Economy

SYDNEY (Reuters) – The dollar was staring at a fourth straight session of losses against the euro on Monday as more hawkish comments on European interest rates contrasted with market pricing for a less aggressive Federal Reserve.The euro crept ahead to $1.0870 and nearer its recent nine-month peak of $1.08875. A break there would open the way to a spike top from last April at $1.0936.It was aided by European Central Bank (ECB) governing council member Klaas Knot, who said interest rates would rise by 50 basis points in both February and March and continue climbing in the months after.Knot is considered a hawk among policy makers and the comment was taken as push back against recent reports that the ECB would scale back to quarter-point moves from March.In contrast, futures have priced out almost any chance the Fed could move by 50 basis points next month and have steadily lowered the likely peak for rates to 4.75% to 5.0%, from the current 4.25% to 4.50%.Investors also have around 50 basis points of U.S. rate cuts priced in for the second half of the year, reflecting softer data on inflation, consumer spending and housing.Flash surveys on January manufacturing due this week are forecast to show more improvement in Europe, in part thanks to falling energy costs, than in the United States.”The U.S. has lost its global growth leadership position if most recent PMI surveys are to be believed,” said Ray Attrill, head of FX strategy at NAB. “Meanwhile, gas prices have fallen by 60% since early December, sharply reducing the negative terms of trade shock weighing on the Eurozone/EUR.””Additionally, U.S. inflation is seen falling further and faster than the Fed’s own projections,” he added. “Under this scenario, the USD has scope to fall much further this year.”Attrill now sees the euro reaching $1.1000 by March and $1.1700 by year end.Much the same argument goes for sterling, with markets wagering the Bank of England will hike by half a point to 4.0% at its policy meeting next week.The pound was up at $1.2410 and within striking distance of last week’s top of $1.2435.The dollar was thus a shade weaker against a basket of currencies at 101.890 and just a whisker for its recent eight-month trough of 101.510. The dollar has at least managed to steady on the yen after the Bank of Japan (BOJ) defied market pressure to reverse its ultra-easy bond control policy.Analysts assume the BOJ will stand the line until at least the next policy meeting in March, though one hurdle will be the expected naming of a new BOJ governor in February.Any hint the replacement is less dovish than current governor Haruhiko Kuroda could see the yen climb anew.For now, the dollar was holding at 129.40 yen, following last week’s wild gyrations between 127.22 and 131.58.The focus on interest rates will make the Bank of Canada’s meeting on Wednesday of some note, with markets leaning toward another quarter-point hike to 4.5%, but that to be the end of the tightening cycle there.The Canadian currency was a touch firmer at $1.3374 per U.S. dollar, having bounced from $1.3497 on Friday when local data on retail sales proved a lot less weak than expected. More

LUSAKA (Reuters) – U.S. Treasury Secretary Janet Yellen on Sunday said the United States wanted to see quicker progress on the World Bank’s plans for expanding its lending capacity to address climate change and other global crises.The World Bank’s “evolution roadmap”, reported by Reuters earlier this month, calls for the bank to negotiate with shareholders ahead of April meetings on proposals that include a capital increase and new lending tools.It calls for World Bank management to develop specific proposals to change its mission, operating model and financial capacity that could be approved by the joint World Bank and International Monetary Fund Development Committee in October.The plan marks the start of a negotiation process to alter the bank’s mission and financial resources and shift it away from a country- and project-specific lending model used since its creation at the end of World War Two.Yellen said the bank’s roadmap was a “constructive document” and formed a good basis for discussion, but more work was needed.”We do have some concerns,” she told Reuters as she traveled to Zambia from Senegal. “We would like to see some progress on a quicker timeline. And think there are some things that could be done to expand lending given the current capital release.”Yellen said working on the reforms – first of the World Bank and then other multilateral development banks – was one of her biggest priorities this year.The United States, the bank’s largest shareholder, worked with other countries to push the World Bank to develop the reform