Central Bank News suspends production

     Dear Readers     After reporting on global monetary policy for a decade, it's time for a change. Effective immediately, Central Bank News is suspending publication.            I will no longer be updating the Central Bank News website with monetary policy decisions or updating tables with changes to interest rates, inflation targets, reserve requirements, the names of governors or calendars.     It has been a privilege to report on the evolution of monetary policy and publish Central Bank News, and it has always been exciting to hear from readers from every corner of the world.     My goal in publishing Central Bank News was to provide accurate, comprehensive and timely information about monetary policy for the benefit of my readers. It is my sincere hope I have come close to meeting this goal.     Anyone interested in further information, can contact me via email at centralbanknews@yahoo.com.            Sincerely,     Your publisher           Peter Nielsen

Posted on: 8 February 2022 | 6:21 pm

Central banks speed up policy tightening week 5, 2022

      The tightening of global monetary policy picked up speed last week as another nine central banks - from Asia through Europe, Africa and then to the Americas - raised interest rates to dampen buoyant demand and prevent rising inflation from boosting inflation expectations further.      In the first five weeks of 2022, central banks from 51 countries have examined their monetary policy stance, with more than half of those - 27 to be exact - concluding their policy was too loose, with 24 of those banks then raising interest rates.      Last week alone, nine central banks - Kyrgyzstan, Dominican Republic, Australia, Armenia, Lesotho, Brazil, United Kingdom, the European Central Bank and the Czech Republic - tightened their monetary policy stance by either raising interest rates or stopping the injection of liquidity into financial markets by scrapping further purchases of government bonds.      In comparison, only three central banks have raised interest rates this year, resulting in a net tightening of global monetary policy by 24 central banks so far this year compared with a net tightening in the entire year of 2021 by 23 central banks.     The tightening of global monetary policy, which began in earnest in October 2021, comes after 256 rate cuts by 93 central banks in 2020 and 17 rate cuts by 12 central banks in 2021.     Decisions by central banks aimed at tightening monetary policy - which includes rate hikes along with reduced asset purchases - account for 91 percent of all changes to monetary policy year-to-date, up from 88 percent in the previous week and up from 87 percent in 2021      Central Bank News, which tracks the monetary policy stance of 104 central banks, publishes Global Monetary Policy Changes (GMPC), a country-by-country overview of changes to monetary policy.       GMPC aims to capture changes to a wide range of monetary policy instruments, not just key interests rates but also changes to reserve requirements, bond purchases or foreign exchange rates to understand whether the monetary conditions become tighter of easier.      GMPC complements Central Bank News' other products, such as the Global Interest Rate Monitor (GIRM), which tracks official policy rates, and Global Monetary Policy Highlights (GMPH), which summarizes interest changes each month.      GMPC includes an alphabetical list of countries with changes to their monetary policy.                CHANGES TO POLICY RATE YEAR TO DATE      During the past week - week 5 of 2022 - 16 central banks took monetary policy decisions, resulting in 7 changes to policy interest rates with rates raised 7 times.       Year-to-date central banks worldwide have taken 51 monetary policy decisions, with the policy rate lowered 3 times, the rate increased 24 times and the rate left unchanged 24 times.      Cuts to interest rates thus account for 11.1% of the 27 changes to the policy rate year-to-date, down from 15.0% from the previous week.       Rate increases account for 88.9% of all changes to the policy rate year-to-date, up from from 85.0% the previous week.      LIST OF 3 RATE CUTS IN 2022 BY 3 CENTRAL BANKS:       Democratic Republic of Congo, South Sudan and China.            LIST OF 24 RATE RISES in 2022 BY 24 CENTRAL BANKS:       Poland, Uruguay, Argentina, Peru, Romania, Moldova, South Korea, Sri Lanka, Ukraine, Paraguay, Kazakhstan, Hungary, Chile, Costa Rica, South Africa, Azerbaijan, Colombia, Kyrgyzstan, Dominican Republic, Armenia, Lesotho, Brazil, United Kingdom and Czech Republic.                  EASING VS TIGHTENING      In addition to raising or lowering the policy rate, central banks also change their monetary policy stance by other tools, such as raising or lowering banks' reserve requirements, asset purchases or changing foreign exchange rates.      Last week (week 5 of 2022) central banks made 10 changes to their overall policy stance, including the 7 changes to the policy rate.     Year-to-date central banks have made 35 changes to their monetary policy stance, with 3 moves aimed at easing the policy stance, or 8.6% of all changes, down from 12% in the previous week.      In comparison, in 2021 central banks took 50 steps toward easing their monetary policy stance, which accounted for 24.9% of all changes to monetary policy, whereas in 2020 monetary easing steps accounted for 96.3% of all changes to monetary policy.     Rate cuts account for 8.6% of all changes to the monetary policy stance in 2022, down from 12% the previous week and compared with 8.5% in 2021.     Central banks have taken 27 steps so far this year to tighten monetary policy, which means 91.4% of all changes to monetary policy so far in 2022 have ended in tightening, up from 88.0% in the previous week and up from 87% in 2021.     Interest rate increases account for 68.6% of all changes to monetary policy year-to-date, up from 68.0% in the previous week and up from 61.7% in 2021.                     CUMULATIVE SIZE OF RATE CUTS 2022: 410 basis points            CUMULATIVE SIZE OF RATE RISES 2022: 1,650 basis points      NET CHANGE IN RATES 2022: +1,240 basis points      GLOBAL MONETARY POLICY RATE: 5.63%, up 12 basis point since start of 2022.                                                              ------     EASIER VS TIGHTER COMPARED WTH EARLIER YEARS     2022: 27 central banks have tightened monetary policy year-to-date and 3 have eased, global net tightening by 24 central banks.     2021: 50 central banks tightened monetary policy and 27 eased, global net tightening by 23 central banks.     2020: 10 central banks tightened monetary policy and 93 eased, global net easing by 83 central banks.     2019: 17 central banks tightened monetary policy and 67 eased, global net easing by 50 banks     2018: 43 central banks tightened monetary policy and 32 eased, global net tightening by 11 banks     2017: 28 central banks tightened monetary policy and 34 eased, global net easing by 6 banks     2016: 29 central banks tightened monetary policy and 46 eased, global net easing by 17 banks     2015: 48 central banks tightened monetary policy and 34 eased, global net tightening by 14 banks            2022 MONETARY POLICY CHANGES BY MONTH:      FEBRUARY:      EASING: None      TIGHTENING: Armenia, Lesotho, Brazil, United Kingdom and Czech Republic raise rates. Australia ends bond purchases and ECB ends asset purchases under pandemic emergency purchase program.      JANUARY:      EASING: Congo, South Sudan and China cut rates.      TIGHTENING: Poland, Uruguay, Argentina, Peru, Romania, Moldova, South Korea, Sri Lanka, Ukraine, Paraguay, Kazakhstan, Hungary, Chile, Costa Rica, South Africa, Azerbaijan, Colombia, Kyrgyzstan and Dominican Republic raise rates.      Indonesia to raise reserve requirements in 3 steps, Kazakhstan withdraws from stimulus measures, Singapore raises slightly rate of appreciation of Singapore dollar band and Australia ends bond purchases.          2022 MONETARY POLICY RATE CHANGES BY MARKETS:     DEVELOPED MARKETS: Central banks in developed markets have decided on monetary policy 5 times in 2022, with 1 central bank (the Bank of England) raising its rate and the other 4 decisions ending in unchanged rates.     EMERGING MARKETS: Central banks in emerging markets have decided on monetary policy 14 times in 2022, with 9 decisions ending in rate hikes: Poland, Peru, South Korea, Hungary, Chile, South Africa, Colombia, Brazil and Czech Republic.     One decision, by China, ended in a rate cut and 4 decisions ending in unchanged rates.     FRONTIER MARKETS: Central banks in frontier markets have decided on monetary policy 5 times in 2022, with 4 decisions resulting in rate hikes: Romania, Sri Lanka, Ukraine and Kazkhstan.     One decision ended with interest rates being maintained.           OTHER MARKETS: Central banks in other markets have decided on monetary policy 12 times in 2022.     10 central banks have raised rates: Uruguay, Argentina, Moldova, Paraguay, Costa Rica, Azerbaijan, Kyrgyzstan, Dominican Republic, Armenia and Lesotho.     2 central banks have cut rates: Congo and South Sudan.                                                                                                                          