Archive for Economics & Fundamentals – Page 2

Israel maintains rate as economy seen contracting less

By CentralBankNews.info

Israel’s central bank left its main interest rate unchanged at 0.10 percent and while its staff now sees less of a economic contraction this year than last month, the monetary policy committee still left the door open for further easing if the crises were to continue.
In April the Bank of Israel (BOI) cut its key rate for the first time in five years in response to the economic slowdown from measures to contain the COVID-19 pandemic and has also been using a range of other monetary tools to boost accommodation and ensure the orderly functioning of financial markets.
“The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that the crises is lengthening and it is necessary to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crises,” BOI said.
But compared with its last policy statement in April, BOI staff is more upbeat as some of the restrictions imposed to contain the spread of the coronavirus have been lifted.
Real time data point to a recovery of economic activity in some industries, though activity is still low and in other industries where limitations have not been removed, activity remains around the lowest level.
In a special update to its economic forecast, the bank’s staff now sees an economic contraction this year of 4.5 percent, less than April’s estimate of a 5.3 percent contraction.
In 2021 Israel’s gross domestic product is seen expanding 6.8 percent, down from April’s forecast of 8.7 percent, assuming there won’t be another wave of infections and restrictions.
BOI said the first estimate of gross domestic product in the first quarter shows an annual 7.1 percent contraction.
The gradual removal of restrictions after the Passover holiday is reflected in economic activity but the recovery is expected to take a long time and the adverse impact will be notable, BOI said.
Israel’s shekel was volatile in March, plunging just over 9 percent from March 1 to March 18 before the central bank offered $15 billion in currency swaps, helping the shekel firm so it was only down 2.8 percent by the end of the month against the U.S. dollar.
This month it has been more stable, trading at 3.52 to the dollar today to be down 1.7 percent since the start of the year.
BOI noted the shekel was now back to its pre-crises level, saying “to the extent that the exchange rate stabilizes at this level, it will weigh on the recovery of exports, particularly in view of the decline in global demand, and on the return of inflation to within the target range.”
Israel’s inflation rate has decelerated sharply, with consumer prices down 0.6 percent in April from zero percent in March. In April BOI’s staff forecast inflation this year would average a negative 0.8 percent before rising to a positive 0.9 percent in 2021.
The fall energy prices has put downward pressure on inflation worldwide and BOI said short-term inflation expectations are below its target range of 1.0 to 3.0 percent while medium and long-term expectations are within its range.
“At this point, there are no signs of an inflationary impact from the adverse shock to supply,” BOI said, adding the crises has made it more difficult to calculate and analyze the meaning of changes to prices.

The Bank of Israel published the following statement:

“·      The coronavirus crisis has led to an unprecedented contraction in the scope of economic activity and to a steep increase in the number of jobseekers. The gradual process of removing the restrictions that the government imposed on movement and activity is beginning to be reflected in economic activity, though the adverse impact on the economy is still considerable and is expected to persist. The Research Department assesses, under the assumption there won’t be an additional wave of infections and a renewed increase in the severity of the limitations, that after a marked contraction in 2020, GDP growth will recover rapidly in 2021, but that the unemployment rate at the end of 2021 will be higher than what it was just prior to the crisis.
·      According to the Research Department’s assessment, as of the middle of May, the scope of the economy’s shutdown had declined by close to half in light of the removal of the restrictions. Real time indicators of economic activity point to a recovery in some industries, though the level of activity continues to be low and in the industries in which the main limitations have not yet been removed it remains around the lowest level, and the recovery is reflected only partly in the labor market.
·      Many countries are in various stages of a gradual return to economic activity under health-related limitations, but the magnitude of the global economic crisis is still high. International institutions revised their forecasts downward, and the economic slowdown is expected to worsen in the second quarter. The magnitude of the crisis has led to a broad and unprecedented policy response by central banks and by governments.
·      The policy steps of central banks worldwide has brought about a partial recovery in capital markets. The sharp declines in equity markets were to varying degrees reversed and government bond markets have stabilized. The Bank of Israel’s own activity has markedly reduced the yield on government and corporate bonds in Israel.

Bank credit has increased during the course of the crisis, primarily in light of the growth in business credit and in mortgages, but credit to small businesses and consumer credit declined. The activity of the funds to extend credit to small and medium sized businesses, with partial ·      government guarantees, led to a decline in the average interest rate on credit to small businesses. After a halt in issuance in the corporate bond market in March, there was a recovery in the issuance in April and May.

 

·      Since the previous interest rate decision, the shekel has strengthened by 2.2 percent in terms of the effective exchange rate, and the exchange rate is back to its pre-crisis level. To the extent that the exchange rate stabilizes at this level, it will weigh on the recovery of exports, particularly in view of the decline in global demand, and on the return of inflation to within the target range.
·      The downward trend in the inflation environment continues, particularly against the background of the decline in energy prices. In April, the annual inflation rate was -0.6 percent, and short-term inflation expectations are below the target while medium and long-term expectations are within the target range. At this point, there are no signs of an inflationary impact from the adverse shock to supply. Due to the crisis, there is a methodological difficulty in calculating the CPI and in analyzing the meaning of measured changes in prices.
In view of the magnitude of the crisis’s adverse impact on economic activity, the Committee is utilizing a range of tools in order to increase the extent of the monetary policy accommodation and to ensure the continued orderly functioning of the financial markets. The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that the crisis is lengthening and it is necessary to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crisis.
For the file of figures accompanying this notice, click here.
The coronavirus crisis led to an unprecedented contraction in the scope of economic activity and to a steep increase in the number of jobseekers. Based on the first estimate of National Accounts data, GDP contracted by 7.1 percent in the first quarter, in annual terms, as a result of the shutdown of a notable part of economic activity in the middle of March (Figure 1 in the attached data file). The gradual process that has occurred after the Passover holiday, of removing the restrictions that had been imposed by the government on movement and activity in order to halt the spread of the virus, was reflected in economic activity as well, though the recovery is expected to take a long time and the adverse impact on the economy is expected to be notable.

According to the Research Department’s staff forecast, the scope of the economy’s shutdown, which was estimated to be approximately 36 percent of activity at the peak of the crisis, decreased to approximately 19 percent in the middle of May in view of the removal of the restrictions (Figure 4). Indicators of private consumption show a recovery; data on credit card purchases indicate an increase in the scope of purchases in most industries in which the strict limitations were removed, to close to the pre-crisis level. In industries in which the main limitations have not yet been removed (such as tourism, restaurants, education and leisure), the level of purchases remains near the lowest point (Figure 3). Indicators of the public’s mobility show an increase in the scope of mobility to workplaces, retail and recreation, beginning in mid-April (Figure 7). Goods exports declined sharply in March and April. Goods imports contracted as well, but the import of raw materials remained stable in view of the adverse impact on manufacturing being relatively moderate (Figures 8-9). Data on services exports are still not available for the crisis period but a sharp decline is expected in exports of tourism and transportation services. The Business Tendency Survey indicates a deterioration in the economic situation in March and April, in addition to an increase in companies’ difficulty in attaining credit (Figure 2).

The partial recovery of economic activity is only part reflected in the labor market. At the end of April, there were 1.15 million people claiming unemployment benefits—28 percent of the economy’s workforce. Israel Employment Service data indicate that in May, 141,000 people had returned to work and that there were 41,000 new jobseekers, though apparently the return to work is reported with a lag so that this is very likely to be an underestimation. Real-time surveys among companies, conducted by the Central Bureau of Statistics, indicated that in the middle of April, the share of active employees was around 61 percent, and it increased to about 71 percent in the beginning of May, with notable variance among the industries (Figure 5).
In view of the ongoing crisis, the Research Department published a special update to its macroeconomic forecast that was published in April. The Department currently expects a contraction in 2020 GDP of 4.5 percent (compared with a contraction of 5.3 percent in the April forecast), and a growth rate of 6.8 percent (as opposed to 8.7 percent in the April forecast) in 2021, assuming that there will not be another wave of infections and a renewed increased severity of the limitations. The unemployment rate in the second half of 2020 is expected to rise to 8.5 percent (compared with 8 percent in the previous forecast) and to decline to 5.5 percent at the end of 2021 (as opposed to 4 percent). In 2020, the government budget deficit is expected to be 11.5 percent of GDP and the debt to GDP ratio is expected to increase to approximately 75 percent. The Research Department assesses that in a case of an outbreak of a second wave of infection in the final quarter of the year, GDP in 2020 is expected to contract even more sharply, by approximately 8 percent, and the unemployment rate is expected to increase to 11 percent in the fourth quarter.

