Economy

Until recently, mortgage holders across advanced economies seemed safe in the knowledge that interest rates would stay put for some time. For the entirety of some of their lives as homeowners, there has barely been a hint of problematic inflation, let alone a suggestion that central banks would raise rates quickly to stop it. The worry was not unmanageable repayments, or falling prices, but finding enough money for a deposit to keep up with a market that showed no signs of slowing. Many now find themselves revising these expectations. The Bank for International Settlements — the so-called central bankers’ central bank — has warned that rising interest rates could make existing debt burdens difficult to cope with and cause house prices to fall. Some have wondered whether housing debt represents the next “Minsky moment”: a term used to denote the point at which debt-fuelled asset bubbles unwind to cause economic collapse.Much ink has been spilled in an effort to explain the long housing boom in advanced economies. The availability of cheap money with which to buy property has undoubtedly been a significant factor. Rates have been kept low in an effort to boost wages and growth. The side effect of these measures has been turbocharged demand for housing which ran head-on into supply constraints in many big cities.If this boom is about to meet its own “Minsky moment”, an out-and-out crisis should be avoidable. While some banks could be overexposed to housing, regulators have not been ignorant to this risk. Stricter capital requirements should better insulate banks — unlike in 2008 — while some authorities have also been on the front foot, restricting the ability of households to become too highly leveraged. Still, regulators cannot afford to be sanguine. Many mortgage borrowers who purchased over the course of the boom will be in significant debt — keeping up with house price inflation has been costly. While these high-leverage loans may not make up a large proportion of banks’ books, they are the kind that could go bad as borrowers struggle to keep up with higher rates, record increases in energy prices and other cost-of-living pressures.Even if broader financial turbulence can be avoided, falling prices would not pass by without any impact. Economists have long speculated that households’ willingness to spend has some relationship to wealth as well as income. If house prices fall markedly, some decline in consumption is likely. Any shortfall in spending due to this so-called “wealth effect” may also be exacerbated by individuals devoting a greater proportion of their income to debt repayments as rates rise, and less to purchasing goods and services in the broader economy. Unwinding housing bubbles can also have deep ramifications in communities where defaults, or mortgage stress, may be more concentrated.There are more benign possibilities. If inflation is brought under control, increases to long-term rates — which tend to inform mortgage rates — may be tempered. Many households could cope in this situation by using the buffer of savings they accrued during the pandemic. House prices may not fall as far as feared, or even at all.That does not mean the risks are not real. Supporting growth and staving off economic crisis through years of “cheap money” was an understandable choice. As a new age of monetary tightening dawns, central banks and governments alike must hope that the housing debt built up in the previous era does not weigh too heavily on the prospects of the next. More

JOHANNESBURG (Reuters) -South Africa is close to reaching a five-year target for new investment, President Cyril Ramaphosa said on Thursday as he sought to drum up further backing for the pandemic hobbled economy.In 2018 soon after coming to power, Ramaphosa set a goal to raise 1.4 trillion rand – or around $100 billion at the exchange rate at the time – to revitalise Africa’s most developed economy following repeated recessions and years of anaemic growth. The global pandemic, which temporarily shuttered swathes of the economy and helped push unemployment rates to record levels, has complicated those efforts. But speaking to an investment conference in Johannesburg, Ramaphosa said South Africa nonetheless remained an attractive investment destination.”You see opportunities in this country. You see beyond the difficulties and the challenges,” he told investors. “Your investments are making a difference in our country and our local communities.”The conference, which in part aims to sell foreign companies on South Africa’s potential, brought in a total of 332 billion rand ($22.83 billion), bringing the total of new investment since 2018 to 1.14 trillion rand. “We’ve now reached 95% of the ambitious target we set ourselves four years ago,” Ramaphosa said.MANUFACTURING, MINING, VACCINESFord Motor (NYSE:F) Co has committed 16.4 billion rand that would enable it to produce its next generation Ranger pick-up in South Africa. Mining companies, which were benefiting from favourable market conditions even before Russia’s invasion of Ukraine sent prices soaring, are also boosting their South African operations. Anglo American (LON:AAL) plans to expand an existing 100 billion rand investment to put an additional 10 billion rand into the country this year. And Impala Platinum (OTC:IMPUY) pledged 11.8 billion rand to develop new mining and processing capacity.With the pandemic, South Africa has sought to position itself as a vaccine manufacturing hub for the vastly underserved African continent, attracting investment from Pfizer (NYSE:PFE) and South Africa’s Biovac Institute and Aspen Pharmacare (OTC:APNHY). Netflix Inc (NASDAQ:NFLX) meanwhile is investing 929 million rand for television and film production in South Africa’s Gauteng and Western Cape provinces.The African Development Bank (AfDB) is committing $2.8 billion over the next five years to support private sector investment in agriculture, renewable energy, transport, youth employment, health and vaccine manufacturing. The bank is already supporting South Africa’s struggling state-owned companies, and is currently preparing a $400 million loan package to assist coal-dependent power utility Eskom’s transition to renewable energy.($1 = 14.5431 rand) More