2022 GMPCARGENTINAJan 6: benchmark 28-day Leliq rate raised 200 bps to 40.0% as part of a redesign of monetary policy instruments to meet the 2022 goal of setting interest rates that result in a positive real return on investments in pesos, and preserve monetary and exchange rate stability.ARMENIAFeb 1: refinancing rate raised 25 bps to 8.0% as the risks of inflation deviating from its projected trajectory are mainly upwards and if these risks materialize, the Bank will respond accordingly and ensure the goal of price stability.AUSTRALIAFeb 1: further purchases under the bond purchase program to be ended, with the final purchases to take place on Feb. 10. Ceasing bond purchases does not imply a near-term increase in interest rates and while inflation has picked up, it is too early to conclude it is sustainably within the target bandAZERBAIJANJan 28: discount rate raised 25 bps to 7.50% as inflationary pressures have continued to rise.BRAZILFeb 2: Selic rate raised 150 bps to 10.75% and while monetary tightening will persist until inflation decelerates and inflation expectations anchor around the target, the size of rate increases will be reduced in future policy decisions.CHILEJan 26: monetary policy rate raised 150 bps to 5.50% as there are still significant risks of higher inflation as recent data on economic activity and inflation are above latest forecast at the same time inflationary pressures from abroad have risen.CHINAJan 20: Loan Prime Rate (LPR) cut 10 bps to 3.70%, the same week the rate on the medium-term lending facility (MLF) was cut by 10 bps to 2.85%.COLOMBIAJan 28: interest rate raised 100 bps to 4.0% due to higher-than-expected inflation and a significant increase in inflation expectations.CONGOJan 2: key interest rate cut 100 bps to 7.50%, helping strengthen the financing of the economy in Congolese francs and thus support de-dollarization of the economy amid greater control of inflation.COSTA RICAJan 26: policy rate raised 50 bps to 1.75% as risks to inflation remain tilted to the upside and Bank expects to continue to raise the rate gradually to reach a neutral monetary policy stance.CZECH REPUBLICFeb 3: 2-week repurchase rate raised 75 bps to 4.50% to push inflation down to the target and anchor firms’ and households’ inflation expectations. Future monetary policy steps will depend on incoming new information and forecasts.DOMINICAN REPUBLICJan 31: monetary policy rate raised 50 bps to 5.0% as part of the normalization of monetary policy aimed at moderating shocks on prices and help inflation converge toward the target range.EURO AREAFeb. 3: asset purchases under the pandemic emergency purchase program (PEPP) to be ended at the end of March, as decided in December 2021, while monthly asset purchases under the Asset Purchase Program (APP) will be increased in the second and third quarters to 40 billion euros and 30 billion, respectively, before returning to the previous monthly pace of 20 billion.HUNGARYJan 25: base rate raised 50 bps to 2.90% and Bank will continue the cycle of interest hikes until the outlook for inflation stabilizes around the target and inflation risks become evenly balanced.INDONESIAJan 20: To normalize the loose liquidity conditions the rupiah reserve requirement for conventional banks will be gradually raised in three steps. As of March 1, the reserve requirement will be raised 150 bps to 5.0%, then on June 1 it will be raised 100 bps to 6.0% and on Sept. 1 the requirement will be raised 50 bps to 6.5%. BI will provide reserve requirement remuneration of 1.5%.KAZAKHSTANJan 24: Base rate raised 50 bps to 10.25% to reduce inflation expectations and bring inflation back to the target range by the end of 2022.KYRGYZ REPUBLICJan 31: discount rate raised 50 bps to 8.50% to curb high inflationary pressuresLESOTHOFeb 1: CBL rate raised 25 bps to 4.0% to ensure the domestic cost of funds remains aligned with the rest of the region.MOLDOVAJan 13: interest rate on short-term monetary policy operations raised 200 bps to 8.50% and ratio on required reserves on leu by 200 bps to 28.0% to temper inflationary pressures and the effects of shocks on the economy.PARAGUAYJan 21: monetary policy rate raised 25 bps to 5.50% but pace of tightening slowed due to a weaker economic outlook from drought and the latest wave of COVID-19 pandemic.PERUJan 6: reference rate raised 50 bps to 3.0% and board expects to continue normalizing monetary policy stance in coming months based on current information.POLANDJan. 4: reference rate raised 50 bps to 2.25% to reduce inflation to its target, with extent of monetary tightening needed to reach goal to depend on new information about inflation, economic growth and the labour market.ROMANIAJan 10: monetary policy rate raised 25 bps to 2.0% as monetary policy is gradually normalizes amid a worsening outlook for inflation in the near term while economic activity came to a standstill in the fourth quarter of 2021 due to a fourth wave of the pandemic, supply bottlenecks and the energy crises.SINGAPOREJan 25: raises rate of appreciation of Singapore dollar against basket of currencies as inflation outlook had shifted further upward amid confluence of recovering global demand and persistent supply-side frictions.SOUTH AFRICAJan 27: repurchase rate raised 25 bps to 4.0%, with gradual rise in interest rates sufficient to keep inflation expectations well anchored, and thus moderate the future path of rates given the expected trajectory of inflation and upside risks.SOUTH KOREAJan 14: base rate raised 25 bps to 1.25% and degree of monetary policy accommodation will be appropriately adjusted as Korean economy is expected to continue its sound growth and inflation to run above the target for a considerable time.SOUTH SUDANJan 11: central bank rate cut 300 bps to 12.0% and minimum reserve requirement on local deposits 500 bps to 15.0% to achieve 1.0% economic growth in fiscal 2021/22, maintain inflation in single digits at  8.0%, plus/minus 1 percentage points, boost lending to the private sector and increase international reserves.SRI LANKAJan 20: Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) raised 50 bps each to 5.50% and 6.50% respectively, and further measures taken to boost foreign exchange reserves to curtail the possible build-up of underlying demand pressures in the economy, which will also help ease pressures in the external sector.UKRAINEJan 20: discount rate raised 100 bps to 10.0% and central bank will continue the cycle of strengthening monetary policy and is ready to act decisively in the event of further implementation of pro-inflationary factors, such as an escalation of the conflict with Russia or further spikes in prices.UNITED KINGDOMFeb 3: bank rate raised 25 bps to 0.50% and stock of government and corporate bonds will be reduced as the economy is expected to bounce back quickly after a soft spell and inflation continues to rise.URUGUAYJan 5: reference rate raised 75 bps to 6.50% and rate expected to be raised by the same magnitude at the next two monetary policy meetings so the rate reaches a neutral level by the beginning of the second quarter.              www.CentralBankNews.info

Posted on: 5 February 2022 | 10:26 pm

Czech raises rate 6th time but signals it may pause

      The central bank for the Czech Republic raised its interest rates for the sixth time to push inflation down to its target and anchor firms' and households' inflation expectations, but signaled it may now take a pause in tightening by saying "future monetary policy steps will depend on incoming new information and future forecasts."      The Czech National Bank (CNB) raised its benchmark 2-week repurchase rate by a further 75 basis points to 4.50 percent and has now raised the rate a total of 4.25 percentage points since it began tightening its policy stance in June 2021 and followed this up with rate hikes in August, September, November, December and today.      The CNB also raised its discount rate by the same amount, putting it at 3.50 percent and its Lombard lending rate at 5.50 percent.      The bank's board was split in its decision, with five members voting for the rate hike while two members voted to leave rates unchanged.      Today's rate hike was expected and comes after CNB in December said it was ready to continue increasing interest rates to maintain price stability as risks were "markedly" inflationary.       However, in its statement today, the bank's board omitted any reference to being ready to continue raising rates and said the balance of risks were now "moderately inflationary."      Inflation in the Czech Republic rose for the sixth straight month to 6.6 percent in December - more than three times CNB's target of 2.0 percent, and the highest rate since September 2008.      "The Czech National Bank is thus continuing to respond to the combination of strong price pressures from the domestic and foreign economies, which are gradually passing through to domestic inflation," CNB said, boosting its forecast for inflation this year to 8.5 percent from a previous 5.6 percent.      "Headline inflation will rise significantly further at the start of this year and exceed 9%, with all its components contributing to the increase," CNB said.       But after peaking during the first half of this year, inflation is expected to fall gradually and approach the target in the first half of 2023 as production costs slow and the impact of a higher koruna and tighter monetary policy slows domestic demand.      The Czech economy is expected to continue to recover from the pandemic, driven by household consumption, and CNB forecast growth this year of 3.0 percent, slightly down from its previous forecast of 3.5 percent, but similar to estimated 2021 growth of 3.1 percent.      "Next year, economic growth will accelerate slightly," CNB said, forecasting growth of 3.4 percent.       The last time CNB's benchmark interest rate was at 4.50 percent was in January 2002 when the CNB was in the midst of an easing cycle that began in July 1997 when it began cutting the rate from 18.20 percent and continued cutting until August 2003 when the rate hit 2.0 percent.       Between then and the European sovereign debt crises, the interest rate fluctuated between a high of 3.75 percent and 0.75 percent before the CNB in November 2012 slashed the rate to 0.05 percent.        The rate remained at this rock-bottom level until the economy finally recovered and the rate could be raised in August 2017, four months after CNB also ended its exchange rate commitment.      