There is a continued decline in the inflation environment, and at this stage, no inflationary impact is seen from the negative shock to supply. The March and April CPI readings were slightly higher than expected—the CPI for March increased by 0.4 percent and the CPI for April decreased by 0.3 percent, but the rate of inflation over the past 12 months declined sharply to a negative rate of 0.6 percent, mainly due to the significantly negative contribution of the energy component (Figure 12). The annual inflation rate measured by the CPI excluding energy and fruit and vegetables continued its downward trend, and in April it was 0.2 percent. There is a methodological difficulty in calculating the CPI and in analyzing the meaning of measured changes in prices so long as the strict limitations on economic activity lead to numerous goods and services not being consumed, and their prices not being able to be measured, and there is a sharp change in the composition of households’ consumption basket. One-year inflation expectations from most sources continued their trend of decline until the middle of May. In recent days, there was a slight increase, but they are all lower than the target. There was some increase in expectations derived from the capital market for the second year, and those expectations for medium and longer terms did not change markedly and they are anchored within the target range. Since the previous interest rate decision, the shekel strengthened by 2.2 percent in terms of the effective exchange rate, and the exchange rate is similar to its pre-crisis level (Figure 15). To the extent that the exchange rate stabilizes at this level, it will weigh on the recovery of exports, particularly in view of the negative impact on global demand, and on the return of inflation to within the target range.

Bank of Israel activity in the financial markets moderated the strong volatility that characterized them at the outbreak of the crisis, and in particular, markedly reduced the yield on government bonds (Figure 16) and on corporate bonds (Figures 18–19), despite the increase in the government deficit and in the risk in business credit. After the strong shock in markets in March, unprecedented policy measures taken by central banks worldwide led to a change in the trend in capital markets. The sharp declines in equity markets were partly corrected (Figure 28). Government bond markets around the world stabilized,
Bank credit increased during the course of the crisis primarily against the background of increases in business credit, mortgage balances, and the activity of funds to extend partially government-guaranteed credit to small and medium sized businesses, which also led to a decline in the average interest rate on credit to small businesses. However, the overall volume of credit to small businesses and of consumer credit contracted, partly in view of the decline in activity and in demand for credit, and partly in view of the increased risk for small businesses in industries negatively affected by the crisis. In contrast, the banks enabled nearly a half-million businesses and households to defer loan repayments for several months, at a total amount of NIS 6.2 billion (Figure 21). In March, there was a steep increase in mortgage volumes as many borrowers rushed to close on the interest rates agreed on prior to the crisis, and in April there was a decline in mortgage volume with some increase in the interest rate. After a halt in the scope of issuance in the corporate bond market in March, there was a recovery in issuance in April and May.
Many countries are in various stages of a gradual return to economic activity under health-related limitations, but the magnitude of the global economic crisis is still high, particularly in the services industries. International institutions revised their forecasts downward, and the economic slowdown is expected to worsen in the second quarter (Figure 23). The risks to activity are still notable, and particularly the risk for the outbreak of a second wave of the pandemic. The tension between the US and China and the political risks in Europe are also weighing on a potential recovery. In contrast, the increased magnitude of the crisis led to a broad policy response by central banks and by governments; many central banks reduced interest rates and took additional accommodative monetary steps, some of which were unprecedented. Governments put into operation comprehensive plans for expanding public expenditure, compensating those negatively impacted by the crisis, and extending credit to the business sector. The crisis led to a decline in the inflation rate worldwide and to a sharp decline in commodity prices (Figures 25–26); the price of oil fell sharply although it has recovered partly in recent days, with exceptional volatility.
The minutes of the monetary discussions prior to this interest rate decision will be published on June 8, 2020. The next decision regarding the interest rate will be published at 16:00 on Monday, July 6, 2020, following which the Governor will hold a press briefing.”


Ray Dalio Suggests USA Is Entering A Period Of Decline And New World Order

By TheTechnicalTraders

We find it interesting how researchers attempt to compare history, sometimes ancient history, to the applicable functions of today’s world and to attempt to translate the decline of empires in the past to what is happening in today’s world.  Ray Dalio appears to be suggesting the rise of the Chinese economy and economic capabilities is going to threaten to unseat the US as a world super-power.

Within Ray Dalio’s article, he suggests the following which seems to sum up his cycle theory:

“In brief, after the creation of a new set of rules establishes the new world order, there is typically a peaceful and prosperous period. As people get used to this they increasingly bet on the prosperity continuing, and they increasingly borrow money to do that, which eventually leads to a bubble.
As the prosperity increases the wealth gap grows. Eventually the debt bubble bursts, which leads to the printing of money and credit and increased internal conflict, which leads to some sort of wealth redistribution revolution that can be peaceful or violent. Typically at that time late in the cycle the leading empire that won the last economic and geopolitical war is less powerful relative to rival powers that prospered during the prosperous period, and with the bad economic conditions and the disagreements between powers there is typically some kind of war. Out of these debt, economic, domestic, and world-order breakdowns that take the forms of revolutions and wars come new winners and losers. Then the winners get together to create the new domestic and world orders.”

Our own research team has completed quite a bit of research into cycles and super-cycles and, although we agree with Mr. Dalio that past Empires have collapsed and been replaced with more efficient and emerging soon to be a new world leader. Yet, in every instance in the past, the world has been transitioning from a rather disconnected economic structure where ancient empires, or rather the last gasps of ancient empires and wealth, have become threatened, gone to war, and declined.

WWI initiated with the assassination of Archduke Franz Ferdinand in Sarajevo on June 28, 1914.  Nearly a month later, the great powers of Europe were aligned into two coalitions: the Triple Entente – consisting of France, Russia, and Britain – and the Triple Alliance of Germany, Austria-Hungary, and Italy.  Thus, the lines were drawn between ancient European empires that led to the beginning of a new structure of world empires.

Throughout history, the biggest world empires are structured, grow into superpowers, and begin to decline.  Most of these last well over 200 to 250+ years.

The Ottoman Empire started in the early 1300s and ended in the early 1600s because of a war with Persia – more than 300 years.

The Arab Empire, Mohammed, started in 632 and ended in 1258 – more than 600 years.

The Roman Empire began in 753 BC and ended in 23BC – over 700 years.

Chinese Qing Dynasty started in 1644 and ended in 1911 – over 250 years.

Chinese Ming Dynasty started in 1368 and ended in 1644 – almost 300 years.

America’s strength as a nation started to build in the late 1800s/early 1900s. Our rise to a world power came at a great expense in the 1930s and 1940s – fighting Hitler and the Japanese while saving most of Europe and SE Asia in the process. Then, we managed to rebuild most of these areas over a very short period of time.

Additionally, the idea that the current world would allow a nation like China to become a world-power – threatening world-order, capitalism, democracy, and current global geopolitical order seem alien to our researchers.  There is one thing Mr. Dalio seems to ignore in his theories – the world has a choice in the matter – just like we did when Adolf Hitler threatened western Europe and with Hideki Tojo threatened the US and most of SE Asia.  We have a choice in how we address the rise of China and how we protect our freedoms, rights, and futures from any threat China may present.

Currently, the world is moving away from a China-friendly relationship after the COVID-19 virus event has wreaked havoc across the globe.  China’s rise over the past 25+ years has mostly been on the success of selling China as a cheap manufacturing center for the US and other stronger economies.  The process of growing China has been to take advantage of the relationships they’ve built with foreign business/banking.  This is all starting to come to a sudden halt which may put extreme pressures on China’s banking and credit systems over the next 20+ years.

Before we continue, be sure to opt-in to our free market trend signals 
before closing this page, so you don’t miss our next special report!

Our research team put together this chart to highlight the past 100+ years of cycle/super-cycle trends.  When you review this chart, pay attention to the deep collapse of the heavy blue line from 1923 through 1939 – the span of the Great Depression.  We’ve highlighted the area of the Great Depression in BLUE.  We’ve also highlighted recessions in RED and MAGENTA.  Red areas being recessions in cycle areas where the cycles are trending lower and Magenta are where recessions happened in upward trending cycles.  Near the end, we’ve highlighted an area in YELLOW where we believe a new recession will emerge.

Now, as we align these cycle trends with price, we start to see a bigger picture emerge.  This SPY Weekly Log chart illustrates how our cycle analysis aligns with price trends quite well over the past 45+ years.  Our cycle research goes forward over 600 years and we can identify where and when price trends will likely set up, breakdown, or breakout as a result of our extensive cycle research.

Mr. Dalio’s comments, while somewhat valid in general scope, don’t necessarily translate into real-world processes.  With the amount of wealth and new global alliances, inter-connected economies and the recent push attempt to right the many wrongs of the past 30+ years, the world appears to be much more aligned towards restoring some proper order and developing a real future where nations are held accountable and central banks may be forced to adopt a more conservative capital process in the near future.

Without giving away too many details, our cycles are point to a very important cycle event that will take place in the near future.  Many people are completely unaware of when and how this event will take place.  In fact, many analysts are simply guessing as to what may happen over the next 20+ years whereas we’ve actually mapped out 500+ years of detailed price cycles for the global markets.