The five-year ‘rhino bond’ issued on Wednesday will pay investors returns based on the rate of growth of black rhino populations at South Africa’s Addo Elephant National Park (AENP) and the Great Fish River Nature Reserve (GFRNR), the bank said.After five years, investors would get a return of between 3.7% and 9.2% if the population increases. They would get no return if there is no change in the black rhino population, it added.Black rhinos are two-horned species of the endangered rhino family and are found only in Africa. Between the 1970s and 1990s, their population fell by 96% to below 2,500 due to poaching to meet demand for their horns in China and the Middle East, according to Save The Rhino International, a London-based non-profit organisation.Later, large scale conservation efforts were taken up which led to their increase to between 5,000 and 5,500, according to Save The Rhino’s website. South Africa accounts for approximately half of the total black rhino population on the continent, World Wildlife Fund (WWF), a global non-governmental organisation says. “The pay-for-success financial structure protects an endangered species and strengthens South Africa’s conservation efforts by leveraging the World Bank’s infrastructure and track record in capital markets,” World Bank Group President David Malpass said in the statement. More

(Reuters) – Minneapolis Federal Reserve Bank President Neel Kashkari on Thursday said he has “dramatically” shifted his view of inflation over the last six months, and he has now penciled in seven quarter-point interest rate hikes this year to help rein it in.”We need to adjust,” Kashkari told the Fargo-Moorhead Chamber of Commerce’s Midwest Economic Outlook Summit, because inflation is not proving as temporary as he had thought it would be. “The data just keeps coming in in that direction, and we just have to respond.” More

“With housing costs gaining an ever-larger weight in the inflation Americans experience, I will be looking even more closely at real estate to judge the appropriate stance of monetary policy,” Waller said in prepared remarks for a webinar on housing organized by Tel Aviv University and Rutgers University.He noted that real estate comprises a big share of key inflation gauges as well as making a sizeable contribution to gross domestic product. Measures of market rent have risen more than 6.5% over the past two years while house prices are up a cumulative 35% since the beginning of the COVID-19 pandemic, according to the Zillow Home Value Index.Waller also said he hoped some pandemic-specific factors pushing up home prices and rents would ease in the next year or so, but cautioned that overall rising costs in the “red-hot” housing market are due to demand far exceeding supply and are not fueled by excessive leverage or easy lending.He did not specifically address the general U.S. economic outlook or monetary policy in his speech. In an interview last week, Waller said economic data suggests the central bank should do a bigger interest rate hike in the next two policy meetings to begin to tame inflation, which at above 6% is more than three times the Fed’s target.Only economic uncertainty caused by Russia’s invasion of Ukraine prevented Waller from supporting the larger half-percentage-point increase he had been advocating for ahead of the Fed’s last policy meeting.Fed policymakers raised the benchmark overnight interest rate by a quarter of a percentage point from the near-zero level on March 16 as they began to close the chapter on loose monetary policy measures put in place to bolster the economy through the pandemic. But since then, Fed Chair Jerome Powell and several other central bank policymakers have indicated an increasing willingness to raise rates by 50 basis points when they gather again on May 3-4, at which time they may also begin to reduce the Fed’s nearly $9 trillion balance sheet. More