The Czech National Bank issued the following statement:     In view of the forecast and its moderately inflationary overall balance of risks"At its meeting today, the Bank Board of the Czech National Bank increased the two-week repo rate to 4.50%, i.e. by 0.75 percentage point. At the same time, it increased the discount rate by the same amount to 3.50% and the Lombard rate to 5.50%. Five members voted in favour of this decision and two members voted for leaving rates unchanged.The decision adopted by the Bank Board is underpinned by a new macroeconomic forecast. Consistent with the forecast is a substantial rise in market interest rates at the start of this year. The Czech National Bank is thus continuing to respond to the combination of strong price pressures from the domestic and foreign economies, which are gradually passing through to domestic inflation. The interest rate increase will ensure that inflation returns close to the 2% the target at the monetary policy horizon and will help anchor inflation expectations.Continuing production and supply chain problems and another wave of the pandemic are slowing the recovery of the global economy, including the euro area. However, the economic growth outlook for this year and the next is little changed compared with the previous forecast. A gradual easing of international logistics problems remains the key assumption. These effects, coupled with a jump in energy prices, are simultaneously fostering sizeable price pressures. This is reflected in a marked upward revision of expected producer price inflation and, to a lesser extent, also consumer price inflation in the euro area, especially this year. The slightly higher 3M EURIBOR outlook for 2023 reflects a shift in financial market expectations towards higher future inflation in the euro area and the related reaction by the ECB.The Brent crude oil outlook has shifted slightly higher compared with the previous forecast, due to underproduction, more robust global demand and concerns about low global stocks and reserve capacity. However, the price of oil is expected to fall gradually from its current high levels this year and the next. The outlook for the euro-dollar exchange rate has moved towards a modestly stronger dollar but still assumes slight appreciation of the euro against the US currency.The Czech economy will continue to recover from the pandemic this year. Despite more high numbers of positive cases, the forecast does not expect the introduction of measures having a significant dampening effect on domestic economic activity. Economic growth will continue to be driven largely by household consumption, although the initially high year-on-year growth of the latter will be due to last year’s low base. Households’ consumption expenditure will be funded by solid growth in disposable income and spending of the forced savings accumulated during the shutdowns of the economy. However, growth in consumer demand will be dampened by strong inflation and increased interest rates. Higher corporate investment will be motivated by continued growth in external demand, a shortage of workers on the domestic labour market and increasing wage costs. Government investment will also record growth, supported by absorption of EU funds. The problems in global production and supply chains, which are being felt strongly in the highly industrial Czech economy, will persist this year, resulting in higher additions to inventories. However, their impact on GDP will be smaller than in autumn last year and will gradually disappear during the second half of the year. As international trade gets going again, export growth will recover gradually and net exports will start to contribute to growth again. The Czech economy will grow by roughly 3% overall this year, similarly to last year. Economic activity will thus reach the pre-pandemic level by the year-end. Next year, economic growth will accelerate slightly.Headline inflation will rise significantly further at the start of this year and exceed 9%, with all its components contributing to the increase. Core inflation will go up further. Traditional repricing in January, amid strong domestic demand, will reflect the sizeable previous growth in firms’ personnel and material costs and the recent rise in energy prices on commodity exchanges. The contribution of the costs of owner-occupied housing to core inflation will also remain significant. Moreover, the pick-up in inflation will be due significantly to a jump in administered price inflation on the back of the surge in energy prices and the end of the temporary waiver of VAT on electricity and gas. Food price inflation will also stay high in the first half of this year. Inflation will peak in the first half of this year. It will then start to fall gradually as growth in import prices and firms’ production costs slows, aided by an appreciating koruna, and as the stabilising effect of monetary policy manifests itself via domestic demand. Inflation will fall close to the Czech National Bank’s 2% target over the monetary policy horizon, i.e. in the first half of 2023.Consistent with the winter forecast is a substantial rise in market interest rates, followed by a gradual decline from the second half of this year onwards. The rise in rates reflects a need to respond to the combination of exceptionally strong price pressures from the domestic and foreign economies. The monetary policy response to date will ensure that inflation falls towards the 2% target at the monetary policy horizon and will help anchor inflation expectations. The subsequent gradual decline in rates towards their long-run neutral level starting in the second half of this year reflects an expected decline in inflation pressures in the Czech economy in 2023 and once again firmly anchored inflation expectations. The exchange rate of the koruna will average CZK 24.50 to the euro in Q1. It will appreciate to CZK 24 to the euro in Q2, owing to a significantly positive interest rate differential vis-à-vis the euro area, and later stabilise just below this level.By comparison with the autumn forecast, the inflation outlook is considerably higher for this year and slightly higher for next year. Economic growth was faster last year than expected in the autumn. By contrast, the growth forecast for this year and the next has been revised downwards. The outlook for domestic interest rates is higher for 2022 and 2023. Expectations regarding the koruna exchange rate are essentially unchanged.The Bank Board assessed the uncertainties and risks of the new forecast at the monetary policy horizon as being significant and moderately inflationary overall. The possibility of weaker anchoring of inflation expectations to the CNB’s 2% target is an inflationary risk. Slower appreciation of the koruna as a result of a sharp tightening of monetary policy abroad or an escalation of the situation in Ukraine is a risk towards a slower or later decline in domestic interest rates. Conversely, the possibility of more modest growth in household consumption in response to the jump in energy prices and, to some extent, also consolidation of Czech public finances are downside risks to inflation. The uncertainties include the extent of repricing of goods and services this January and the duration of the overloading of global production and supply chains.In view of the forecast and its moderately inflationary overall balance of risks, the Bank Board decided to increase interest rates by 0.75 percentage point. The interest rate increase aims to return inflation close to the Czech National Bank’s 2% target at the monetary policy horizon, i.e. 12–18 months ahead, and to help anchor firms’ and households’ inflation expectations. Future monetary policy steps will depend on incoming new information and future forecasts."    www.CentralBankNews.info

Posted on: 3 February 2022 | 5:06 pm

ECB confirms it will end pandemic asset purchases

     The European Central Bank (ECB) kept its main interest rates on hold and confirmed it was ending asset purchases under its pandemic emergency purchase program (PEPP) at the end of March as the economy continues to recover and inflation is likely to remain higher than previously expected.     The ECB, the central bank for the 19 countries that share the euro currency, left its benchmark refinancing rate at 0.0 percent, the marginal lending rate at 0.25 percent and the deposit rate at minus 0.50 percent, and reiterated it expects to maintain these rates until inflation stabilizes at its target of 2.0 percent over the medium term.      "This may also imply a transitory period in which inflation is moderately above the target," said the ECB's governing council, confirming its decision in December to end its PEPP asset purchase program - which was created in March 2020 and ultimately reached a size of 1.85 trillion euros - next month.      To cushion the impact on financial markets from ending the bond purchases, the ECB will continue to reinvest principal payments from maturing PEPP securities until at least the end of 2024 and boost its monthly asset purchases under its Asset Purchase Program (APP) from 2015 to 40 billion euros in the second quarter and then reduce it to 30 billion in the third quarter.      By October the ECB will then lower its monthly purchase of assets to the previous monthly pace of 20 billion euros and confirmed this will continue "for as long as necessary to reinforce the accommodative impact of its policy rates."      "The Governing Council expects net purchases to end shortly before it starts raising the key ECB interest rates," the ECB said, confirming earlier guidance.      The ECB's marginal tightening of its policy stance comes against a backdrop of a steady improvement in the economy although growth is likely to remain subdued in the first quarter as the current Omicron wave of the COVID-19 pandemic weighs on activity at the same time shortages of materials, equipment and labour holds back output in some industries.      However, ECB President Christine Lagarde also told a news conference the economy is affected less and less by each wave of the pandemic and the factors restraining production and consumption should gradually ease, allowing the economy to pick up speed during the year.      In the fourth quarter of last year the gross domestic product of the euro area grew 4.6 percent year-on-year for 2021 growth of a record 5.2 percent after shrinking 6.4 percent in 2020.      Inflation in December rose to a 2021-high of 5.1 percent, pushed up by energy prices, and the ECB expects inflation to remain high in the near term before declining during the year.      But Lagarde also said the risks to the inflation outlook were tilted to the upside, particularly in the near term, and the pace at which supply bottlenecks are resolved remains a risk to the outlook for both economic growth and inflation.     "We continue to see the risks to the economic outlook as broadly balanced over the medium term," Lagarde said, adding the economy could be stronger if households become more confident.      "By contrast, although uncertainties related to the pandemic have abated somewhat, geopolitical tensions have increased," she said, a clear reference to the tensions over Russia and Ukraine.         