plan, which was discussed by the bank’s board on Jan. 11. “2023 is the year to reap specific progress in the short-term with the Spring Meetings (in April) … and lay the foundation for more fundamental/complex reforms by the October meetings,” a senior Treasury official said.The United States and other shareholders favor a staged implementation approach, with proposals for certain reforms released in time for the spring meetings of the IMF and World Bank to enable some “quick wins,” the official said.These would focus on the World Bank’s vision and mission, stretching its financial capacity … and stepping work on private sector mobilization, the official said.More work was also needed to reorient the World Bank’s operational model to focus more on global challenges, its use of incentives and a strengthened framework for the use of concessional, or low-interest resources, the official said.Treasury was also looking for more details on how the bank could work with supra-and sub-national entities. More

Hello and welcome to the working week.Are you enjoying the start of the new lunar calendar year? The Year of the Rabbit is supposed to represent hope, peace and prosperity. And we all need more of these things in 2023.For the time being, however, this week is likely to see a continued focus on the more difficult matters of the present, not least China’s ability to vaccinate its citizens as the country opens up for the holiday season.Industrial disputes will continue to rumble on with ambulance workers in England and Wales due to stage another strike on Monday. In Portugal, cabin crew at national carrier TAP will begin strike action on Wednesday amid a dispute about the airline’s pay offer and working conditions.In Westminster politics on Tuesday, Labour’s shadow foreign secretary David Lammy will take up a more positive tone when he sets out his party’s policy priorities.He will probably weigh in on the UK’s relationship with the EU. By coincidence, Monday is the 10th anniversary of former prime minister David Cameron’s speech on Europe in which he pledged he would renegotiate the UK’s relationship with the EU and offer a referendum on membership. Perhaps Lammy will reference this.Also in the UK, but not to do with the British government, Nigeria is due to mount a high-stakes legal trial at London’s High Court on Monday. The case involves a long-running attempt to overturn an $11bn arbitration award that left the Nigerian government owing more than a quarter of its foreign reserves to an obscure oil and gas company.The main election news of the next seven days will be the run-off vote for the Czech presidential contest, which concludes on Saturday. Former Nato commander Petr Pavel is the frontrunner.Also, Donald Trump is back. The former US president is expected to make his first public appearance on the 2024 election campaign trail on Saturday, when he will name his South Carolina leadership team.Still feeling positive and hopeful?Thank you again to those who send messages of support and advice about the contents of this newsletter. I greatly enjoy your various suggestions. Email me at [email protected] or if you’ve received this in your inbox, hit reply.Economic dataThe fourth week of the month should be renamed survey week. Over the next seven days we have the comparison of G7 nations with the purchasing managers’ index updates and the CBI industrial trends survey on Tuesday, followed by Germany’s Ifo Business Climate report on Wednesday, as well as other consumer confidence measures.On Thursday the US releases its first estimate for GDP movement in the fourth quarter of last year. Spain will follow suit on Friday.Inflation updates are due from the UK, Australia, Spain, Sweden and Singapore on Wednesday. Japan will also report its Consumer Price Index cost of living measure. In central banker news, European Central Bank board member Fabio Panetta is due to appear at the Committee on Economic and Monetary Affairs of the European parliament on Monday. Across the Atlantic, the Fed enters its purdah period ahead of the next Federal Open Market Committee meeting, which begins on January 31, and the Bank of Canada’s monetary policy committee is expected to raise its rate a further 25 basis-points to 4.50 per cent with the possibility of it signalling a pause in further increases.CompaniesTech earnings are a key theme this week; investors remain concerned about the prospects for the sector after a series of significant job cut announcements by most of the largest companies. The approach taken by Microsoft, which reports second quarter figures on Tuesday, could be a model for other Big Tech players to follow, according to our West Coast editor Richard Waters. Microsoft chief