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Our one-stop source for central banking & monetary policy news.
By GEOFFREY SMITH
with ANJULI DAVIES, BEN MUNSTER and IZABELLA KAMINSKA
— Russia’s central bank faces up to labor shortage ahead of rate decision meeting.
— Italy issues “patriotic bonds” as it gets creative with how to woo retail investors as the ECB stops buying.
— Economist Stephen Cecchetti tells central bankers the world needs a treaty to suspend CBDC development.
ECB 3.75% ⇡ — BOE 4.5% ⇡ — FED 5.35% ⇡— SNB 1.5% ⇡— BOJ -0.10% ⇣— RBA 4.10% ⇡— PBOC 3.65%⇣— CBR 7.5% ⇣ — BOC 4.75% ⇡
Greetings and welcome to the end of the week. A reminder that both the Federal Reserve and the ECB are in their silent period ahead of rate meetings next week. Yesterday, India’s central bank broke ranks and kept its key lending rate steady for a second straight policy meeting, as widely expected, but signalled that monetary conditions will remain tight for some time as it looks to curb inflationary pressures further. The decision allowed markets to breathe a sigh of relief, with bond yields falling in both North America and Europe.
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— Central Bank of Russia holds policy meeting, 12:30 p.m.
— Chinese May consumer and producer price data (before you woke).
— Erdogan appoints Turkey’s first female central bank governor
THE BEAR CASE: A diverse week of central bank meetings winds up with the Central Bank of Russia, which will announce its policy decisions at 12:30 p.m. CET. Governor Elvira Nabiullina’s press conference follows at 2 p.m. The CBR has held its key rate at 7.5 percent since September, but Nabiullina warned in April that it may have to resume hiking as inflation pressures mount.
Faring better than expected. Since invading Ukraine, Russia has defied widespread predictions of economic collapse — Nabiullina herself had been among the more pessimistic commentators — thanks to the support of its ally China, and to a high degree of political and commercial ingenuity that has cushioned the impact of Western sanctions. High inventories, the legacy of an excellent 2022 harvest and much precautionary stockpiling, are helping to keep the shops stocked, while middlemen across Turkey and the former Soviet Republics facilitate sanctions-busting ‘triangular’ trade with gusto. The OECD, which previously forecast Russia’s economy would shrink by 2.5 percent this year, trimmed its projection to a smaller 1.5 percent in its half-yearly update this week.
Manpower shortage? No amount of ingenuity can really make up for the flight of fighting-age skilled labor from Russia over the last year, which has left the labor market badly constrained. The ruble’s recent depreciation, against a backdrop of falling oil prices and continued deadlock in Ukraine, has also worsened the inflation outlook. President Vladimir Putin has traditionally given Nabiullina extensive leeway to preserve macro stability, and it looks like she will have to make more active use of it.
The best man for the job is a woman. If imitation is the sincerest form of flattery, then Turkey’s President Recep Tayyip Erdogan is sending more ingratiating gestures Moscow’s way. He appointed Hafize Gaye Erkan as the country’s first female central bank governor on Thursday, completing a shake-up of his economic team as he embarks on a new term. Erkan was most recently a board member of Marsh McLennan, but her CV boasts spells at both Harvard and Princeton, as well as private-sector experience at Goldman Sachs, Tiffany and, er, First Republic Bank, where she served as president for seven years. Keep your snarky comments to yourselves.
SHOW US THE MONEY: It’s open season on bankers in the U.K. (when isn’t it?), as politicians and newspapers line up to express outrage at the low savings rates on offer from the Big Four of Barclays, HSBC, Lloyds and Nat West Group.
The Treasury Select Committee had already grilled their CEOs in February on why they were paid so much and their net interest margins rising so fast while the everyday saver was still only getting between 0.5 and 0.65 percent on their savings accounts. The Bank of England is also upset that the banks aren’t doing their bit to channel money away from consumption and into investment, describing the pass-through rate as “unusually weak” in its May policy report.
Challenger banks weigh in: Well yesterday we had new responses from the country’s second-tier lenders — Nationwide, TSB, Virgin Money and Santander UK, who argued that instant access accounts can’t be used easily to lend out for products such as mortgages due to their short-term nature.