The European Central Bank issued the following statements with its policy decisions, the introductory statement to the press conference and the questions and answers.Pandemic emergency purchase programme (PEPP)In the first quarter of 2022, the Governing Council is conducting net asset purchases under the PEPP at a lower pace than in the previous quarter. It will discontinue net asset purchases under the PEPP at the end of March 2022. The Governing Council intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the Governing Council’s efforts to achieve its goal more effective. Within the Governing Council’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability. In particular, in the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time. This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic. Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.Asset purchase programme (APP)In line with the step-by-step reduction in asset purchases decided on in December 2021 and to ensure that the monetary policy stance remains consistent with inflation stabilising at the Governing Council’s target over the medium term, monthly net purchases under the APP will amount to €40 billion in the second quarter of 2022 and €30 billion in the third quarter. From October onwards, the Governing Council will maintain net asset purchases under the APP at a monthly pace of €20 billion for as long as necessary to reinforce the accommodative impact of its policy rates. The Governing Council expects net purchases to end shortly before it starts raising the key ECB interest rates. The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.Key ECB interest ratesThe interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.In support of its symmetric 2% inflation target and in line with its monetary policy strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. This may also imply a transitory period in which inflation is moderately above target.Refinancing operationsThe Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy. The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance. As announced, it expects the special conditions applicable under TLTRO III to end in June this year. The Governing Council will also assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.***The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term. The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today."     Introductory statement to press conference by Christine Lagarde, president of the ECB"Good afternoon, the Vice-President and I welcome you to our press conference. The euro area economy is continuing to recover and the labour market is improving further, helped by ample policy support. But growth is likely to remain subdued in the first quarter, as the current pandemic wave is still weighing on economic activity. Shortages of materials, equipment and labour continue to hold back output in some industries. High energy costs are hurting incomes and are likely to dampen spending. However, the economy is affected less and less by each wave of the pandemic and the factors restraining production and consumption should gradually ease, allowing the economy to pick up again strongly in the course of the year. Inflation has risen sharply in recent months and it has further surprised to the upside in January. This is primarily driven by higher energy costs that are pushing up prices across many sectors, as well as higher food prices. Inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year. The Governing Council therefore confirmed the decisions taken at its monetary policy meeting last December, as detailed in the press release published at 13:45 today. Accordingly, we will continue reducing the pace of our asset purchases step by step over the coming quarters, and will end net purchases under the pandemic emergency purchase programme (PEPP) at the end of March. In view of the current uncertainty, we need more than ever to maintain flexibility and optionality in the conduct of monetary policy. The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term. I will now outline in more detail how we see the economy and inflation developing, and will then talk about our assessment of financial and monetary conditions.Economic activityEconomic growth weakened to 0.3 per cent in the final quarter of last year. Nevertheless, output reached its pre-pandemic level at the end of 2021.Economic activity and demand will likely remain muted in the early part of this year for several reasons. First, containment measures are affecting consumer services, especially travel, tourism, hospitality and entertainment. Although infection rates are still very high, the impact of the pandemic on economic life is now proving less damaging. Second, high energy costs are reducing the purchasing power of households and the earnings of businesses, which constrains consumption and investment. And third, shortages of equipment, materials and labour in some sectors continue to hamper the production of manufactured goods, delay construction and hold back the recovery in parts of the services sector. There are signs that these bottlenecks may be starting to ease, but they will still persist for some time.Looking beyond the near term, growth should rebound strongly over the course of 2022, driven by robust domestic demand. As the labour market is improving further, with more people having jobs and fewer in job retention schemes, households should enjoy higher income and spend more. The global recovery and the ongoing fiscal and monetary policy support also contribute to this positive outlook. Targeted and productivity-enhancing fiscal measures and structural reforms, attuned to the conditions in different euro area countries, remain key to complement our monetary policy effectively. InflationInflation increased to 5.1 per cent in January, from 5.0 per cent in December 2021. It is likely to remain high in the near term. Energy prices continue to be the main reason for the elevated rate of inflation. Their direct impact accounted for over half of headline inflation in January and energy costs are also pushing up prices across many sectors. Food prices have also increased, owing to seasonal factors, elevated transportation costs and the higher price of fertilisers. In addition, price rises have become more widespread, with the prices of a large number of goods and services having increased markedly. Most measures of underlying inflation have risen over recent months, although the role of temporary pandemic factors means that the persistence of these increases remains uncertain. Market-based indicators suggest a moderation in energy price dynamics in the course of 2022 and price pressures stemming from global supply bottlenecks should also subside. Labour market conditions are improving further, although wage growth remains muted overall. Over time, the return of the economy to full capacity should support faster growth in wages. Market-based measures of longer-term inflation expectations have remained broadly stable at rates just below two per cent since our last monetary policy meeting. The latest survey-based measures stand at around two per cent. These factors will also contribute further to underlying inflation and will help headline inflation to settle durably at our two per cent target. Risk assessment We continue to see the risks to the economic outlook as broadly balanced over the medium term. The economy could perform more strongly than expected if households become more confident and save less than expected. By contrast, although uncertainties related to the pandemic have abated somewhat, geopolitical tensions have increased. Furthermore, persistently high costs of energy could exert a stronger than expected drag on consumption and investment. The pace at which supply bottlenecks are resolved is a further risk to the outlook for growth and inflation. Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher. Financial and monetary conditionsMarket interest rates have increased since our December meeting. However, bank funding costs have so far remained contained. Bank lending rates for firms and households continue to stand at historically low levels and financing conditions for the economy remain favourable. Lending to firms has picked up, supported by both short and longer-term loans. Robust demand for mortgages is sustaining lending to households. Banks are now as profitable as they were before the pandemic and their balance sheets remain solid. According to our latest Bank Lending Survey, loan demand by firms increased strongly in the last quarter of 2021. This was driven by both higher working capital needs, stemming from supply bottlenecks, and increased financing of longer-term investment. In addition, banks continue to hold an overall benign view of credit risks, mainly because of their positive assessment of the economic outlook.ConclusionSumming up, the euro area economy continues to recover, but growth is expected to remain subdued in the first quarter. While the outlook for inflation is uncertain, inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year. We will remain attentive to the incoming data and carefully assess the implications for the medium-term inflation outlook. We stand ready to adjust all of our instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term.We are now ready to take your questions."My first one would be: In light of that record inflation reading seen in January for the eurozone, how did the discussion go in the Governing Council? Are there more frictions now, and is the camp of those who are calling for action getting louder?The second one is on the market pricing and two rate hikes for 2022. You have been saying that a rate hike this year is highly unlikely. What are you saying now? Are you sticking to “highly unlikely,” or have you moved on?Thank you very much for these two very pertinent questions. Concerning inflation: with the upside surprise that we have seen first in December, second in January, I can tell you that there was unanimous concern around the table of the Governing Council about inflation numbers and obviously the impact this has on the near term and the impact this has on our compatriots in Europe. We know that the burden is first and foremost borne by those who are most vulnerable, most exposed and who face the day-to-day hardship of having to put up with higher prices. I can assure you that that concern was across the board and around the table in equal numbers.We had a very thorough and in-depth discussion about inflation precisely and were focussing on the latest information we have, but also the impact that