executive Satya Nadella managed to strike a note of cautious optimism while announcing 10,000 lay offs last week to bring down its cost base.It will be another week for Elon Musk watchers (just like every other week) with Tesla reporting fourth quarter figures on Wednesday. The company has been cutting prices of its electric vehicles to bolster demand in the US and Europe. We’re assuming Musk will be following the FT’s coverage of the latest numbers given claims made by the billionaire’s lawyer last week in court.The war in Ukraine has boosted the fortunes of the world’s largest defence contractors with governments promising to increase spending on weapons and other military equipment. Investors will be looking for comments from Lockheed Martin (reporting on Tuesday) and Northrop Grumman (whose numbers are out on Thursday) to see if these promises will actually generate future revenues.Key economic and company reportsHere is a more complete list of what to expect in terms of company reports and economic data this week.MondayEU, European Central Bank board member Fabio Panetta appears before the Committee on Economic and Monetary Affairs of the European parliament in BrusselsUK, CBI director-general Tony Dankers gives a speech, Is the UK Stuck in a Rut on Growth?, at the UCL campus in LondonUK, investment by British companies abroad and foreign direct investment dataUK, EY Item Club winter economic forecast for the British economyResults: Baker Hughes Q4TuesdayAustralia, Eurozone, France, Germany, Japan, UK, US: S&P Global purchasing managers’ index (PMI) for manufacturing and servicesGermany, GfK Consumer Climate surveyHungary, monetary policy committee rate decisionNigeria, monetary policy committee rate decisionUK, December public sector net borrowing figuresUK, CBI industrial trends surveyResults: Associated British Foods Q1 trading update, Brown & Brown Q4, Canadian National Railway Q4, Capital One Financial Q4, Danaher Q4, General Electric Q4, Halliburton Q4, Invesco Q4, Johnson & Johnson Q4, Lockheed Martin Q4, Microsoft Q2, Raytheon Technologies Q4, Saga trading update, Tata Motors Q3, Texas Instruments Q4, 3M Q4, Travelers Q4, Union Pacific Q4, Verizon Communications Q4WednesdayAustralia, Q4 and December CPI inflation rate dataBelgium, NBB Business Climate surveyCanada, Bank of Canada monetary policy committee rate announcementGermany, January Ifo Business Climate reportSingapore, December CPI inflation rate dataSweden, December PPI inflation rate dataSouth Africa, monetary policy committee rate decisionSpain, December PPI inflation rate dataUnited Nations World Economic Situation and Prospects reportUK, December producer price index (PPI) inflation rate dataResults: Alstom Q3 sales update, ASML FY, AT&T Q4, Boeing Q4, CMC Markets Q3 trading update, easyJet Q1 trading update, Givaudan FY, IBM Q4, Kimberly-Clark Q4, Levi Strauss Q4, Lonza FY, Raymond James Q1, Tesla Q4, Tod’s FY sales figures, JD Wetherspoon Q2 trading update, Woodside Energy Q4ThursdaySouth Africa, December PPI inflation rate data. Also, central bank’s monetary policy committee rate-setting meeting.UK, quarterly productivity statisticsUK, Zoopla house price index reportUS, flash Q4 GDP dataUS, Q4 consumer spending figuresResults: Banco Sabadell Q4, Comcast Q4, CVS Group trading update, Diageo H1, Fevertree Drinks FY trading update, Foxtons FY trading statement, Intel Q4, JCDecaux Q4, JetBlue Airways Q4, LVMH FY, Marsh & McLennan Q4, Mastercard Q4, Nokia Oyj Q4, Northrop Grumman Q4, Salvatore Ferragamo FY, Rank Group H1, SAP FY, St James’s Place Q4 trading statement, STMicroelectronics FY, Telia FY, Tate & Lyle Q3 trading statement, T Rowe Price Q4, Visa Q1, Volvo Group Q4, Wizz Air Q3FridayAustralia, Q4 PPI inflation rate dataFrance, January consumer confidence surveySpain, flash Q4 GDP dataUS, December personal income and spending dataResults: American Express Q4, Charles Schwab winter business update, Chevron Q4, Colgate-Palmolive Q4, H&M FY, HCA Healthcare Q4, LG Electronics Q3, Rémy Cointreau Q3 sales update, YouGov H1 trading statementWorld eventsFinally, here is a rundown of other events and milestones this week. MondayArgentina, Brazil’s Luiz Inácio Lula da Silva begins his first state visit since becoming president again, meeting his Argentine counterpart Alberto FernándezFrance, annual year ahead address by European Space Agency director-general Josef Aschbacher, providing an overview of ESA’s achievements in 2022 and the opportunities ahead in 2023UK, Office for National Statistics publishes another tranche of data from the 2021 Census of England and Wales, detailing the ethnicity breakdown of the nations. Gender and sexual orientation data are published on Wednesday.UK, over 2,600 