If you want to gain insight into the markets next big move or learn how our researchers attempt to stay ahead of the biggest market trends, then you owe it to yourself to visit TheTechnicalTraders.com to learn how we help our members create success and find great opportunities.

We can promise you one thing right now – the global markets are going to continue to be very interesting for technical traders over the next 10 to 20+ years.  You don’t want to miss the opportunities that are setting up in the global markets and we strongly believe everything you are reading about cycles from others is superficial in structure and content.

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles in stocks and commodities. I believe I have a good pulse on the market and timing key turning points for investing and short-term swing traders. 2020 is going to be an incredible year for skilled traders.  Don’t miss all the incredible moves and trade setups.

I hope you found this informative, and if you would like to get a pre-market video every day before the opening bell, along with my trade alerts. These simple to follow ETF swing trades have our trading accounts sitting at new high water marks yet again this week, not many traders can say that this year. Visit my Active ETF Trading Newsletter.

If you have any type of retirement account and are looking for signals when to own equities, bonds, or cash, be sure to become a member of my Long-Term Investing Signals which we issued a new signal for subscribers.

Ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis.

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

TheTechnicalTraders.com

Europe’s Pandemic Dilemma

By Dan Steinbock

– In the ongoing battle against the global pandemic, belated responses will result in huge human costs and massive economic damage. In Europe, losses are climaxing in the 2nd quarter of 2020.

Before advanced economies – including those in Europe – began to flatten the epidemic curve, they fattened it for 6-8 weeks. These COVID-19 delays will prolong the global pandemic and cause secondary waves of imported infections and residual clusters both in Europe and worldwide (for the full story, see my report on the historical COVID damage: https://www.differencegroup.net/coronavirus-briefs ).

In the United States, the Trump administration’s futile effort to “protect the economy” (read: the markets) backfired disastrously. The European Union was more willing to battle the virus but was unable to do so proactively because it lacks the needed common institutions for effective response.

As the consequent political backlash will soon wash across Brussels and the continents major capitals, the EU federalists are likely to demand “more integration” to deter past policy delays in the future. In contrast, the advocates of sovereign states will insist on “less integration” to overcome the EU’s institutional deficiencies.

The current status quo – sub-optimal integration that undermines both the bloc’s and the sovereign states’ effective responses – is ridden with pitfalls.

Late mobilization in the euro area

On January 25, 2020, the European Centre for Disease Prevention and Control (ECDC) was still painting a fairly rosy picture about the virus spread: “Even if there are still many things unknown about 2019-nCoV [coronavirus], European countries have the necessary capacities to prevent and control an outbreak as soon as cases are detected,” it reported.

Yet, inadequate EU preparedness involves not just its small virus-alert agency, but delays at the highest levels of EU institutions.

In Brussels, the full continental response took a few days even longer than in the U.S., although some member states had been more proactive, and the most affected countries had to mobilize earlier.

On March 10, 2020, when Italy already had 9,200 confirmed cases and over 460 deaths, its EU ambassador Maurizio Massari pled for help. Just days later, Italian Foreign Minister Luigi Di Maio hailed the arrival of a Chinese plane loaded with medical equipment and doctors to help fight the coronavirus. “Many foreign ministers offered their solidarity and want to give us a hand … [and yet] the first aid arrived from China” said Di Maio in a pointed rebuke to the EU.

Subsequently, many European observers and policymakers suggested that Chinese aid efforts were a sinister ploy to divide Europe. What they set aside was the question why Brussels and individual European economies failed Italy at the time of its greatest need.

When the EU mobilization finally began – another two weeks after Massari’s pleas – the number of cases in Italy had soared tenfold, while the deaths had tripled.

6-8 weeks of delays

As part of the EU’s joint response to the COVID-19 outbreak, the European Parliament almost unanimously adopted three urgent proposals in an extraordinary plenary session, on March 26, 2020. Now Brussels hoped to mobilize up to €37 billion to support national health care systems, SMEs, labor markets and other vulnerable parts of its member economies. The EU also extended the EU Solidarity Fund to cover public health emergencies. The measures would make up to €800 million available for European countries in 2020.

However, the “urgent” proposals followed two months after multiple first cases in Europe and the WHO’s international emergency alert; that is, after 250,000 recorded cumulative cases and more than 14,000 cumulative deaths.

Although the European CDC had virus information after the first week of January, as did China, Hong Kong and Singapore, Brussels did not respond proactively. Nor did the EU take a stronger preemptive stance between the 1st week of January and the 30th day, when WHO chief Tedros declared the international emergency.

What’s even more distressing is that Brussels chose not to mobilize between January 30 and March 10, when the WHO declared the global pandemic. Instead, effective mobilization began only toward the end of March, which virtually ensured the extraordinary and protracted human costs and economic damage (Figure).

Figure   Human Costs of Coronavirus Complacency*

* Confirmed COVID-19 cases worldwide through May 23, 2020

Source: WHO, Difference Group.

 

European Commission President Ursula von der Leyen acknowledged that “the EU was not ready when the pandemic first began sweeping the continent, and member states did not offer enough support to hard-hit Italy.”

Despite the economic damage, the European Commission, as President Trump in the U.S., hoped to introduce early “exit strategies” to the lockdown measures, especially after Austria and Denmark announced plans to ease restrictive measures. After pressure by member states, the EC was forced to delay plans for exit.

Following the belated virus response, premature opening would have resulted in still another disaster.

Costs of complacency

Due to the belated response, prior efforts at fiscal support measures proved soon inadequate. So, by late April, European leaders gave Brussels green light for a huge €1 trillion stimulus package to ease the EU’s recovery from the coronavirus crisis.

However, markets are struggling. By year-end 2019, the Euro Stoxx 50 had recovered from 2,200 in 2012 back to 3,800; now the index is still hovering around 2,900. Despite mounting human costs and economic damage, the European Central Bank (ECB) responded only after its “emergency meeting” on March 18, 2020; that is, after 75,000 recorded cases and 11,000 deaths in Europe. That’s when the ECB moved ahead with large asset purchases and a new round of quantitative easing, while interest rate stayed at the zero-bound.

The delays in Brussels penalized severely the euro area’s annual GDP growth rate. In the 1st quarter in 2020, the bloc’s economy plunged -3.3% from a year earlier. But that was just a prelude to the expected carnage of -14.7% in the 2nd quarter.

Today, there were 2 million recorded cases and some 175,000 deaths in Europe. And by the 2nd quarter, the cases could climb to 2.4-2.7 million and deaths up to 225,000-235,000, respectively. These recorded losses are just a fraction of real losses. Without vaccination and therapies, the human costs will climb until the epidemic curves normalize, earliest by 2021.

After a disappointing start, Europe’s collective response to the coronavirus crisis was the “most impressive anywhere in the world”, said European Commission President Ursula von der Leyen in mid-April. Since the statement followed almost quarter of a year of missed opportunities, the self-congratulatory tone was not warranted.

This is the short version of an essay released by The European Financial Review (June/July), based on Dr Steinbock’s COVID-19 report

About the Author:

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net

 

 

This week in monetary policy: Kyrgyzstan, Israel, Hungary, Kenya, Fiji, South Korea, Poland, Nigeria, Gambia, Bulgaria & Colombia

By CentralBankNews.info

    This week – May 24 through May 30 – central banks from 11 countries or jurisdictions are scheduled to decide on monetary policy: Kyrgyz Republic, Israel, Hungary, Kenya, Fiji, South Korea, Poland, Nigeria, Gambia, Bulgaria and Colombia.
    The Central Bank of Nigeria had originally scheduled its monetary policy meetings for Monday and Tuesday, May 25 and May 26, but changed the meeting to a one-day meeting on Thursday, May 28 after Monday and Tuesday were declared Eid-el-Fitr holidays, which marks the end of the month-long Ramadan.
    The Central Bank of the Republic of Colombia normally doesn’t hold monetary policy meetings during the months of February, May, August and November. However, on May 13 it decided it would evaluate monetary policy and economic conditions in May, August and November this year due to the exceptional circumstances facing the country’s economy.
    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.