it will have on our medium-term outlook. That is clearly something that will be examined in more depth at the time of our March Governing Council meeting, when we produce more projections – which we have not on this occasion – when we can harness all the latest data that we have, where we can also have more information about the job markets, about wages and where we can really analyse in depth what the impact is on our medium-term projections. We are all driven by the same mandate, which is price stability. We are all concerned to take the right steps at the right time, and I think there was also a concern and a determination around the table not to rush into a decision unless we had a proper and thorough assessment based on data and the analytical work that will take place in the next few weeks. That's on your first point concerning the inflation numbers.On the other question of the rate hikes: you know, I never make pledges without conditionalities and it is even more important at the moment to be very attentive to that. As I said, we will assess very carefully, we will be data dependent, we will do that work in March. I think it will take us into the analysis of what are the drivers behind inflation in the short term, what are the drivers behind inflation in the medium term, and how the whole outlook and medium-term projections look like. Let's not forget that we will continue doing so on the basis of our forward guidance, that we will continue to observe the sequence that we have agreed, and that we will be gradual in any determination that we make at the right time on the basis of data.A couple of hours ago, President Lagarde, the Bank of England increased its rate by 0.25%. Four of the nine members of the Committee actually wanted more than that, they wanted 0.5%. You're going to tell me of course that different economies mean different decisions. Could you tell me: what is the difference between the 5.4% inflation in the UK compared to the 5.1% in the eurozone? Why is it not the same course of action in the ECB?The other question is about wage growth. What can you tell us about wage growth in the eurozone? Do you see any sign of that? Are you worried about that side of things?It's interesting because your second question is almost the answer to your first question, but I'll go back a little bit into history. The United Kingdom has had a history of much higher inflation than what we have had in the euro area; that's point number one. The critical difference now between our respective economies, the critical one – there are many other ones – but the critical one has to do with the labour market, where clearly there is a lot of pressure on wages, where there is scarcity of workers for jobs that are available, and where - I don't want to take a political stance, but I think that there was a lot of non-UK labour force that eventually had to leave the United Kingdom which has not been totally replaced, and where the shortage of workers is actually having a bearing on the forces of the labour market in the UK. So that's really in essence what is causing the significant difference between the two.On the wage front: what we are seeing and that we can really celebrate is that the euro area is at the lowest unemployment number it has ever been. 7% unemployment is a record number. The second aspect of that labour market is that our participation of employees in the labour market is back to the level where it was pre-COVID. So on those two accounts we have good news to celebrate. What we are not yet seeing is a significant movement in terms of wage increases. We are not seeing a lot either in relation to wage negotiations. That normally should be the next step that we see, with lower unemployment, more people leaving the furlough schemes under which they were operating, and the output gap closing gradually and the economy returning to full capacity. We should see movement, and we are not seeing a lot of it yet. Now, of course a lot of the information that we are getting statistically is backward-looking, but we are also very attentive to what is happening and what is likely to happen. That is actually taken into account to a certain extent in our projection numbers, but clearly what will happen in the next few weeks and what we can see, both for our March meeting and then later on our June meeting, will be critically important to determine whether the three criteria of our forward guidance are fully satisfied.The first one is that from your guidance about standing ready to act you removed “in either direction” and I'm curious about the significance of that, if there is a significance. But in the interest rate guidance you left “or lower”. The two seem to be incoherent to me because that would mean if lower is an option and you are not ready to act in both directions, then you're only going down. Surely you didn't mean to say that?The second question is about the quality of your projections: do you maintain your full confidence in the ECB's projections? The track record of ECB projections has been quite mixed in recent quarters. It's clear to me that the models are not equipped to be modelling a once-in-a-lifetime event. What do you think about the projections going forward?On your first point: you've done a good compare reading of the various paragraphs that are included in our monetary policy statement. It is a fact that we have removed the portion that says in both directions. We now say the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term. I think “as appropriate” – which we debated within the Governing Council – captures the vast array of optionalities that we have available depending on the data that we receive, and as, hopefully, some of the uncertainty we have around clears off. So we thought that “as appropriate” was perfectly adequate to cover all the moves that we could take and all the optionalities that are available for us.I think based on recollection - because we debated that a little bit – the “in either direction” was inserted once to really indicate that there was a change of tack and that we were no longer in that low inflation environment for such a long period of time. That was inserted in the December monetary policy statement. We are clearly receiving data that inform us about the high level of inflation, certainly the upside risk to our projection, particularly for the short term, and that is the reason why we thought that “as appropriate” would cover all the optionalities that we have.Now, I'm glad you're asking me about the quality of the projection by staff. It's actually interesting because as managing director of the IMF I did have exactly the same questions in due course in my previous life. What it means is that providing forecasts, elaborating projections is a difficult exercise that is based on the assumptions that you make and on the models that you use. I have full confidence that staff do their best to include all the sensible, reasonable, rational assumptions that they can. I can assure you that they go through a whole array of scenarios: what if, what if, what if. They use the models that they use – that many of you listening to me are also using. It is hardly surprising that most projectionists, most forecasters have also been surprised by the inflation numbers in particular in December and January. Very few of them could've anticipated the energy shock, the massive shock that is hitting our economies around the world, but particularly so in Europe, where we are so vastly export[1]-dependent when it comes to our energy. That clearly has an impact that was not anticipated because it was not in the assumptions. Now, all the work that is done by staff to elaborate on those projections, all that work is also assessed by the Governing Council and each and every Governor of each and every national central bank is consulting with their staff as well. Their staff are also feeding data into the aggregate projections that we produce at least in one case out of two every year – sorry, two out of four. But the determination is made by the Governing Council. Indeed, there is an element of discretionary judgement. We don't take projections just at face value and this is particularly relevant in the current circumstances given the level of uncertainty, given the geopolitical risks around. There has to be an element of judgement that actually belongs to the table of the Governing Council.I just wanted to draw on your response to Annette's question on rate hikes earlier, and wanted to confirm: are you not willing to repeat today, as you said recently in December, that it's “very unlikely” that you will raise interest rates this year?Secondly, you were talking about how inflation risks are tilted to the upside, particularly in the short term. Could you give us some more thoughts on the medium-term and specifically the assumption that inflation will fall below 2% and stay there in 2023 and 2024?On your first question about interest rate hikes: as I said, I don't make pledges without conditionalities and I did make those statements at our last press conference on the basis of the assessment, on the basis of the data that we had. It was, as all pledges of that nature, conditional. So what I am saying here now is that come March, when we have additional data, when we've been able to integrate in our analytical work the numbers that we have received in the last few days, we will be in a position to make a thorough assessment again on the basis of data. I cannot prejudge what that will be, but we are only a few weeks away from the closing time at which we provide the analytical work, prepare the projections for the Governing Council, and then come with some recommendations and make our decisions.I think it all goes back to: how do we make our decisions? We make them on the basis of data, we make them on the basis of the forward guidance when it comes to interest rates. We make them gradually because we are not here to rock the boat, if I may say. We are going to use all instruments, all optionalities in order to respond to the situation – but the situation has indeed changed. You will have noticed that in the monetary policy statement that I just read, we do refer to the upside risk to inflation in our projection. So the situation having changed, we need to continue to monitor it very carefully. We need to assess the situation on the basis of the data, and then we will have to take a