Unison ambulance workers to begin another day of strike action in their dispute over pay. Separately, more than 1,000 Welsh Ambulance Service members of Unite the union begin a second 24-hour walk out over pay.US, Mauricio Hernandez Pineda, a former national police officer in Honduras and cousin of the Central American country’s former president Juan Orlando Hernández, due to go on trial in Manhattan federal court on drugs chargesTuesdayEU, 15th European Space Conference begins in BrusselsUK, shadow foreign secretary David Lammy to speak about the opposition Labour party’s foreign policy at a Chatham House event in LondonUS, Academy Award winner Riz Ahmed and star of hit film M3gan Allison Williams will announce this year’s Oscar film award nomineesUS, Bulletin of Atomic Scientists announces the location of the minute hand on its Doomsday Clock, indicating the perceived likelihood of nuclear catastropheWednesdayPortugal, cabin crew at Portugal’sTAP airline begin strike action running until January 31, seeking better working conditions and higher paySenegal, the African Development Bank, the Senegalese government and the AU Commission host a food summit on the theme Feed Africa: Food Sovereignty and ResilienceUK, annual Convention of the North is held in Manchester to discuss the opportunities and challenges for the North of England. Speakers include Levelling Up secretary Michael Gove and his Labour party opposite Lisa Nandy.UK, first strike by Amazon workers in the UK at a warehouse in Coventry, organised by members of the GMB union, over a 50p per hour pay offer.UK, Burns Night celebrations in honour of Scotland’s national poetThursdayAustralia, Australia Day national holidayIndia, Republic Day national holidayUK, first edition of JK Rowling’s Harry Potter and the Philosopher’s Stone goes on sale at Forum Auctions, estimated to raise between £50,000 to £70,000US, Nasa’s Day of Remembrance to honour astronauts who gave their lives in the process of space explorationFridayEU, European Banking Authority launches an EU-wide stress test of banksUK, Holocaust Memorial daySaturdayArmenia, Army Day national holidayAustralia, the Australian Open women’s final at Melbourne ParkCzech Republic, second round of the presidential election concludesUS, former president Donald Trump is expected to make his first public appearance for the 2024 presidential campaign, unveiling his South Carolina leadership teamSundayAustralia, the Australian Open men’s final at Melbourne Park More

WASHINGTON (Reuters) – A bipartisan group of U.S. lawmakers is preparing a plan to defuse a looming crisis over the nation’s debt ceiling by changing it from a fixed dollar amount a percentage of national economic output, the group’s top Republican said on Sunday.The proposal would replace Washington’s current federal debt ceiling – currently set at $31.4 trillion – with a rule that would instead limit debt to a share of national economic output, said U.S. Representative Brian Fitzpatrick, the Republican co-chair of the moderate Problem Solvers Caucus.Fitzpatrick – appearing on Fox News Sunday with Democratic Problem Solvers co-chair Josh Gottheimer – said Republican House of Representatives Speaker Kevin McCarthy will be taking the lead in negotiations with the White House over the debt ceiling. But he and Gottheimer were “putting meat” on the bones of their proposal to help avoid a crisis.”We’re just going to offer up … a possible bridge building solution,” Fitzpatrick said.The U.S. government on Thursday came close to its statutory borrowing limit. The Treasury Department warned that its extraordinary cash management measures could only allow the government to pay all its bills through early June, at which point the nation could be at risk of failing to meet its obligations, including on its debt securities.House Republicans want to use that critical deadline to force spending cuts, while the White House has said there should be no negotiations over lifting the debt limit. Republicans’ narrow House majority has given outsized influence to the party’s most hardline voices.Washington’s debts are currently equivalent to about 125% of one year of production across the U.S. economy. Fitzpatrick said the proposal he is working on with Gottheimer would force budget cuts on Washington if federal borrowing exceeded a set share of economic output. He did not say what that share would be. Congress’s rules on the debt ceiling are intended to limit growth of the nation’s debt. The measure has not had that effect, as, in practice, Congress has treated the annual budget process — deciding how much money to spend — separately from the debt ceiling, in essence, agreeing to cover the costs of previously approved