    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

WEEK 22
MAY 24 – MAY 30, 2020:
KYRGYZSTAN 25-May 5.00% 0 75 4.25%
ISRAEL 25-May 0.10% -15 -15 0.25%          DM
HUNGARY 26-May 0.90% 0 0 0.90%          EM
KENYA 27-May 7.00% -25 -150 9.00%          FM
FIJI 28-May 0.25% 0 -25 0.50%
SOUTH KOREA 28-May 0.75% 0 -50 1.75%          EM
POLAND 28-May 0.50% -50 -50 1.50%          EM
NIGERIA 28-May 13.50% 0 0 13.50%          FM
GAMBIA 28-May 12.00% -50 -50 12.50%
BULGARIA 29-May 0.00% 0 0 0.00%          FM
COLOMBIA  29-May 3.25% -50 -100 4.25%          EM

 

Lesotho cuts rate 4th time in 2020 as economy to shrink

By CentralBankNews.info

Lesotho’s central bank lowered its key interest rate for the fourth time this year and slashed its growth forecast for this year to a contraction of 5.7 percent.
The Central Bank of Lesotho (CBL) cut its rate by another 50 basis points to 3.75 percent and has now cut the rate 275 points this year following cuts in January and at extraordinary meetings of its monetary policy committee in March and April.
Since July 2019, when CBL began its current easing cycle, it has cut the rate 325 basis points.
“The rate, set at this level, will ensure that the domestic cost of borrowing and lending will be aligned with the cost of funds elsewhere in the region,” CBL said, lowering its target for the floor of net international reserves to US$530 million from $660 million.
“The NIR target remains consistent with the maintance of the exchange rate peg between the loti and the South African rand.
CBL’s rate cut was decided at a meeting of its policy committee on May 22, rather than on May 26 as scheduled. On May 21 the South African Reserve Bank (SARB) cut its policy rate by 50 basis points to 3.75 percent, its fourth rate cut this year.
Lesotho is surrounded by South Africa and its economy relies on inflows and workers’ remittances. Along with Namibia and Eswatini (former Swaziland), Lesotho is part of the rand monetary area that uses South Africa’s rand as a common currency. In 1980 Lesotho introduced its own currency, the loti, which trades at par with the rand.
“The domestic economy has generally been weak,” CBL said, adding measures of economic activity had declined 0.6 percent in March compared with a 0.2 percent decrease in February.
The labour market showed a decline in employment in both manufacturing and migration mineworkers, consistent with lower demand for some of the large firms’ products, while government employment had improved slightly, CBL said.
“While economic forecasts are likely to change, the economy is expected to contract by 5.7 per cent in 2020 mainly due to COVID-19 infection and control measures,” CBL added.
In March CBL forecast growth this year would be lower than its earlier forecast of 2.2 percent and 2021 growth of 4.1 percent.
In 2019 Lesotho’s economy grew an estimated 2.6 percent based on strong mining performance and a recovery in textiles.
Lesotho’s inflation rate eased to 4.0 percent in March from 4.2 percent in February while gross international reserves rose to 4.7 months of import cover from 4.3 months in the first quarter.

   www.CentralBankNews.info

 

India cuts rate 7th time as data reveals economic damage

By CentralBankNews.info

India’s central bank cut its benchmark repo rate for the second time this year and for the 7th time in 15 months at a surprise monetary policy meeting and said it would “continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
The Reserve Bank of India (RBI) cut its repo rate by 40 basis points to 4.0 percent and has now cut it by 115 points this year following the first cut on March 27.
“The recent release of macroeconomic data, that for the first tine revealed the damage wrought by COVID-19, brought forward the need for an off-cycle meeting of the monetary policy committee (MPC) in lieu of the scheduled meeting during June 3-5, 2020,” said RBI Governor Shaktikanta Das.

      Since February 2019, when the RBI began easing its policy to boost the economy in response to slowing global growth, the repo rate has been cut seven times and by a total of 250 basis points.

RBI today also lowered its reverse repo rate by 40 basis points to 3.35 percent and has now cut it by 155 points this year.
At the previous policy meeting on April 17 the repo rate was maintained but the reverse repo rate was cut by 25 basis points to 3.75 percent to encourage banks to deploy a surplus of liquidity in the banking system to businesses following large injections by itself and the government.
“The MPC is of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress” from the lockdown over the past two months, RBI said, adding:
“High frequency indicators point to a collapse in demand beginning March 2020 across both urban and rural segments.”
RBI pointed to a plunge in electricity consumption while investment activity and private consumption have “suffered precipitous declines” that is reflected in a “collapse” in capital goods production and a large retrenchment in the output of consumer durable and non-durables.
Private consumption accounts for some 60 percent of domestic demand and the production of consumer durables fell 33 percent in March and the output of non-durables 16 percent, Das said, adding industrial production shrank close to 17 percent in March, with manufacturing down 21 percent.
India’s exports suffered their worst slump in the last 30 years as the virus paralyzed world proaction and demand, with merchandise exports down 60.3 percent in April and imports contracted 58.6 percent.
Agriculture provides the only silver lining, with summer sowing of rise, pulses and oilseeds progressing well and total area sown up by 43.5 percent in the current season while the winter season promises to be a number year, RBI said.
Even though India’s government may lift the lockdown by the end of May, RBI said economic activity, apart from agriculture, is likely to remain depressed in the first quarter of the current 2020-21 year, which began April 1, and may remain subdued in the second quarter due to social distancing measures and the temporary shortage of labour.
Although there is heightened uncertainty about the duration of the pandemic and how long measures remain in place, RBI expects the economy to begin recovering in the third quarter and then gain momentum in the fourth quarter as supply lines are restored to normalcy and demand gradually revives.
“On the other hand, upside impulses could be unleashed if the pandemic is contained, and social distancing measures are phase out faster,” RBI said.
Economic growth in the current fiscal year is estimated to remain negative.
The outlook for inflation also remains uncertain but the usual spike in food inflation in April is expected to be moderate and the forecast for a normal monsoon season also portends well.
Together with low prices for oil, metals and other industrial raw materials, input costs for domestic firms will remain low and deficient demand will restrain upward pressure on core inflation.
RBI said it expects headline inflation in the third and fourth quarters of 2020-21 to remain below its target of 4.0 percent. In March India’s headline inflation eased to 5.84 percent.
In addition to past rate cuts, injection of liquidity in both rupees and foreign exchange to keep the financial system and markets functioning, RBI today announced additional measures to support exports and imports, improve the functioning of markets, ease financial stress and constraints faced by state governments.

The Reserve Bank of India released the following monetary policy statement and a statement by its governor, Shaktikanta Das:

“On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (May 22, 2020) decided to:
  • reduce the policy repo rate under the liquidity adjustment facility (LAF) by 40 bps to 4.0 per cent from 4.40 per cent with immediate effect;
  • accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.25 per cent from 4.65 per cent; and
  • the reverse repo rate under the LAF stands reduced to 3.35 per cent from 3.75 per cent.
  • The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
The main considerations underlying the decision are set out in the statement below.
Assessment
Global Economy
2. Since the MPC met in March 2020, global economic activity has remained in standstill under COVID-19 related lockdowns and social distancing. Among the key advanced economies (AEs), economic activity contracted in the US, Euro area, Japan and the UK in Q1:2020. Among emerging market economies (EMEs), the Chinese economy went into a pronounced decline and data on high frequency indicators suggest that activity may have also shrunk in other EMEs such as Brazil and South Africa.
3. Global financial markets calmed after a turbulent period in March, and volatility ebbed as swift and large fiscal and monetary policy responses helped to soothe sentiment. Equity markets recovered some lost ground, while government bond yields remained range-bound, although somewhat elevated in some EMEs due to country-specific factors. Portfolio flows to EMEs revived in April and the rush to safe havens eased. With the US dollar weakening, major EME currencies, which had experienced persistent downward pressure, traded with an appreciating bias. Crude oil prices firmed up modestly as oil producing countries (OPEC plus) agreed to cut production, and prospects for revival in demand improved on expectations of imminent easing of lockdowns. Gold prices remained elevated on hedging demand. CPI inflation remained subdued across major AEs and EMEs primarily due to a collapse in oil prices and compression in demand amidst lockdowns, while food inflation picked up due to supply disruptions.
Domestic Economy
4. Domestic economic activity has been impacted severely by the lockdown which has extended over the past two months. High frequency indicators point to a collapse in demand beginning March 2020 across both urban and rural segments. Electricity consumption has plunged, while both investment activity and private consumption suffered precipitous declines, as reflected in the collapse in capital goods production and the large retrenchment in the output of consumer durables and non-durables in March. High frequency indicators of service sector activity such as passenger and commercial vehicle sales, domestic air passenger traffic and foreign tourist arrivals also experienced sizable contractions in March. The only silver lining was provided by agriculture, with the summer sowing of rice, pulses and oilseeds in the country progressing well, with total area sown under the current kharif season up by 43.5 per cent so far, and the rabi harvest promising to be a bumper as reflected in record procurement.
5. Retail inflation, measured by the consumer price index, moderated for the second consecutive month in March 2020 to 5.8 per cent after peaking in January. This was mainly due to food inflation easing from double digits in December 2019 – January 2020. In April, however, supply disruptions took a toll and reversed the softening of food inflation, which surged to 8.6 per cent from 7.8 per cent in March. Prices of vegetables, cereals, milk, pulses and edible oils and sugar emerged as pressure points1.
6. The Reserve Bank remained in pro-active liquidity management mode, expanding its array of measures, both conventional and unconventional, to augment system-level liquidity as also to channel liquidity to specific sectors facing funding constraints. Systemic liquidity remained in abundance, with average daily net absorptions under the liquidity adjustment facility (LAF) increasing to ₹5.66 lakh crore in May 2020 (up to May 20) from ₹4.75 lakh crore in April. During 2020-21 (up to May 20), ₹1,20,474 crore was injected through open market operation (OMO) purchases and ₹87,891 crore through three targeted long-term repo operation (TLTRO) auctions and one TLTRO 2.0 auction. In order to distribute liquidity more evenly across the yield curve, the Reserve Bank conducted one ‘operation twist’ auction involving the simultaneous sale and purchase of government securities for ₹10,000 crore each on April 27, 2020. Furthermore, the Reserve Bank has provided ₹22,334 crore as refinance to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB) so far (as on May 21, 2020) and ₹2,430 crore to mutual funds through a special liquidity facility (SLF) with a view to easing liquidity constraints and de-stress financial markets. Since February 6, 2020 the Reserve Bank has announced liquidity augmenting measures of ₹9.42 lakh crore (4.6 per cent of GDP).
7. Reflecting the various liquidity management measures, domestic financial conditions have eased appreciably as reflected in the narrowing of liquidity premia in various market segments. Yields on government securities, commercial paper (CP), 91-day treasury bills, certificates of deposit (CDs) and corporate bonds have softened. The weighted average lending rates on fresh rupee loans of commercial banks declined by 43 bps in March 2020 alone. Though credit growth remains muted, scheduled commercial banks’ investments in commercial paper, bonds, debentures and shares of corporate bodies in this year so far (up to May 8) increased sharply by ₹66,757 crore as against a decline of ₹8,822 crore during the same period last year. There were net inflows into various schemes of mutual funds in April in contrast to large outflows in March.
8. In the external sector, India’s merchandise trade slumped in April 2020, with exports shrinking by 60.3 per cent and imports by 58.6 per cent (y-o-y), respectively. While imports contracted in all 30 commodity groups in April, exports contracted in 28 out of 30 groups. The trade deficit narrowed in April 2020 – both sequentially and on a year-on-year basis – to its lowest level in 47 months. On the financing side, net foreign direct investment inflows picked up in March 2020 to US$ 2.9 billion from US$ 0.8 billion a year ago. In 2020-21 so far (till May 18), net foreign portfolio investment (FPI) in equities increased to US$ 1.2 billion from US$ 0.8 billion a year ago. In the debt segment, however, there were portfolio outflows of US$ 3.8 billion during the same period as compared with outflows of US$ 1.4 billion a year ago. By contrast, net investment under the voluntary retention route increased by US$ 0.7 billion during the same period. India’s foreign exchange reserves have increased by US$ 9.2 billion in 2020-21 so far (up to May 15) to US$ 487.0 billion – equivalent to 12 months of imports.
Outlook
9. The inflation outlook is highly uncertain. As supply lines get restored in the coming months with gradual relaxations in the lockdown, the unusual spike in food inflation in April is expected to moderate. The forecast of a normal monsoon also portends well for food inflation. Given the current global demand-supply balance, international crude oil prices are likely to remain low although they may firm up from the recent depressed levels. Soft global prices of metals and other industrial raw materials are likely to keep input costs low for domestic firms. Deficient demand may hold down pressures on core inflation (excluding food and fuel), although persisting supply dislocations impart uncertainty to the near term outlook. However, volatility in financial markets could have a bearing on inflation. These factors, combined with favourable base effects, are expected to take effect and pull down headline inflation below target in Q3 and Q4 of 2020-21.
10. Turning to the growth outlook, economic activity other than agriculture is likely to remain depressed in Q1:2020-21 in view of the extended lockdown. Even though the lockdown may be lifted by end-May with some restrictions, economic activity even in Q2 may remain subdued due to social distancing measures and the temporary shortage of labour. Recovery in economic activity is expected to begin in Q3 and gain momentum in Q4 as supply lines are gradually restored to normalcy and demand gradually revives. For the year as a whole, there is still heightened uncertainty about the duration of the pandemic and how long social distancing measures are likely to remain in place and consequently, downside risks to domestic growth remain significant. On the other hand, upside impulses could be unleashed if the pandemic is contained, and social distancing measures are phased out faster.
11. The MPC is of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated, and various sectors of the economy are experiencing acute stress. The impact of the shock has been compounded by the interaction of supply disruptions and demand compression. Beyond the destruction of economic and financial activity, livelihood and health are severely affected. Even as various measures initiated by the Government and the Reserve Bank work to mitigate the adverse impact of the pandemic on the economy, it is necessary to ease financial conditions further. This will facilitate the flow of funds at affordable rates and revive animal spirits. With the inflation outlook remaining benign as lockdown-related supply disruptions are mended, the policy space to address growth concerns needs to be used now rather than later to support the economy, even while maintaining headroom to back up the revival of activity when it takes hold.
12. Accordingly, all members voted for a reduction in the policy repo rate and maintaining the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
13. Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Janak Raj, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted for a reduction in the policy repo rate by 40 bps, while Dr. Chetan Ghate voted for a reduction by 25 bps.
14. The minutes of the MPC’s meeting will be published by June 5, 2020.”
    Governor’s statement:
“”It is when the horizon is the darkest and human reason is beaten down to the ground that faith shines brightest and comes to our rescue.”1
As a nation we must have faith in India’s resilience and capacity to overcome all odds. COVID-19, a virus of the size of 0.12 microns, has crippled the global economy, with more than 300,000 dead and economic activity across the world stalled. Once again, central banks have to answer the call to the frontline in defence of the economy.
2. The recent release of macroeconomic data, that for the first time revealed the damage wrought by COVID-19, brought forward the need for an off-cycle meeting of the monetary policy committee (MPC) in lieu of the scheduled meeting during June 3 to 5, 2020. Over the last three days, i.e., 20th, 21st and 22nd May 2020, the MPC reviewed domestic and global developments and their implications for the outlook. After extensive discussions, the MPC voted unanimously for a reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target. On the quantum of reduction, the MPC voted with a 5-1 majority to reduce the policy rate by 40 basis points from 4.4 per cent to 4.0 per cent. Consequently, the Marginal Standing Facility (MSF) rate and the Bank rate stand reduced to 4.25% from 4.65%. The reverse repo rate stands reduced to 3.35% from 3.75%.
3. Before I lay out the backdrop, the rationale and expected outcomes of the MPC’s decision, I wish to thank the Committee members for their valuable contributions to the work of the Committee in the monetary policy decision taken today. I would also like to thank my colleagues in the RBI who have been working tirelessly in our fight against COVID-19. My gratitude goes out to our teams for their intellectual support, analytical work and logistical arrangements. A special word of praise for our team of over 200 officers, staff and service providers who are working unstinted 24X7 in isolation in order to keep essential RBI services available to the nation. I wish to express our admiration for doctors, healthcare and medical staff, police and law enforcement agencies, functionaries and personnel in the government, the private sector, banks and other financial institutions who have risen to the call of duty, day after day, through the pandemic to ensure continuity in the provision of all essential services. Our deepest gratitude to their families too.
I. Assessment
4. By all counts, the macroeconomic and financial conditions are austere. The global economy is inexorably headed into recession. The global manufacturing purchasing managers index (PMI) contracted to an 11-year low in April 2020. The global services PMI recorded its steepest decline in the history of the index. Among advanced economies (AEs) that have released GDP readings for Q1: 2020, contractions were in the range of 3.4 per cent to 14.2 per cent (q-o-q, annualised); for emerging market economies (EMEs), the growth rate ranged between 2.9 per cent and (-) 6.8 per cent (year on year basis). EMEs face additional pressures in the form of capital outflows and asset price volatility from the bouts of turbulence afflicting financial markets. The plunge in crude prices has dried up budgetary revenues for oil exporters; on the other hand, oil importers have been denied terms of trade gains by the crushing blow to demand delivered by the pandemic. According to the United Nations Conference on Trade and Development (UNCTAD), the value of global trade contracted by 3.0 per cent in Q1:2020. The volume of world trade can shrink by 13-32 per cent in 2020, as projected by the World Trade Organisation (WTO). World services trade deteriorated in the first quarter of 2020 due to a broad-based loss of momentum in passenger air travel, container shipping, financial and ICT services. While commodity prices have eased on large demand shocks amidst widespread lockdowns, food price pressures are visible in inflation prints due to supply disruptions, especially in countries where food is a prominent item of households’ consumption expenditure. Global financial markets have calmed after a turbulent period in March, and volatility has ebbed; but markets have generally been disconnected from real economy developments.
5. Relatively unsung, the global policy response by central banks and governments has been unprecedented.
6. Let me now turn to domestic developments. Domestic economic activity has been impacted severely by the 2 months lockdown. The top 6 industrialised states that account for about 60 per cent of industrial output are largely in red or orange zones. High frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments. Electricity and petroleum products consumption – indicators of day to day demand – have plunged into steep declines. The double whammy in terms of losses of both demand and production has, in turn, taken its toll on fiscal revenues. Investment demand has been virtually halted by a decline of 36 per cent in the production of capital goods in March, which was coincident with a contraction of 27 per cent in imports of capital goods in March and 57.5 per cent in April. This is also evident in a fall of 91 per cent in finished steel consumption in April and a 25 per cent shrinkage in cement production in March. The biggest blow from COVID-19 has been to private consumption, which accounts for about 60 per cent of domestic demand. The production of consumer durables fell by 33 per cent in March 2020, accompanied by a 16 per cent decline in the output of non-durables. Similar indications are reflected in surveys of the fast moving consumer goods space.