judgement. You had a second question, which had to do with: what's my prediction about the medium-term inflation? Well, again I'm very sorry to say, but we do assess risk to the upside for the near term, particularly for the near term. We're not excluding, but we say particularly for the near term. We will know better what impact it will have on the medium-term inflation. Let me just say one thing: we are getting much closer to target and this is so because in the medium term there are factors, drivers of inflation that are helping us finally reach - hopefully - that target. That has to do with the labour market that I was discussing earlier. That has to do with the broad-based inflation that we have, which concerns more than 60% of the items. It has to do with the inflation expectations which, whether based on surveys or market-based, are now heading very close to or at target. So this is all a good development and I'm saying that with a concern because I know how much hardship it imposes on all of us Europeans, and particularly those who have to fill up the tank and who have to put food on the table, because it is hard. Prices are going up very much at the moment. We see them continuing to stay high for a few more months, but then declining over the course of '22 and then our medium-term numbers, we will have more certainty at our March meeting.Could you clarify what is the best way for the ECB to act when there is an increase in inflation driven mostly by supply rather than demand? In the eurozone of course there are significant increases in energy prices, but inflation can be a burden on demand, as you have said before.Secondly, I have a question on fiscal rules because in the last days, the advisers of the Italian and French Governments have published some proposals on the Stability and Growth Pact. Have you seen them? What do you think of them and in particular, what do you think of the proposal to transfer part of the ECB – of the government bonds in the ECB balance sheet - to a European agency in order to give ECB more space for monetary policy?I opened this press conference by saying how all Governing Council members were concerned about the inflation numbers which were at a very surprising level, by all accounts, and whoever are the projectionists and the forecasters. Of course, we went into the analysis of: is it more supply, is it more demand? We all know that monetary policy can have a stronger impact on demand and that the impact on supply particularly if it is imported supply as is the case with energy price increase, is going to be more limited. I would have a little caveat on that one because clearly, the longer it lasts, the higher the likelihood of second-round effects there will be. In that case, obviously monetary policy has a role to play. I think that we are all concerned that we have a mandate which is to deliver price stability, which is to make sure that inflation is at target in the medium term, which is the strategy that we have adopted, all of us. We know the limits of what can be done and when it can be done, but we know that action has to be taken when the conditions are ready for that.You referred to the editorial that had been jointly prepared and published in one of your colleagues' newspapers. Of course I have read it and we also have taken a view within the Governing Council of the European Central Bank concerning fiscal – the Stability and Growth Pact, because we have an interest in how fiscal rules will be applied. We have an interest in the governance of the euro area and we are very keen to see as much of a fiscal union as is possible given that we have a monetary union and that the current crisis has demonstrated amply that when monetary and fiscal policy work in intelligent synchronization, it can be very efficient. But I am not going to pass judgement on one proposal or the other, however respectable the authors are. We, the Governing Council of the ECB, have said that we would like to see rules that are simpler, that are more user-friendly, that provide for a counter-cyclical response. We have also said that we believe that a fiscal capacity would be appropriate in order to respond collectively to shocks.There are other proposals that are being floated but the decision will ultimately depend on what the leaders are prepared to compromise and are prepared to accept. From our perspective, the more fiscal union there is, obviously the better for our monetary policy.I asked this question in December; I'm going to ask it again, and forgive me, but do you think the market, in pricing several rate increases this year by the ECB, has got ahead of itself?Secondly, can you tell us what your view is on the impact of tensions between Russia and Ukraine on the economic outlook and particularly the outlook for inflation?I don't know what answer I gave you to the December question, and I might be giving you a similar answer – although it will be in the light of a different indication from the economic situation and certainly different inflation numbers and different labour market numbers. When it comes to interest rate hikes, we have a forward guidance which has been approved by the Governing Council which identifies three pillars or three criteria, if you will, that need to be satisfied in order for rates to be hiked. I don't want to insult you by repeating those three criteria, but I will actually! We have the inflation at target, which is 2%, well ahead of the projection horizon; we have, second, the durability so that we see it staying at target until the end of the horizon; and third, we need to see underlying inflation that is sufficiently strong to determine progress towards target.We will apply these three criteria at each and every step of the way, and we will determine if and when they are satisfied in order to possibly hike rates. But don't forget that we also have a sequence, and the sequence is that we will not hike rates until we have completed net asset purchases. So I think what comes first comes first; we have to look at net asset purchases. We are conducting a step-by-step guide of those net asset purchases. We will determine in March what is the assessment, on the basis of the data that is then available and we will see what pace, what speed, what amounts we will apply to this net asset purchase programme for the rest of '22.You asked me a more political question on which I am not going to take a political stance, but I will simply say that the geopolitical clouds that we have over Europe, if they were to materialise, would certainly have an impact on energy prices and, through energy prices, an increased cost throughout the whole structure of prices. It would also impact growth as a result of reduced income and possibly as a result of reduced consumption and deferred investment. The pure economic impact would certainly be more significant than what we are seeing at the moment in terms of prices. We are very attentive to that and by the way, we include that in our scenario when we prepare the projection and the work that is submitted to Governing Council members at the time of the next Governing Council meeting. I will say separately that peace is a lot better than any kind of war from an economic point of view, and I have seen that in other parts of the world in previous lives.The first one is on inflation. You mentioned several times now the upside surprises of inflation in December and January. Does that mean that the December projections from the ECB staff, that they are already outdated, especially the projections that inflation will fall below 2% in 2023, in 2024?My second question is on the degree of monetary policy accommodation: if inflation is significantly higher than expected, this means that real interest rates are lower than thought. So monetary policy is more expansionary than thought. Isn't that in itself a reason to recalibrate monetary policy and to tighten monetary policy?On the latter one: it's obvious that monetary policy has to continue to support the economy and you mentioned it yourself: the whole panoply of instruments that we use, that are currently working, is also explaining some of the good results that the economies are showing at the moment. On the upside surprise: we did not only use the word upside in relation to surprises; we used it in relation to risk. Risk is to the upside in our projection. We hardly ever – I'd have to double-check in the last 20 years, we may have in the past – but in the recent past we have not actually mentioned, we have not included in our monetary policy statement the characterisation of risks in relation to inflation. I think that is a very explicit indication that it might very well be significantly higher than what we had expected over the course of the year, and possibly higher than we had anticipated at the end of the year. Risk is to the upside, in particular in the near term.I have got a quick question on your March projections that you've highlighted now repeatedly: if those updated forecasts show inflation exceeding your 2% target in 2023 and 2024, would that, in your present view, be a reason to start slowing bond purchases earlier than currently suggested?Thank you for your pointed question, but I am not going to speculate on what the Governing Council will decide. I think you have the answer, but I am not going to speculate here on what the decision will be.I was wondering in light of these events if you had measured any kind of what degree of monetary contraction could cause the decision of ending the special rate period of the TLTROs.Actually we have not discussed TLTROs at all in this particular Governing Council meeting, and it's one of the items that I'm sure we will debate at our March meeting, or later actually. I think they end in June '23[2] if I recall, yes.In the beginning of the press conference you said that there was a unanimous concern within the Governing Council about inflation. Just to be sure: does it mean that the monetary policy decision taken today was also taken unanimously?My second question, if I may: to what degree does the scenario or the risk of rising bond spreads determine the pace of normalisation of monetary policy of the ECB, especially given the fact that sovereign debt has exploded so much during the pandemic?I think I said that there was general concern around the table about inflation and the impact it has on our fellow Europeans. Equally, there was