spending.The United States is among the few countries to set a legal limit on borrowing.Democratic President Joe Biden on Friday said he would “have a discussion” on U.S. debt with McCarthy, who has said he will sit down with the president to discuss a “responsible” debt ceiling increase.The White House has said raising the debt ceiling should not be a negotiation. But some Democrats, including Gottheimer as well as prominent Democratic moderates such as U.S. Senator Joe Manchin, have said the administration needs to engage in a debt ceiling negotiation.A 2011 standoff over the debt ceiling lead Standard & Poor’s to cut the U.S.’s credit rating, a historic first. Failure to address the limit this time could roil global markets and trigger an economic downturn.Gottheimer said: “I’ve had conversation with the White House just this weekend, and I’m optimistic that they will sit down” to discuss the debt ceiling with Republicans.Biden is hosting Democratic congressional leaders at the White House on Tuesday. More

The eurozone will avoid a recession this year according to a widely-watched survey of economists which illustrates the sharp about-turn in global economic sentiment in the past couple of weeks.As recently as last month, analysts surveyed by Consensus Economics were predicting the bloc would plunge into recession this year. But this month’s survey found that they now expect it to log growth of 0.1 per cent over the course of 2023. This is thanks to lower energy prices, bumper government support and the earlier-than-anticipated reopening of the Chinese economy, which is set to boost global demand.The upgrade comes after officials and business leaders at this week’s annual World Economic Forum in Davos also embraced a more upbeat outlook, and the IMF signalled that it would soon upgrade its forecasts for global growth.Economists had feared that Europe would be among the hardest-hit areas of the global economy this year due to its exposure to the economic consequences of Russia’s war with Ukraine. Just weeks ago IMF managing director Kristalina Georgieva said that “half of the European Union will be in a recession” during 2023. Carsten Brzeski, head of macro research at ING Bank, described the about-turn in economists’ forecasts as “a recession that never came”. Susannah Streeter, analyst at Hargreaves Lansdown, said: “The threat of the feared energy crisis [is] retreating, and inflation [is] climbing down more rapidly than expected.”“Our perceptions have changed quite radically since October,” said Andrew Kenningham, chief Europe economist at Capital Economics, adding government support had been more generous than expected, while the auto sector has rebounded more strongly than predicted. There is now less than a 30 per cent chance of a recession, down from the an estimated 90 per cent last summer, according to Anna Titareva, economist at UBS. She said that the easing of supply chain disruptions, a strong labour market and excess savings explain the eurozone’s economic resilience, and Europe has been successful in filling its gas storage in recent months, which has greatly reduced fears of gas rationing.The recent sharp fall in wholesale gas prices back to levels last seen before Russia’s invasion of Ukraine has also helped boost the economic outlook. JPMorgan this week raised its 2023 eurozone GDP forecast to 0.5 per cent after anticipating natural gas prices would be about €76 per megawatt hour, rather than its previous expectation of €155. Speaking at Davos this week Christine Lagarde, president of the European Central Bank, said the economic prognosis was looking “a lot better” than feared. Gita Gopinath, the IMF’s deputy managing director, said China’s decision last month to ease Covid-19 restrictions was one reason why the fund had become more optimistic. Sven Jari Stehn, economist at Goldman Sachs, said firmer demand in China would “boost European trade significantly, especially in Germany”. German chancellor Olaf Scholz said this week he was “convinced” Europe’s largest economy would not fall into a recession. Banque de France governor François Villeroy de Galhau said: “For Europe, we should avoid a recession this year, which I wouldn’t have said with such confidence three months ago.”Some economists do still expect a recession. Silvia Ardagna, economist at Barclays Bank, said that while the downturn would not be as deep as previously thought, the eurozone economy would still contract for two successive quarters — meeting the technical definition of a recession. Kenningham warned aggressive rate increases by the ECB could lead to a weak recovery. Lagarde signalled in Davos the ECB would raise rates by 50 basis points at its February and March meetings. The deposit rate has already increased by 2.5 percentage points to 2 per cent since June last year, a pace of tightening that eurozone economies have not experienced before. “The eurozone economy may avoid a recession but interest rates may need to stay high for a prolonged period,” said Kenningham. “It looks like we may get — at worst — a mild recession, but that will be followed by a weak recovery.” More