The European Central Bank will end most of the more relaxed bank funding rules it introduced in response to the coronavirus pandemic, further reducing its economic and financial support despite fears the war in Ukraine will cause significant disruption.The move indicates that while the war in Ukraine is expected to slow growth and increase inflation, ECB officials are confident that the eurozone’s financial system shows few signs of excessive stress, having come through the Covid-19 crisis in better shape than expected. The ECB said that from July it would phase out over three years many of the changes it introduced in April 2020. The relaxed rules were designed to avoid the pandemic turning into a debt crisis by increasing by over €240bn the collateral banks could use to raise cheap funds from the central bank.However, it said Greek government bonds would continue to be accepted as collateral until at least the end of 2024, despite the fact that they do not meet its minimum credit quality requirements because their rating is below investment grade.The central bank has already announced plans to stop all net bond purchases in the third quarter of this year ahead of a potential increase in interest rates for the first time in over a decade. It also plans to stop lending to banks at the most generous rate in its history of minus 1 per cent from June.“This gradual phasing out allows ample time for the euro system’s counterparties to adapt,” the ECB said, adding that its governing council had “taken into account in a forward-looking manner” the impact of its latest decision on banks’ ability to access its refinancing facility.The phaseout will start in July when the ECB will increase the valuation discounts, or haircuts, it applies to the assets that banks use as collateral and it will no longer accept “fallen angel” bonds that lost their investment grade rating after the pandemic hit.The process will end in March 2024 when the ECB will stop accepting extra forms of collateral such as loans guaranteed by governments and public sector institutions.The ECB has already said it will stop much of its net asset purchases at the end of this month when they stop under its €1.85tn pandemic emergency scheme, which allowed it to buy Greek government bonds for the first time in almost a decade. Investors have worried this could mean the ECB stops buying Greek bonds or accepting them as collateral. But it said this month that it would continue to buy some Greek bonds using the proceeds of maturing bonds until those reinvestments end in 2024.The central bank also sent a clear signal that if other governments were downgraded below investment grade it could still buy their bonds, saying it “reserves the right to deviate also in the future from credit rating agencies’ ratings if warranted, in line with its discretion under the monetary policy framework, thereby avoiding mechanistic reliance on these ratings”.Eurozone government bonds have been hit by a heavy sell-off since the start of this year, underlining investors’ concern over the ECB and other central banks’ plans to remove much of the extra stimulus they provided in response to the pandemic, including vast bond purchases.This article was republished to correct the size of the ECB’s pandemic emergency scheme More

LONDON (Reuters) – The Bank of England on Thursday began sketching out Britain’s first regulatory framework for cryptoassets, saying that although the sector remained small, its rapid growth could pose risks to financial stability in future if left unregulated.Cryptoassets have come under the regulatory spotlight amid concerns they could be used to circumvent financial sanctions imposed on Russia since its invasion of Ukraine.”While cryptoassets are unlikely to provide a feasible way to circumvent sanctions at scale currently, the possibility of such behaviour underscores the importance of ensuring innovation in cryptoassets is accompanied by effective public policy frameworks to… maintain broader trust and integrity in the financial system,” the BoE’s Financial Policy Committee (FPC) said in a statement https://www.bankofengland.co.uk/financial-stability-in-focus/2022/march-2022 on Thursday.Cryptoassets, such as bitcoin and ether, are largely unregulated as they fall outside the regulatory ‘perimeter’ and a change of law would be needed to bring them under the full scope of UK securities rules, a step Britain’s finance ministry is looking at.”This would likely require the expansion of the role of existing macro and microprudential, conduct, and market integrity regulators, and close co-ordination amongst them,” the FPC said.The FPC said direct risks to financial stability from crypto were currently limited, but if the recent pace of growth is maintained, there would be risks in future.The sector globally grew tenfold between early 2020 and November 2021, and now stands at $1.7 trillion or 0.4% of global financial assets, with over 17,000 different cryptoasset tokens in circulation.Regulation for the sector should be based on “equivalence”, meaning that crypto-related financial services that perform a similar function to existing financial services should be subject to the same laws, the FPC said.Until cryptoassets are brought fully under the regulatory net, the BoE is focusing on ensuring that risks from crypto are controlled in the banking sector. The Financial Conduct Authority on Thursday told firms they must fully explain to consumers the risks from unregulated crypto.Regulators across the world are also trying to grapple with cryptoassets and their offshoots. STABLECOIN CONDITIONSBoE Deputy Governor Sam Woods wrote https://www.bankofengland.co.uk/prudential-regulation/letter/2022/march/existing-or-planned-exposure-to-cryptoassests to lenders on Thursday, noting increasing interest from banks and investment firms in the sector.Risks from crypto should be “considered fully” by the boards of banks and they would likely need to adapt their existing risk management strategies and systems, Woods told them.”We would also expect firms to discuss the proposed prudential treatment of cryptoasset exposures with their supervisors,” Woods said in reference to the amount of capital needed to cover any losses.The BoE launched a survey of banks’ existing exposures and future crypto plans, setting a June 3 deadline for responses.Stablecoins, which are backed by assets or cash, that became systemically important would need to be backed by high-quality, liquid assets and loss-absorbing capital similar to that held by banks, the FPC said.Using deposits with commercial banks to provide backing for stablecoins would pose significant financial stability risks if pursued at scale, the FPC said.The BoE and the Financial Conduct Authority will carry out further work on rules for stablecoins and consult on a regulatory “model” for systemic stablecoins in 2023, the FPC said. (Graphic: Bank of England Graphic on Stablecoins, https://fingfx.thomsonreuters.com/gfx/mkt/znpneqzdwvl/Bank%20of%20England%20Graphic%20on%20Stablecoins.PNG) More