7. In the production sectors, industrial production shrank by close to 17 per cent in March 2020, with manufacturing activity down by 21 per cent. The output of core industries, which constitutes about 40 per cent of overall industrial production, contracted by 6.5 per cent. The manufacturing PMI for April recorded its sharpest deterioration to 27.4, spread across all sectors. The services PMI plunged to an all all-time low of 5.4 in April 2020.
8. Amidst this encircling gloom, agriculture and allied activities have provided a beacon of hope on the back of an increase of 3.7 per cent in foodgrains production to a new record (as per the third advance estimates of the Ministry of Agriculture released on May 15, 2020). A ray of hope also comes from the forecast of a normal southwest monsoon in 2020 by the India Meteorological Department (IMD). By May 10, 2020 up to which latest information is available, kharif sowing was higher by 44 per cent over last year’s acreage. Rabi procurement is in full flow in respect of oilseeds, pulses and wheat, benefiting from the bumper harvest. These developments will support farm incomes, improve the terms of trade facing the farm sector and strengthen food security for the country. Going forward, these would also have a salutary effect on food price pressures.
9. The inflation outlook has become complicated by the release of partial information on the consumer price index (CPI) by the National Statistical Office(NSO), obscuring a comprehensive assessment of the price situation. From the incomplete data that have been made available, food inflation, which had eased from its January 2020 peak for the second successive month in March, suddenly reversed and surged to 8.6 per cent in April as supply disruptions took their toll, immune to the ongoing demand compression. Prices of vegetables, pulses, edible oils, milk and cereals emerged as pressure points.2
10. In the external sector, India’s merchandise exports and imports suffered their worst slump in the last 30 years as COVID-19 paralysed world production and demand. India’s merchandise exports plunged by 60.3 per cent in April 2020 while imports contracted by 58.6 per cent. The trade deficit narrowed to US$ 6.8 billion in April 2020, lowest since June 2016. On the financing side, net foreign direct investment inflows picked up in March 2020 to US$ 2.9 billion from US$ 0.8 billion a year ago. In 2020-21 so far (till May 18), net foreign portfolio investment (FPI) in equities has also increased to US$ 1.2 billion from US$ 0.8 billion a year ago. In the debt segment, however, there were portfolio outflows of US$ 3.8 billion during the same period as against outflows of US$ 1.4 billion a year ago. By contrast, net investment under the voluntary retention route increased by US$ 0.7 billion during the same period. India’s foreign exchange reserves have increased by US$ 9.2 billion in 2020-21 so far (up to May 15) to US$ 487.0 billion – equivalent to a year’s imports.
II. Outlook
11. Against this backdrop, the MPC assessed that the inflation outlook is highly uncertain. The supply shock to food prices in April may show persistence over the next few months, depending upon the state of lockdown and the time taken to restore supply chains after relaxation. Among the pressure points, the elevated level of pulses inflation is worrisome, and warrants timely and swift supply management interventions, including a reappraisal of import duties. Immediate step-up of open market sales/PDS-offtake by the FCI to offload some part of excess stocks can cool down cereal prices and also create room for rabi procurement. Given the current global demand-supply balance, international crude oil prices, metals and industrial raw material prices are likely to remain soft. This would ease input costs for domestic firms. Deficient demand may hold down pressures on core inflation, although persisting supply dislocations impart uncertainty to the near term outlook. Much will depend on the shape of the recovery after COVID. Accordingly, the MPC is of the view that headline inflation may remain firm in the first half of 2020-21, but should ease in the second half, aided also by favourable base effects. By Q3 and Q4 of FY20-21, it is expected to fall below target. Thus, the MPC’s forward guidance on inflation is directional rather than in terms of levels. Going forward, as and when more data are available, it should be possible to estimate the path of inflation with greater certainty.
12. It is in the growth outlook that the MPC judged the risks to be gravest. The combined impact of demand compression and supply disruption will depress economic activity in the first half of the year. Assuming that economic activity gets restored in a phased manner, especially in the second half of this year, and taking into consideration favourable base effects, it is expected that the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual revival in activity in the second half of 2020-21. Nonetheless, downside risks to this assessment are significant and contingent upon the containment of the pandemic and quick phasing out of social distancing/lockdowns. Given all these uncertainties, GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from H2: 2020-21 onwards. The end-May 2020 release of NSO on national income should provide greater clarity, enabling more specific projections of GDP growth in terms of both magnitude and direction. Much will depend on how quickly the COVID curve flattens and begins to moderate. As the nation prepares for this future, the words of Mahatma Gandhi should inspire us to fight on: “We may stumble and fall, but shall rise again…….”3
13. The MPC is of the view that that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated. Beyond the destruction of economic and financial activity, livelihood and health are severely affected. Judging that the risks to growth are acute, while the risks to inflation are likely to be short-lived, the MPC believes that it is essential now to instil confidence and ease financial conditions further. This will facilitate the flow of funds at affordable rates and rekindle investment impulses. It is in this context that the MPC voted to reduce the policy repo rate by 40 basis points from 4.4 per cent to 4.0 per cent. If the inflation trajectory evolves as expected, more space will open up to address the risks to growth.
III. Regulatory and Developmental Measures
14. I now turn to the various regulatory and developmental measures being announced today to complement and amplify the reduction in the policy rate decided by the MPC. While doing so, let me spend a little time on the policy actions already taken by the RBI, their rationale and their likely impact. In my statement at the time of the MPC’s meeting in February 2020, I had pointed out the increasing downside risks to global growth in the context of the outbreak of the coronavirus, the full effects of which were still uncertain and unfolding. Since then, the RBI has pro-actively managed liquidity conditions, expanding its array of measures, both conventional and unconventional – to augment system-level liquidity, both in rupees and forex, as also to channel liquidity to specific sectors facing funding constraints. These liquidity measures are intended to keep the financial system and financial markets functioning as normally as possible under the circumstances so that financial conditions do not freeze up.
15. In the meantime, monetary policy transmission to banks’ lending rates has continued to improve. The 1 year median marginal cost of funds-based lending rate (MCLR) declined by 90 bps (February 2019-May 15, 2020). The weighted average lending rate (WALR) on fresh rupee loans has cumulatively declined by 114 bps since February 2019, of which 43 bps decline occurred in March 2020 alone. The WALR on outstanding rupee loans declined by 29 bps during October 2019-March 2020. Domestic financial conditions have also eased as reflected in the narrowing of liquidity premia in various market segments. After April 17th when I last spoke to you, interest rates on 3-month CPs, 3-month CDs, 5-year AAA corporate bonds, 91-day Treasury Bills, 5-year and benchmark 10-year government paper have softened by 220 bps, 108 bps, 48 bps, 71 bps, 59 bps and 66 bps, respectively, by May 15, 2020.
16. The decision of the MPC to reduce the policy repo rate and maintain the accommodative stance of monetary policy provides the opportunity for the RBI to announce certain additional measures against the backdrop of a deteriorating outlook for economic activity. These policy actions complement and strengthen each other in intent and reach. The measures being announced today can be broadly delineated under four categories:
(A) measures to improve the functioning of markets and market participants;
(B) measures to support exports and imports;
(C) efforts to further ease financial stress caused by COVID-19 disruptions by providing relief on debt servicing and improving access to working capital; and
(D) steps to ease financial constraints faced by state governments.
(A) Measures to Improve the Functioning of Markets
Refinancing Facility for Small Industries Development Bank of India (SIDBI)
17. The RBI had earlier announced a special refinance facility of ₹15,000 crore to SIDBI at RBI’s policy repo rate for a period of 90 days for on-lending/refinancing. In order to provide greater flexibility to SIDBI, it has been decided to roll over the facility at the end of the 90th day for another period of 90 days.
Investments by Foreign Portfolio Investors (FPIs) under the Voluntary Retention Route (VRR)
18. Since its introduction, the VRR scheme has evinced strong investor participation, with investments exceeding 90 per cent of the limits allotted under the scheme. In view of difficulties expressed by FPIs and their custodians on account of COVID-19 related disruptions in adhering to the condition that at least 75 per cent of allotted limits be invested within three months, it has been decided that an additional three months time will be allowed to FPIs to fulfil this requirement.
(B) Measures to Support Exports and Imports
19. The deepening of the contraction in global activity and trade, accentuated by the rapid spread of COVID-19, has crippled external demand. In turn, this has impacted India’s exports and imports, both of which have contracted sharply in recent months. In view of the importance of exports and imports to the economy certain measures are being taken to support the foreign trade sector.
Export Credit
20. In order to alleviate genuine difficulties being faced by exporters in their production and realisation cycles, it has been decided to increase the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks from the existing one year to 15 months, for disbursements made up to July 31, 2020.
Liquidity Facility for Exim Bank of India
21. In order to enable EXIM bank to meet its foreign currency resource requirements, it has been decided to extend a line of credit of ₹15,000 crore to the EXIM Bank for a period of 90 days (with rollover up to one year) so as to enable it to avail a US dollar swap facility.
Extension of Time for Payment for Imports
22. With a view to providing greater flexibility to importers in managing their operating cycles in a COVID-19 environment, it has been decided to extend the time period for completion of outward remittances against normal imports (i.e. excluding import of gold/diamonds and precious stones/jewellery) into India from six months to twelve months from the date of shipment for such imports made on or before July 31, 2020.
(C) Measures to Ease Financial Stress
23. The RBI had earlier, on two separate occasions (March 27 and April 17, 2020), announced certain regulatory measures pertaining to (a) granting of 3 months moratorium on term loan installments; (b) deferment of interest for 3 months on working capital facilities; (c) easing of working capital financing requirements by reducing margins or reassessment of working capital cycle; (d) exemption from being classified as ‘defaulter’ in supervisory reporting and reporting to credit information companies; (e) extension of resolution timelines for stressed assets; and (f) asset classification standstill by excluding the moratorium period of 3 months, etc. by lending institutions.
24. In view of the extension of the lockdown and continuing disruptions on account of COVID-19, the above measures are being extended by another three months from June 1, 2020 till August 31, 2020 taking the total period of applicability of the measures to six months (i.e. from March 1, 2020 to August 31, 2020). The lending institutions are being permitted to restore the margins for working capital to their original levels by March 31, 2021. Similarly, the measures pertaining to reassessment of working capital cycle are being extended up to March 31, 2021.
25. Additionally, it has been decided to permit lending institutions to convert the accumulated interest on working capital facilities over the total deferment period of 6 months (i.e. March 1, 2020 up to August 31, 2020) into a funded interest term loan which shall be fully repaid during the course of the current financial year, ending March 31, 2021.
26. In view of the current difficulty in raising resources from capital markets, the group exposure limit of banks is being increased from 25 per cent to 30 per cent of eligible capital base, for enabling corporates to meet their funding requirements from banks. The increased limit will be applicable up to June 30, 2021.
(D) Measures to ease financial constraints faced by State Governments
Consolidated Sinking Fund (CSF) of State Governments – Relaxation of Guidelines
27. In order to ease the bond redemption pressure on states, it has been decided to relax the rules governing withdrawal from the CSF, while at the same time ensuring that depletion of the Fund balance is done prudently. Together with the normally permissible withdrawal, this measure will enable the states to meet about 45 per cent of the redemptions of their market borrowings, due in 2020-21. This change in withdrawal norms will come into force with immediate effect and will remain valid till March 31, 2021.
28. Detailed guidelines for all the above announcements will be issued separately.
Concluding Remarks
29. Central banks are typically seen as conservative institutions. Yet when the tides turn and all the chips are down, it is to them that the world turns for support. As I have stated earlier, the RBI will continue to remain vigilant and in battle readiness to use all its instruments and even fashion new ones, as the recent experience has demonstrated, to address the dynamics of the unknown future. The goals, as I have enunciated earlier, are (i) to keep the financial system and financial markets sound, liquid and smoothly functioning; (ii) to ensure access to finance to all, especially those that tend to get excluded by financial markets; and (iii) to preserve financial stability. It shall be our endeavour that RBI’s actions and stance contribute to laying the foundations of a better tomorrow. Today’s trials may be traumatic, but together we shall triumph. Thank you.”