How did the US economy fare in the fourth quarter of 2022?The US economy is expected to have expanded in the fourth quarter, albeit at a slower pace than earlier in the year, as the Federal Reserve’s aggressive interest rate-raising campaign bites into growth.The Bureau of Economic Analysis on Thursday is forecast to report that US gross domestic product grew by 2.6 per cent in the three months to December 31, according to a Bloomberg poll of economists. That would mark a shift lower from the 3.2 per cent in the third quarter.The housing sector is likely to have contributed to that slowdown, Citi analysts Veronica Clark and Andrew Hollenhorst argue. Lower residential investment, they say, is likely to have weighed “substantially” on Q4 GDP, which is already evident in data such as housing starts and building permits. As the Fed has raised interest rates, and in turn lifted mortgage rates, the housing sector has slowed, with new home construction falling in December for the fourth consecutive month and marking the first annual drop since 2009.Also included in the GDP release will be the personal consumption expenditures price index, which reflects changes in the price of goods and services. That data is expected to show an increase of 1.7 per cent, down from 2.3 per cent in the previous quarter. Kate DuguidWill confidence in the European economic outlook rise?The first economic indicators for the eurozone and the UK in 2023 are expected to show signs among companies that a downturn in Europe will be milder than previously feared.The closely watched S&P purchasing managers’ indices, a measure of the health of private sector activity, are expected to have edged up when preliminary figures for January are published on Tuesday.Economists polled by Reuters forecast the eurozone composite PMI index to have increased to 49.8 in January from 49.3 estimated in the previous month.The services sector is forecast to have moved back above the 50 mark, indicating a majority of businesses reporting an expansion compared with the previous month. The manufacturing PMI is forecast to remain below that threshold, but rise to 48.5 in January from 47.8 in December.“Aided by substantial government intervention to limit the hit to consumers and businesses from higher energy prices, activity has seemingly held up better than many had expected, to the point that recession fears for this winter have receded,” said Sandra Horsfield, economist at Investec.While Horsfield is “cautious” about calling off a recession in the eurozone, she noted that marked falls in wholesale energy costs, aided by unusually mild weather conditions in late 2022, “may well have improved activity further in January, even though energy costs are still at high levels historically”.Similar improvements are expected for the UK PMI indices, with the composite indicator forecast to rise near the 50 mark from 49 in December, in part thanks to the government’s energy support schemes for households and businesses supporting demand. Despite the expected improvement, most analysts forecast the British economy to be in recession for most of this year. Valentina RomeiWhat will tech sector earnings reveal about the Fed’s rate-tightening campaign? The biggest names in the technology sector report earnings this week with investors keen to find out how the industry has coped with rising inflation and the Federal Reserve’s steep interest rate increases in 2022.“The more growth oriented sectors, such as technology, have faced the biggest pressure from rising interest rates,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe.Results from Morgan Stanley and Goldman Sachs last week exemplified the challenging environment, as a fall in M&A activity, new stock market listings and debt deals led to a massive drop in profits in the banking sector compared with the record levels seen in 2021.Morgan Stanley’s revenues from its wealth management division in the final quarter helped it punch through analysts’ estimates with net earnings of $2.2bn but rival Goldman undershot forecasts with $1.3bn in the same period.The outlook for tech is set to be equally divided. Microsoft, which publishes results on Tuesday, saw its share price fall about 28 per cent last year and last week announced it would be cutting 10,000 jobs to trim costs.Shares in Tesla, which releases results on Wednesday, fell 65 per cent over the period — despite the fact its global sales volumes rose 40 per cent in 2022. Earlier this month, Tesla announced it would be cutting the price of its electric vehicles in an effort to support demand during the economic downturn forecast for this year.