 2024, when the year-on-year base effect will be less favourable than in 2023 as the economy was recovering from the previous year’s Covid-19 lockdowns.“I expect more credit support to developers,” said Tao Wang, chief China economist at UBS, which forecasts the country’s economy will grow 4.4 per cent next year.While the work conference may not formally announce the 2024 growth target — that would usually come during China’s annual parliamentary meeting in March — economists believe the government could target 5 per cent again, which would be “challenging but deliverable”, said Zhu Haibin, chief China economist at JPMorgan, who added that 4.5-5 per cent might be easier to achieve given challenges from housing and local government debt problems.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Investors would probably welcome a 5 per cent target, said Miao Yanliang, executive head of the research department at China’s CICC investment bank. This would be the first time in recent years that the government has not lowered the target. “The target is an important indicator and will have a big impact on the market,” said Miao.The government’s plan for medium-term growth beyond next year would normally be laid out by the so-called Third Plenum, an important economic meeting traditionally held by the Communist party once every five years. It was due to be held in October, but China’s President Xi Jinping has not given any indication of the meeting’s timing or whether it will be held at all.This comes as China’s trading partners fret that the government is ploughing funds that once went into property into manufacturing instead, at a time when it is already running record trade deficits.Bank credit to the industrial sector grew 30.9 per cent in the third quarter compared with a year earlier, more than four times higher than the pre-pandemic level of growth at the end of 2019. This is marginally being offset by a fall in bond issuance by manufacturers.Tensions with trading partners such as the EU are high over China’s exports of electric vehicles and other items.“There is clear overcapacity in China, and this overcapacity will be exported, especially if overcapacity is driven by direct and indirect subsidies,” European Commission President Ursula von der Leyen said last month. She is expected to raise the issue during a visit to Beijing this week.European leaders are unlikely to receive a receptive audience for such complaints. China’s officials say its trade is fair and its economic prospects are bright, while blocking any discussion of the country’s problems domestically.Even Pan’s speech in Hong Kong was toned down for domestic consumption — the Chinese transcript omitted the phrase “long and difficult”. It also offered few hints as to what Beijing had in mind for the coming transition away from property and infrastructure, only that it was aiming for “high-quality and sustainable growth”.Such platitudes might be enough to satisfy China’s censors. But some investors will need more convincing before they return to a market that they left in droves this year.“The reason why the market hasn’t reacted more to it yet is because we have lack of details,” said HSBC’s Neumann. “And also there’s a question of what is the medium-term policy.”On the measures to kick-start the property sector in particular, Neumann said the “market wants to see more specifics . . . that’s the credibility gap that we need to bridge”.Additional reporting by Sun Yu in Beijing More