 

Markets hammered by geopolitical tensions

By Lukman Otunuga, Research Analyst, ForexTime

A darker mood engulfed financial markets on Friday as investors braced for more geopolitical tensions and drama between the United States and China

In a move that rattled global sentiment, China announced plans to impose a national security law on Hong Kong which earned a sharp rebuke from Washington. With US-China trade tensions adding to the horrible bucket list of negative themes draining investor confidence, stock markets could be instore for further pain in the week ahead.

Pound can’t catch a breath as retail sales tumble 

Buying sentiment towards the British Pound evaporated after UK retail sales tumbled by their biggest fall on record in April.

The volume of retail sales in the United Kingdom dropped a staggering 18.1% last month, dwarfing the 5.2% drop witnessed in March. With sales expected to remain depressed amid the change in spending habits and unfavourable macroeconomic conditions, Sterling could remain an easy target for anxious investors.

Looking at the technical picture, the GBPUSD is trending lower on the daily charts. A breakdown below the 1.2200 support level may open a path back towards 1.2000 which is 200 pips away. Alternatively, the GBPUSD could retest 1.2285 if 1.2200 proves to be a reliable support.

EURGBP eyes 0.9000

The impacts of a weaker Pound are being reflected in the EURGBP as the currency pair makes its way towards 0.9000.

With the outlook for Sterling clouded by Brexit uncertainty and disappointing economic data, the EURGBP is positioned to push higher. Looking at the technical standpoint, a solid daily close above 0.9000 could inspire a move towards 0.9120.

Alternatively, sustained weakness below 0.9000 may open a path back towards 0.8850.

USDCAD remains range-bound

Expect the Canadian Dollar hold its ground against G10 currencies thanks to appreciating Oil prices.

If the Canadian Dollar appreciates in the week ahead, the USDCAD may break above the 1.4050 resistance level with the next point of interest at 1.4250.

Alternatively, sustained weakness below 1.4050 should signal a move towards 1.3850.

Gold poised to shine on geopolitics  

It was a choppy week for Gold as investors juggled with conflicting themes influencing appetite towards the precious metal.

A wave of optimism over a potential coronavirus vaccine weakened the commodity earlier in the week before renewed US-China trade tensions and global growth fears rekindled widespread risk aversion. Investors still remain guarded and on high alert amid growth fears and geopolitical tensions, and this should accelerate the flight to safe-haven destinations like Gold in the week ahead.

Looking at the technical picture, a solid breakout above $1745 may open the doors towards $1760. Alternatively, a move back below $1715 could trigger a decline towards $1680.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

 


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Geopolitics gatecrashes risk-on party

By Han Tan, Market Analyst, ForexTime

The heightened uncertainties in the markets are causing further ventures into riskier waters to pause for breath, after what has been a bumpy ride for risk assets this week. Asian currencies are now weaker against the US Dollar as regional stocks are adding to Thursday’s losses, with Hong Kong’s Hang Seng index leading the decline. US equity futures are also in the red while US Treasury yields are lower by 4.3 percent. Gold is climbing back towards the $1730 handle and the Yen is advancing against all of its G10 and Asian peers.

Geopolitical risks are threatening to gatecrash an already-tense ‘risk party’ among global investors who have only just begun nibbling at the appetitisers. This craving could be soured by the prospects of escalating tensions between Washington and Beijing, be it over the coronavirus pandemic or plans to impose a new security law on Hong Kong. The recent gains in risk assets could be unwound should the ‘Tariff Man’ make a comeback or US-China capital flows be restricted at a time when the world economy is only managing its first tentative steps towards a post-lockdown recovery. China’s decision to forgo a GDP target for the year also speaks to the persistent uncertainties that markets have to contend with, which suggests that recent gains in riskier assets are on thin ice.

Although investors have been willing to look past the gloomy economic data so far, in the hope that the worst of the global pandemic has passed, such a view might be shattered if the barbs traded between the world’s two largest economies actually translate into actual policy action. Keep in mind also that Brexit risks are looming, with UK and EU negotiators set to resume talks on June 1. A sudden rise in the prospects of a no-deal Brexit would only add to the potency of downside risks and stir up market volatility.

In the interim, an extra dose of caution appears highly warranted.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.