“[Large investors] gave them money in the hopes that a percentage of them would make money, because money was free,” said Steve Blitz, chief US economist at TS Lombard. “Now that it’s not free anymore, money has been pulled from the potential unicorns unless they can show their profit potential.”FactSet, the data provider, estimates that the US information technology sector had a 9.8 per cent decline in earnings per share in the fourth quarter compared to the same period a year ago.“In the near term there are still pressures that could translate into an earnings slowdown, but as we begin to see inflation numbers coming down and pressure from central bank tightening easing, we may also see those pressures start to ease,” said Tahir. “We’re cautiously optimistic that we may pass through the policy tightening storm without a huge effect on earnings.” Martha Muir More

OTTAWA (Reuters) – The Bank of Canada will offer minutes from its policy-setting meeting this week for the first time in its history, a move some analysts say will help restore credibility lost last year amid soaring inflation and encourage out-of-the-box thinking.Annual inflation shot to 8.1% in June, the highest in 39 years and four times the Bank of Canada’s 2% target. In December, inflation slowed to 6.3%. The BoC began hiking rates in March when its benchmark interest rate stood at 0.25%, and most analysts expect another quarter-point rate increase to 4.5% when the six-member governor council meets on Wednesday. The so-called “summary deliberations” from the meeting will be published on Feb 8. On the recommendation of the International Monetary Fund, the BoC in September said it would release minutes to improve transparency, Other central banks including the U.S. Federal Reserve, the Bank of England and the European Central Bank already provide some form of record of their meetings.”Anytime inflation is high – and when it’s been not high for the better part of 30 years to 40 years – the credibility of the institution is going to take a hit,” said Jeremy Kronick, director of monetary and financial services research at the C.D. Howe Institute, a pro-business think tank.One of the criticisms of central bankers over the past year has been “that there was a lot of groupthink happening,” Kronick said, so offering a peek into the policy meeting “might allow people to see that there were debates and deliberations”. Groupthink is where individuals overlook potential problems or new ideas in pursuit of a consensus. Last year central banks globally initially thought inflation would be “transitory”, or pass quickly. Instead supply-chain difficulties persisted, economies bounced back quickly after restrictions eased, and the outbreak of war in Ukraine drove up energy costs leaving most – including the U.S. Federal Reserve – rushing to boost rates and tame inflation. “The big enemy for policymakers and investors is groupthink,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.BoC Governor Tiff Macklem last year admitted missteps and promised more transparency. The glimpse into the policy meetings comes at a delicate moment, as the bank tries to steer the economy to a “soft landing” instead of a deep recession. ‘P.R. JOB’Other market-watchers say releasing minutes is more an exercise in public relations than an effort to boost transparency.”It’s mostly optics,” said Derek Holt, vice president of capital markets economics at Scotiabank, adding that the minutes will be “a pretty tepid step” toward greater transparency. David Rosenberg, president and founder of Rosenberg Research, said the BoC does not need to rebuild credibility because “the inflation we saw in the past 18 months was global”.Instead, Rosenberg said: “It’s a P.R. job, with the bank saying, ‘Look at us, we’re becoming more transparent.'”Conservative leader Pierre Poilievre, during his campaign to take over the party last year, blamed Macklem for letting inflation get out of hand and said he should be fired.One potential pitfall is that the minutes could create uncertainty over the BoC’s overall message.Now, everyone on the governing council “is singing from the same hymnal”, but the minutes could show they are not, said Kristina Hooper, Chief Global Market Strategist for Invesco, a U.S. asset manager.”One of the complaints sometimes that is made about the Fed is that there are disparate voices saying different things… and that can create confusion.” Since policy decisions are made through consensus and not a vote, “the summary won’t provide attribution to individual council members, nor will it record votes because there are no votes in our system,” said Paul Badertscher, the bank’s director of media relations.In October, Macklem said the minutes would reveal the key points of discussion, the options and risks that were weighed, and finally, how a consensus was reached and why. GRAPHIC: Another hike delivered (https://www.reuters.com/graphics/CANADA-CENBANK/klvygkxnxvg/chart.png) GRAPHIC: A year of hikes (https://www.reuters.com/graphics/CANADA-CENBANK/zgpobmqalvd/chart.png) More