The stats: Some 60 percent of household deposits are held in instant access accounts, the reponses noted, with some 88 percent — in Virgin’s case — of the loan book on fixed-term rates curtailing the ability to benefit from higher rates with anything other than new lending. Virgin, you will remember, is the rebranded Northern Rock, which collapsed in ignominy after making a mess of its asset-liability management in 2007-8. Nationwide — ever the goody-two-shoes — argued that its instant access savings rate was now at a similar level to 2006 when the base rate was at its current level of 4.5 percent (“Oh, and did we tell you we’re mutually-owned, so we pay out our profits to depositors too? Really? How many times? Sorry, our memory’s slipping …”).
EUROPE’S RECESSION IS REAL: Revised GDP figures for the eurozone out yesterday showed the bloc has now officially entered a technical recession. GDP shrank 0.1 percent over the first three months of 2023 and figures for the previous quarter were revised down to show a contraction of 0.1 percent from 0 percent.
Recession, reschmession (try saying that one out loud): Successive quarters of contracting GDP is the classic definition of a recession, but as UBS Wealth Management’s Paul Donovan points out, “in the real world, no one will notice the difference between 0.0 percent and -0.1 percent.” In any case, the sign before the number was generated by an almost wholly-irrelevant quirk (see below).
It’s all historical anyway: the more important issue is surely that neither the ECB nor anyone is (yet) forecasting a bona fide recession as a result of the last year’s rate hikes. The OECD this week forecast 0.9 percent growth this year and 1.4 percent next year, for example. That’s despite rising insolvencies, rising default risk, collapsing credit growth and shaky-looking external demand. “Employment was resilient, boosting labor income,” economists at Barclays note. “We expect a shallow rebound in GDP in Q2.”
FASTEST HUN IN THE WEST: A recessionary environment saw Hungarian inflation slow more than expected in May. Data released by the stats office on Thursday showed the annual rate dropping to 21.5 percent in the month from 24 percent in April. “In light of today’s surprise, a single-digit inflation rate at the end of the year seems almost certain,” wrote Peter Virovacz, ING’s senior Hungary economist. “Barring an energy and fuel price shock, a sub-10 percent rate could even be within reach by November”. The analysts expect Hungary central bank to cut its key rate by 100 basis points to 16 percent when it meets on June 20.
BOND INNOVATION: A “patriotic” and much-ballyhooed Italian bond sold this week to retail savers is on a tear, pulling in €5.4 billion from nearly 30,000 buyers. The “step-up” four-year bond pays 3.25 percent interest for the first two years and then 4 percent for the final stretch, on top of a 0.5 percent “loyalty premium.”
Everything must change … Stocking up on “BTP Valore”, as the bond is called, is “prudent and serious politics,” gushes premier Giorgia Meloni, with good reason. The ECB has been the biggest net buyer of Italian debt for years, but is now stepping away from the bid. That means the government needs to try harder to find buyers for its abundant bond sales — still expected to total around €350 billion in gross terms this year, despite a falling budget deficit.
Italian savers hold around half of the government’s €2.8 trillion debt, but overwhelmingly through intermediaries such as banks and fund managers. The only way it has been able to keep retail investors happy has been through inflation-linked BTP Futura bonds, but they were deemed too expensive to sell last year. The step-up in the Valore coupon thus represents an interesting insurance policy against higher-for-longer inflation.
AND NOW FOR SOMETHING COMPLETELY DIFFERENT: If you’re interested in bond innovation, check out this longish thread from the Council for Foreign Relations’ Brad Setser, about the logic of issuing Special Drawing Right bonds. Those would be bonds denominated in the IMF’s special balancing currency. Setser thinks the securities would complement the World Bank’s hybrid capital pilot efforts as the international lender seeks to expand its balance sheet by at least another $50 billion — though Setser thinks up to $400 billion may be needed for U.S.-led multilateral institutions to defend their primacy in global development finance against the likes of the Chinese-dominated Asian Infrastructure Investment Bank.
How would SDR bonds work? They’d be denominated in SDRs, but settled in hard currencies like dollars and euros, as well as be part of a broader official sector funding facility. “The conversation needs to move beyond the rut of the Bank calling for more capital and shareholders seeking that the bank stretch its balance sheet more using only its existing funding model,” Setser tweeted. You can read more about his plan here.