ZURICH (Reuters) – The Swiss National Bank will take “all necessary measures” to tackle higher prices in Switzerland, SNB Chairman Thomas Jordan said on Thursday, indicating a shift in tone at the central bank that for years has battled to tame the strong Swiss franc.The SNB doubled its inflation forecast for this year, citing higher energy costs, production bottlenecks and the Ukraine war.It now sees 2022 inflation at 2.1%, lower than in many countries but still exceeding its target for limiting annual price increases to 0-2%.Unlike the U.S. Federal Reserve and the Bank of England, the SNB held off hiking interest rates, sticking with the world’s lowest interest rate of minus 0.75% as expected.Certainly, Switzerland’s relatively tame inflation rate gives the SNB some flexibility.Still, Jordan said the central bank was determined to control inflation, indicating potential readiness to shift from the ultra-expansive monetary course pursued over the last seven years.”We are not at all powerless, we look at these inflation forecasts and we will take all necessary measures in order to maintain price stability over the medium to long term,” Jordan told journalists.The SNB steers monetary conditions via the franc’s exchange rate and interest rates, and would adjust tools if necessary, he added.The franc strengthened versus the euro after the SNB’s announcement, with the EUR/CHF exchange rate reaching 1.0213 at one point, its highest valuation since March 14.”We are in the business of that for a very long time and if necessary we have to adjust those monetary conditions so inflation remains or returns to the range of price stability.”We also have to look we do not fall into a situation where we have the opposite problem where inflation becomes too low.”The franc strengthened as the market interpreted the SNB’s comments to mean the bank could cope with the currency’s current strength, indicating it may intervene less in future to weaken the currency.Economists said the higher inflation forecasts and Jordan’s comments indicated a more flexible approach at the SNB.”Jordan’s comments … carry a hint of hawkishness and seems to me to be preparing the grounds for days when the SNB no longer maintains the status quo as a matter of course,” said David Oxley at Capital Economics.”The end of its prolonged period of policy stasis is drawing closer.”With the SNB forecasting inflation of 0.9% in both 2023 and 2024, the central bank also had to prevent the country falling into deflation, said Karsten Junius, an economist at J.Safra Sarasin.”The SNB has to monitor risks to its definition of price stability on both sides,” Junius said. “It therefore has to indicate that it stands ready to adjust its policy in both directions.”While keeping policy unchanged, the SNB retained its description of the franc as “highly valued”, despite the currency recently hitting its highest level against the euro in seven years.Jordan said the SNB did not have a particular “pain threshold” for the franc’s valuation, which was being driven by higher inflation abroad as well as the franc’s safe-haven status.The franc’s strength also helps Switzerland overcome rising inflation by making imports cheaper, he said.Many analysts expect the SNB to wait for the European Central Bank to raise rates before starting its own round of hikes, although Jordan stressed Switzerland’s independence.”We never wait for another central bank, we make monetary policy with the goal of maintaining price stability,” he said. More