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BOJ launches 3rd funding measure aimed at SMEs

By CentralBankNews.info

The Bank of Japan (BOJ) launched a third measure aimed at supporting small and medium-sized firms affected by the spread of the Covid-19 pandemic and extended the duration of all three measures by another 6 months until the end of March 2021.
Japan’s central bank noted its existing measures of purchasing commercial paper and corporate bonds, with a maximum amount outstanding of some 20 trillion yen, and the 25 trillion yen Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus.
In its statement following an unscheduled policy board meeting that was announced on May 19, the BOJ said it would add a new fund-provisioning measure based on eligible loans from banks based on the government’s 30 trillion yen emergency economic support plan.
The total size of these three measures aimed a businesses, which will be known as “the Special Program,” will be about 75 trillion.
“By conducting these measures, the Bank will continue to support financing mainly of firms and to maintain stability in financial markets,” BOJ said, reiterating that it is closely monitoring the impact of Covid-19 and “will not hesitate to take additional easing measures if necessary.”
Under its new fund-providing measure, BOJ will provide funds at a loan rate of zero percent while a positive interest rate of  0.1 percent will be applied to the outstanding balances of banks’ current accounts that correspond to the amounts of loans provided through this measure.
The BOJ’s policy board also affirmed the key elements of its current monetary policy framework known as “yield curve control,” which includes a negative interest rate of 0.1 percent on banks’ excess reserves.
It also confirmed decisions taken at its regular meeting in April in which it boosted its asset purchases and scrapped an earlier annual limit of buying 80 trillion yen of Japanese government bonds (JGBs) in favor of buying bonds “without setting an upper limit” so the 10-year yield remains around zero percent.
BOJ confirmed it would be buying exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs) to their amounts outstanding increase at an annual pace with the upper limit of some 12 trillion yen and some 180 billion yen, respectively.
As far as commercial paper and corporate bonds, BOJ said it would maintain their outstanding amounts at about 2 trillion and 3 trillion yen, respectively.
However, BOJ will now undertake additional purchases of both these assets classes until the end of March 2021, as compared with April’s target of September 2020, with the upper limit of 7.5 trillion yen for each asset. In April the additional purchases were raised to the 7.5 trillion from an earlier 1 trillion for each asset.
Data released today showed Japan’s consumer price inflation fell to only 0.1 in April from 0.4 percent in the previous two months and is now at the lowest level since November 2016.
The drop in inflation is bound to ignite concern that BOJ is losing its fight against deflation.
    Japan officially fell into recession in the first quarter of this year as its gross domestic product shrank 0.9 percent following a fall of 1.9 percent in the fourth quarter of 2019, the country’s first recession since late 2014.
     On an annual basis, GDP shrank 2.0 percent in the first quarter after shrinking 0.7 percent in the previous quarter. 
     At its April policy meeting, the BOJ slashed its forecast for growth and inflation.
     BOJ forecast the economy would shrink between 0.4 percent and 0.1 percent in the 2019 fiscal year, which ended on March 30, down from its January forecast of growth of 0.8 to 0.9 percent.
     For fiscal 2020, which began on April 1, BOJ forecast the economy would shrink a further 5.0 to 3.0 percent before expanding between 2.8 and 3.9 percent in fiscal 2021.

     BOJ forecast consumer prices would decline 0.7 to 0.3 percent in the current fiscal 2020 before rising to 0.0 to 0.7 percent in fiscal 2021, well below its 2.0 percent target.

www.CentralBankNews.info


China as COVID-19 scapegoat

By Dan Steinbock

– After the disastrous mishandling of its COVID-19 battle, the Trump White House blames China for the virus, at the cost of American lives and worst contraction since the 1930s.

Ironically, President Trump thanked President Xi for China’s success in the virus battle in late January. But he adopted a very different tone as the White House mishandled the outbreak permitting the virus to spread in America [for the full story, see my COVID-19 report, The Tragedy of Missed Opportunities].

In fact, Trump’s own cabinet took an adversarial stance from the beginning. If the escalation will continue, that stance could result in a new Cold War and the Second Global Depression in the coming years.

Blaming China for Trump’s COVID-19 mishandling

The efforts to exploit the crisis for political purposes began early in the year. On January 30, right after the ‘Phase 1’ trade deal and the national virus emergency in China, Commerce Secretary Wilbur Ross declared the outbreak in China would benefit US manufacturing and bring jobs back to America. He was seconded by Trump’s trade advisor, Peter Navarro, who pledged US tariffs on Chinese imports would not be lifted even if the deadly coronavirus weighs on China’s economy.

Despite the first novel coronavirus cases in the US, both Ross and Navarro apparently presumed the virus would not spread in America.

Between early January and mid-March, the Trump White House’s accusations against China intensified with broad criticism of the administration’s mishandling of the outbreak, particularly as US debate escalated over botched evacuations, faulty test kits and delays in testing, shortages of personal protective equipment (PPE) and additional PPE shortages due to tariff wars, failed responses and associated elevated health risks, inadequate quarantines, failed self-quarantines, premature exits from lockdowns and the list goes on.

That’s when politicized attacks were initiated by Secretary of State Mike Pompeo and Health and Human Services Secretary Alex Azar who blamed China for the U.S. virus crisis. Meanwhile, Trump sought to “talk down” the virus impact in the markets.

When the WHO declared the global emergency on Jan 30, Trump still claimed that “we have it very well under control.” Even in early March, he described the virus as “very mild” and said the infected could get better by “going to work.”

Ironically, as the Trump White House repeatedly labelled the virus a “China virus” or “Wuhan virus,” that fostered a perception that the outbreak would be limited to China, while it was actually exploding in America and Europe.

When these deflection efforts failed to halt public criticism of the administration, the Trump White House began to exploit even reputable media to launder unsubstantiated intelligence meant to ratchet up tensions with China. The hope is that scapegoating – the “Chinagate” – would steer attention away from the Trump administration’s catastrophic disastrous mishandling of the COVID-19 crisis.

That’s why the politicized efforts to re-redefine the COVID-19 as the “China virus” continued into late March (and prevail even today). That’s when the numbers of US virus cases and deaths began to soar.

Use of scapegoats in paranoid politics

Instead of international cooperation to beat the pandemic, the Trump White House and its Republican supporters are on a survival mode. They hope to ensure Trump’s second term. That’s why another critical moment was missed when Pompeo called for COVID-19 to be identified as the “Wuhan virus” at the G7 Summit in late March.

Obviously, European officials resisted the redefinition since the WHO had cautioned against giving the virus a geographic name because of its global nature. But in the process, precious time was missed as US domestic political priorities overrode the urgency for international cooperation against the global pandemic (Figure).

Figure China as the Scapegoat for U.S. Mishandling of the Pandemic

The purposeful use of projective bashing of targeted scapegoats has a long history in US politics. In the mid-1960s, Richard Hofstadter, the iconic historian of postwar liberal consensus, defined it as a recurring “paranoid style in American politics.”

In the effort to explain away the presence of class, ethnic, and immigration divisions in America, this style projects such divides onto other countries, real or imaginary adversaries, as evidenced by the 1950s McCarthyism, the Trump administration’s controversial ties with the U.S. alt-right movement, and Trump’s personal paranoid style that sparked warnings by leading American psychiatrists and psychologists already three years ago (The Dangerous Case of Donald Trump, 2017).

These views have been echoed by former US ambassador to China Max Baucus, who recently warned that he feared the Trump administration’s rhetoric against China was leading the US into an era “which is similar to Joe McCarthy back when he was red-baiting the State Department, attacking communism.”

Months of missed opportunities

The Trump administration knew about the virus risks already by January 3, when CDC Director Dr. Robert R. Redfield called Secretary of Health Azar, telling him China had discovered a new coronavirus. Azar made sure the National Security Council (NSC) knew about the virus because in early 2017 Trump had eliminated NSC’s global health unit, despite warnings about possible future pandemics.

As the New York Times has reported, the new virus team began daily meetings in the basement of the West Wing, yet no mobilization was initiated. Rather, a long debate began within the White House over “what to tell to the American public,” even as Trump, Pompeo and Azar blamed China for the lack of transparency.

Although the government’s leading scientists and health experts raised the alarm early and pushed for aggressive action, they faced resistance at the White House. Trump didn’t want markets to be spooked by panic. As a result, misguided political priorities continue to override science-based policies stressing public health.

The cult of secrecy in the White House has not eased. In mid-April, Dr Anthony Fauci, a key member of the virus task force, was asked by the CNN, whether earlier mitigation efforts could have saved more lives. Truthfully, he admitted: “If we had right from the very beginning shut everything down, it may have been a little bit different. But there was a lot of pushback about shutting things down back then.” Hours later, Trump retweeted a user who said it was “Time to #FireFauci.”

The recent confrontation between Trump and Fauci about the dangers of a premature exit from the lockdown is still another example of Trump’s political priorities, at the expense of American lives and U.S. economy.

Whatever the ultimate reason for the painfully long delay in the mobilization against the virus in America, the fact remains that, like Hong Kong and Singapore after January 3, the Trump White House could have begun the virus battle proactively.

For almost three months, it chose not to. And when it could no longer could hide its catastrophic mistake, the White House blamed China for the catastrophe.

About the Author:

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net

The commentary is based on Dr Steinbock’s briefing on May 16 and report, The Tragedy of Missed Opportunities, see https://www.differencegroup.net/coronavirus-briefs