general consensus about the outcome of our decision. I wouldn't call it a monetary policy decision, so to speak, because what we are doing is we are continuing the normalisation of monetary policy and we are considering what will possibly happen and what options we offer ourselves, what optionalities will be around in response to the uncertainty at future monetary policy meetings. That's what we did in depth and very thoroughly today. There was general consensus on these issues around the table, I can assure you.Now, you asked me a question about the spreads: I would like to just observe that we are not seeing any such development. While yields have moved up, spreads have not widened in any significant manner. So we very much look into these matters very carefully and we have no reason to believe that it is going to be different. If it was, we are obviously going to respond and we have all the tools, all the instruments and the adequate flexibility if it is justified.I would like to focus on the energy prices: if I listen to you and your colleagues one always has the impression that energy prices are something a central bank can't do much about. It has to be taken and this is partly taken as justification for the current monetary policy. On the other hand, one could argue that the current policy is leading to the fact that the dollar is rising quite significantly against the euro. Since most energy – or maybe all energy – is being calculated in US dollars, it basically is another factor why energy prices are rising. So there is a criticism that one could argue that the current monetary policy stance of the ECB actually is fuelling inflation rather than combatting it. I hope you won't just say we don't focus on the exchange rate, but what would you say to this criticism?It is the case that the very high inflation numbers that we observe are at least 50% caused by energy prices. Oil, gas, electricity and they all interrelate, gas having a stronger bearing than in previous years because of the price mechanisms depending on the length of contract and all the rest of it. I will spare you the details, but 50% of the current inflation is caused by energy prices. If the ECB was to first of all reduce and finish its asset purchases, and then raise interest rates in short order, do you think it would have any impact on energy prices? No, it is not in the ambit of monetary policy to decide the price of the barrel that is organised predominantly outside of Europe.Now, true that most of those contracts are in the US dollar currency but if I look at the significant appreciation/depreciation, it varies a little bit. The euro has depreciated a little bit. I don't want to be in the wrong numbers, but it's no more than 3% over the course of the last 12 months[3]. I don't think that we can attribute to the European Central Bank the high cost of energy which impacts 50% of the inflation and the price paid by the consumers. Having said that, the European Central Bank and its Governing Council at large are focussed on its mandate, which is price stability. We are going to stick to the objectives that are set by the Treaty; that is price stability at 2% in the medium term. Believe me, as soon as it is required and the conditions are satisfied, we will act because it is our duty and we shall do so.I have two questions. The first question is on the lower bound: if inflation were to be too high relative to the 2% target, the ECB would respond. Your response will come from the lower bound and from negative interest rates, which is really exceptional. Can you tell us how the Central Bank, the ECB, can respond to higher inflation coming from the lower bound?My second question is on your step-by-step approach: the Governing Council expects net purchases to end shortly before it starts raising the key ECB interest rates and end its APP net purchases. What does this “shortly before” mean if inflation was going too high for too long?Well, how do you hike interest rates? By hiking interest rates. And clearly, we will have a very sophisticated determined approach and analysis to doing that. We will only do that in the sequence that we have fixed for ourselves, and which has been agreed, which is that we will look at net asset purchases first, gradually, on a data-dependent basis. Then we will look at interest rates.Now, you asked the question about net asset purchases, and I'm not sure exactly what your concern was about the net asset purchases and what is the… What was the question?It was “shortly before”…Of course, “shortly before.” Shortly before is probably a little shorter than just before, and that again is going to be in the estimation of the Governing Council, data dependent, and based on the assessment that is conducted. I would say this: we are not there yet for the reasons that I have just mentioned, which are that we will be very faithful to our sequence. We are still conducting net asset purchases. We will stop the Pandemic Emergency Programme net asset purchases in March and then we will look at the net asset purchases under the APP. Don't assume too much in terms of the immediacy of hikes; we will not be complacent, but we are not going to be rushed into a process. We will follow the sequence that we have set for ourselves. We will verify the forward guidance criteria and we will be gradual in whatever we do.It's very crucial to avoid the so-called second-round effects in the setting of wages and prices. In times where we see people are going on the street to defend their purchase power, especially in France, would you go as far as to call the unions to wage moderations in the coming period to avoid these second-round effects – which are not yet there, of course?The second question is: we had an interview with World Bank Vice President, Carmen Reinhart, today in Spiegel, using harsh words towards central banks; telling that they are only independent on paper. For that, she said that the level of public debt is so far so high that the central banks are so hesitant to act. What is your take about this?Well, on the latter question: I have not seen what Carmen has written so I'm not going to comment on that. She is an expert on sovereign debt and she has held that view for a long, long time that excessive sovereign debt is a great burden and should be addressed by sovereigns. I am not going to challenge or second-guess her analysis. I know this is her field and I am not surprised that she's addressing that in her capacity as chief economist of the World Bank and clearly, I am sure, focussed on emerging markets and low-income countries.On the second-round effect, don't get me wrong: what we are saying is that we are not seeing wage increases that would be likely in the conditions of the markets as they are, where we are seeing unemployment as low as it has ever been, where we are seeing participation back to the level where it was pre-COVID, and where gradually the output gap is closing and there is less and less slack in the economy. We are waiting for that movement on wages and our duty of course is to make sure that through a second-round effect, that would not be addressed by monetary policy, inflation would run out of control and would spiral. This is not what we are seeing, and we certainly don't want to see it, but I am not here saying that there should be wage moderation. There is clearly an adjustment to be had which I am hoping we will see in the course of '22. That would be the economic logic of what we are seeing at the moment. By the way, as I am finishing on that question, I think we should be a little bit cautious about what I am hearing a lot, which is constant comparisons between the US and the euro area, the Fed and the ECB. We are really operating in different environments, with different economic data. Just to give you an example: our demand here in the euro area is pretty much back to where it was pre-COVID. In the US it is 30% up. Ask yourself why; this is because of this massive fiscal stimulus that the US economy has had, unlike the euro area, where it has been more moderate, not excessive and which is producing the sort of measured pace at which some factors are significantly improving."         www.CentralBankNews.info

Posted on: 3 February 2022 | 4:10 pm

BOE raises rate 2nd time, sees more hikes, ends QE

      The Bank of England (BOE), the central bank for the United Kingdom, raised its main interest rate for the second time and will start reducing its stock of government and corporate bonds to tighten its monetary policy stance further as the economy is expected to bounce back quickly after a soft spell and inflation continues to rise in coming months.       BOE raised its bank rate by another 25 basis points to 0.50 percent and has now raised it by a total of 50 points after raising the rate by the same amount in December last year as it seeks to curb rising inflation from persistent cost and price pressures in a tight labor market.      BOE has now unwound most of the 60 basis points cut in the bank rate in March 2020 - at the height of the COVID-19 pandemic when the rate was slashed to a rock-bottom 0.10 percent from 0.75 percent -and forecast rates will continue to rise to around 1.50 percent by mid-2023.      The bank's monetary policy committee was split in its decision, with a majority of five members voting for the 25 basis point rate hike while four members voted to raise the rate by 50 points.       However, all nine members of the committee agreed it was time to reduce the bank's stock of UK government and corporate bonds by ceasing to reinvest maturing assets.      In addition to cutting rates in 2020, BOE also expanded it purchases of assets - known as quantitative easing - to ensure interest rates remained low and economic activity was stimulated, with the central bank's total stock of assets purchased eventually reaching 895 billion pounds.      But with the UK and global economies recovering rapidly, central banks and governments worldwide are now unwinding the massive amount of stimulus injected in 2020 and 2021 to avoid economies from overeating and high inflation from becoming persistent.     "The MPC (monetary policy committee) judges that, if the economy develops broadly in line with the February Report central projections, some further modest tightening in monetary policy is likely to be appropriate in the coming months," BOE said, adding the extent of tightening will depend on the prospects for inflation.      