The writer is a member of the executive board of the Deutsche BundesbankRising inflation has been a game-changer for central banks. A few years ago, when inflation was stubbornly low despite a series of interest rate cuts, central banks expanded their toolkit to lift inflation. This resulted in asset purchases in the trillions of euros. With inflation accelerating to historic highs in 2022 and policy rates rising, the time has come to reverse this extraordinary measure. Monetary policy purchase programmes of the Eurosystem — that is the European Central Bank and the central banks of the 20 member states — originate from an environment of inflation well below the 2 per cent target combined with historically low interest rates. To fulfil the price stability mandate, negative side effects were tolerated at the time.The consequences of the significant market footprint resulting from our purchase programmes — roughly 40 per cent of public debt is in the hands of the Eurosystem — are increasingly visible. Collateral scarcity in the market for German government bonds is a significant distortion. The crowding out of traditional investor groups, for example in the market for asset-backed securities, represents another side effect. Finally, a prominent and lasting role of central banks in corporate and covered bond markets can impair market liquidity and alienate issuers from their traditional investor base. As a general principle, central banks should only intervene in financial markets to the degree necessary for monetary policy purposes.Today, we are facing different circumstances from those when the asset purchase programme (APP) started. Excessive inflation calls for a determined response, which we are pursuing in the Eurosystem. The key policy rates are our primary instrument to steer monetary policy on that course. The reduction of our balance sheet supports this restrictive path across the yield curve. The time has come for the Eurosystem to scale back its market presence.The Eurosystem will start reducing its market footprint by decreasing its APP portfolio holdings by an average of €15bn a month between March and June 2023. This amounts to approximately 50 per cent of the expected redemptions in its APP holdings during this initial phase of balance sheet normalisation.From a market functioning perspective, there are good reasons for such a measured approach. First, financial markets have experienced high volatility and rising yields since early 2022, stretching the risk budgets of many investors in fixed income markets. Second, the ease of absorption of higher bond volumes will probably remain closely linked to the outlook for inflation and to the expected interest rate path. Last, an over-proportional share of this year’s elevated bond issuance in the euro area is likely to hit the market in the first half of the year.By decreasing our balance sheets, we enter the territory of quantitative tightening, for which there is plenty of theory but relatively little practical experience to draw on. This is a challenge for central banks and market participants.Still, there is already growing evidence of investors returning to fixed income markets. Higher yields and coupons are creating incentives and opportunities — not only for structural buyers such as insurers or pension funds, but also for more price-sensitive investors. Many institutional investors, who have added to the most illiquid parts of their portfolios over recent years (such as real estate and infrastructure), may now be taking a closer look at eurozone fixed-income assets again. Moreover, US dollar-based investors — among others — are enjoying additional incentives to invest in euro assets due to favourable FX hedging mechanics. All in all, I am optimistic that a predictable and clear withdrawal of the Eurosystem from its APP holdings will support our fight against inflation without triggering market turbulence. The Eurosystem will reassess the speed and scope of its actions in early summer and, in doing so, could well consider a more ambitious future path. More