GEEKING UP ON BANK RISK: The Bank of Finland in conjunction with the European Systemic Risk Board hosted a particularly wonky gathering of cbankers on Thursday, weighing up the latest research about where systemic risk may be lurking in the system, including in new areas like artificial intelligence systems at banks.
Monetary policy’s gain was IT’s loss: Not to be out-wonked, BoF governor Olli Rehn let slip in his opening remarks that if not for the call of the soccer field and a lack of equipment, he might himself have become a coder. “I was an avid member of our school’s automated data programming club,” he told the conference, adding he practised programming languages BASIC and FORTRAN after school. But because his school had no computers he had to write his codes on paper.
No complacency on Skynet risk: “I think we may assume that in the field of financial services, the developments in AI and machine learning can bring substantial benefits, for example in risk management, loan underwriting and customer behavior analysis,” Rehn continued, while noting “we should be aware of the potential dangers of the misuse of such powerful tools” too.
CECCHETTI SLAMS REGULATORS: Former New York Fed director of research Stephen Cecchetti (now at Brandeis University) packed a punch in Helsinki with a speech that touched on everything in its bid to figure out how to make banks safer, from the uselessness of crypto and the deposit beta hedging principle to the limitations of a narrow banking system and general regulatory failure.
A CBDC moratorium: As regulators grapple with how to fill the regulatory gaps exposed by this year’s March mayhem, Cecchetti urged them not to be tempted to revive radical ideas like narrow banking, which central bank digital currencies are just another flavor of. “I believe there should be something equivalent to… a CBDC treaty — like the Nuclear Test Ban treaty — across the world where everyone agrees not to issue CBDCs,” the U.S. economist said. For more on that, see Izzy’s story here.
Banks should be like restaurants: “I like to go to restaurants but restaurants fail all the time,” Cecchetti told the conference, noting New York has a steady state of about 12,000 restaurants, but that it also has about 2,000 new restaurants a year. “If my favorite restaurant fails I might be sad but it doesn’t really affect my life,” he said. “My goal is to make bank failures like restaurant failures.”
“For what it’s worth, the eurozone was NOT in a technical recession over the winter when excluding Ireland, whose huge swings in GDP do not capture real economic activity, but tax-related transactions of large multinationals.” Daniel Kral, senior economist at Oxford Economics Tweeted on Thursday.
“The economy relies on nature. Destroy nature, and you destroy the economy.”, ECB board member and supervisory board vice-chair Frank Elderson, pitching a new framework for measuring environmental risk in the banking system to the Financial Times in an interview.
“Inflation remains very stubborn. It is very important we stabilize it under 2 percent. We cannot rule out having to tighten monetary policy again,” Swiss National Bank chairman Thomas Jordan told the Swiss Economic Forum in Interlaken.
“While market attention has focussed on banks in recent months, potential vulnerabilities in the non-bank sector have not gone away. Liquidity mismatches, leverage and interconnectedness are key potential sources of vulnerability in non-bank financial intermediaries,” Gabriel Makhlouf, Governor of the Central Bank of Ireland, told reporters on Wednesday.
— Japan’s GDP was revised sharply higher in the first quarter on robust spending (CNBC)
— Canada’s top banking regulator is concerned banks have hidden exposure to unregulated private lending sector (Financial Post)
— Turkey is heading for a classic currency crisis. All of its reserves and then some are borrowed (Council for Foreign Relations)
THANKS TO: Ben Munster, Anjuli Davies and Izabella Kaminska.
FRIDAY, June 9
Editor’s note: this is intended as a selective list, giving precedence to European events)
— China May CPI, PPI, 5:30 a.m.
— ECB VP de Guindos speaks in Madrid in seminar on Capital Requirements , 10 a.m.
— ECB’s Enria speaks at financial conference in Milan, 10:30 a.m.
— Central Bank of Russia rate decision, 12:30 p.m.
— Central Bank of Russia press conference, 2 p.m.
— National Bank of Poland meeting minutes, 5 p.m.
All times CET, unless otherwise