Initially, BOE will begin the process of reducing its stock of 20 billion pounds of sterling denominated non-financial investment-grade corporate bonds by first stopping reinvesting maturing bonds and then begin selling them all by the end of 2023.      The central bank said it would first consider selling its 875 billion pound stock of UK government bonds once the bank rate was raised to at least 1.0 percent.      As many other counties, economic activity in the UK slowed in December and January in response to the Omicron variant, but  BOE said the economic impact was likely to be limited and of short duration, with economic output returning to its pre-pandemic level again by the end of the first quarter.      In its latest monetary policy report, BOE lowered its forecast for economic growth in the first quarter of 2022 to 7.8 percent from an earlier 9.5 percent and cut the forecast for growth in the first quarter of 2023 to 1.8 percent from 2.1 percent.      In the third quarter of last year, UK gross domestic product grew 6.8 percent year-on-year, down from 24.2 percent in the second quarter.      "Beyond the near term, UK GDP growth is expected to slow to subdued rate," BOE said, pointing to the impact of higher global energy and goods prices on income and spending.      Growth in the first quarter of 2024 is seen at 1.1 percent and 0.9 percent in first quarter of 2025.      Inflation, however, is more than twice the BOE's target of 2.0 percent and hit 5.4 percent in December, almost 1 percentage point higher the bank forecast in November.      BOE expects inflation to rise further in coming months to close to 6.0 percent in February and March before peaking around 7.25 percent in April, around 2 percentage points higher than earlier forecast, due to the higher costs of global energy and goods.       BOE raised its forecasts for headline inflation of 5.2 percent in the first quarter of 2023, up from an earlier 3.3 percent, but expects wage growth and global bottlenecks to ease over time, with inflation declining to 2.1 percent in the first quarter of 2024 and then to 1.6 percent in 2025 first quarter.      Based on forward market rates, BOE forecast the bank rate rising to 1.3 percent by the first quarter of 2023 - up from its previous forecast of 1.0 percent - then 1.4 percent in the first quarter of 2024 before easing to 1.3 percent in the first quarter of 2025.          The Bank of England issued the following two statements:"The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 2 February 2022, the MPC voted by a majority of 5-4 to increase Bank Rate by 0.25 percentage points, to 0.5%. Those members in the minority preferred to increase Bank Rate by 0.5 percentage points, to 0.75%. The Committee voted unanimously for the Bank of England to begin to reduce the stock of UK government bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets. The Committee also voted unanimously for the Bank of England to begin to reduce the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets and by a programme of corporate bond sales to be completed no earlier than towards the end of 2023 that should unwind fully the stock of corporate bond purchases. The Committee’s updated central projections for activity and inflation are set out in the accompanying February Monetary Policy Report. The projections are conditioned on a market-implied path for Bank Rate that rises to around 1½% by the middle of 2023. Wholesale energy prices are assumed to follow their respective futures curves for the first six months of the projections and remain constant beyond that, in contrast to futures curves, which are downward sloping over coming years. There are material risks around this assumption.Global and UK activity returned to their pre-Covid-19 (Covid) levels towards the end of last year. The emergence of the Omicron variant is expected to have depressed activity somewhat in December and January. But its economic impact is likely to be limited and of short duration, and UK GDP is expected to recover in February and March such that output returns to its pre-pandemic level once again by the end of the first quarter. The Labour Force Survey unemployment rate fell to 4.1% in the three months to November, and is expected to fall further in the near term, to 3.8% in 2022 Q1. Beyond the near term, UK GDP growth is expected to slow to subdued rates. The main reason for that is the adverse impact of higher global energy and tradable goods prices on UK real aggregate income and spending. As a result, the unemployment rate is expected to rise to 5% and excess supply builds to around 1% by the end of the forecast period.Underlying earnings growth is estimated to have remained above pre-pandemic rates, and is expected to strengthen over the coming year, to around 4¾%. This is consistent with the results of the Bank’s Agents’ annual pay survey, with the tight labour market, and with some temporary upward pressure on wage settlements from higher price inflation.Twelve-month CPI inflation rose from 5.1% in November to 5.4% in December, almost 1 percentage point higher than expected at the time of the November Report. Inflation is expected to increase further in coming months, to close to 6% in February and March, before peaking at around 7¼% in April. This projected peak is around 2 percentage points higher than expected in the November Report. The projected overshoot of inflation relative to the 2% target mainly reflects global energy and tradable goods prices. The further rise in energy futures prices meant that Ofgem’s utility price caps were expected to be substantially higher at the reset in April 2022. Core goods CPI inflation is also expected to rise further, due to the impact of global bottlenecks on tradable goods prices. In the February Report central projection, upward pressures on CPI inflation are expected to dissipate over time, as global energy prices are assumed to remain constant after six months, and as global bottlenecks ease and tradable goods prices fall back a little. Underlying wage growth is also projected to ease from 2023, as the labour market loosens gradually and inflation declines. Conditioned on the rising market-implied path for Bank Rate and the MPC’s current forecasting convention for future energy prices, CPI inflation is projected to fall back to a little above the 2% target in two years’ time and to below the target by a greater margin in three years. In an alternative scenario that is conditioned on energy prices following forward curves throughout the forecast period and as set out in the February Report, excess supply is around ½ percentage point lower in the medium term than in the MPC’s central projection, and CPI inflation is around ¾ percentage point below the 2% target in two and three years’ time.The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework also recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. In the recent unprecedented circumstances, the economy has been subject to very large and repeated shocks. In particular, should recent movements prove persistent, the sharp rises in prices of global energy and tradable goods of which the United Kingdom is a net importer will necessarily weigh on UK real aggregate income and spending. This is something monetary policy is unable to prevent. The role of monetary policy is to ensure that, as such a real economic adjustment occurs, it does so consistent with achieving the 2% inflation target sustainably in the medium term, while minimising undesirable volatility in output.Given the current tightness of the labour market and continuing signs of greater persistence in domestic cost and price pressures, the Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting. Consistent with the MPC’s guidance set out in the August 2021 Report, the Committee agrees at this meeting that the Bank of England should cease to reinvest any future maturities falling due from its stock of UK government bond purchases. This reflects the MPC’s intention to reduce its holdings of government bonds in a gradual and predictable manner. In addition, the Committee agrees that the Bank of England should cease to reinvest any maturities falling due from its stock of sterling non-financial investment-grade corporate bond purchases, and that it should initiate a programme of corporate bond sales to be completed no earlier than towards the end of 2023 that should unwind fully the stock of corporate bond purchases. The decision to initiate the programme of corporate bond sales reflects the specific characteristics of the corporate bond market and the MPC’s involvement in it, and should not be taken as a signal regarding the commencement, scale or duration of any potential future UK government bond sales programme. The Committee reaffirms that it will consider beginning the process of actively selling UK government bonds only once Bank Rate has risen to at least 1%, and depending on economic circumstances at the time. The Committee also reaffirms its preference in most circumstances to use Bank Rate as its active policy tool when adjusting the stance of monetary policy. The extent of any further tightening in monetary policy will depend on the medium-term prospects for inflation. The MPC judges that, if the economy develops broadly in line with the February Report central projections, some further modest tightening in monetary policy is likely to be appropriate in the coming months. The Committee continues to judge that there are two-sided risks around the medium-term inflation outlook, primarily from wage developments on the upside and from energy and global tradable goods prices on the downside. The Committee will update its assessment on the balance of the risks to medium-term inflation in light of the relevant data as they emerge.Minutes of the Monetary Policy Committee meeting ending on 2 February 2022 1. Before turning to its immediate policy decision, and against the backdrop of its latest economic projections, the Committee discussed: the international economy; monetary and financial conditions; demand and output; and supply, costs and prices. The international economy2. UK-weighted global GDP was estimated to have grown by 0.8% in 2021 Q4, as had been expected in the November Monetary Policy Report. In 2022 Q1, global GDP was expected to grow more slowly than had been anticipated in the November Report, as the Omicron Covid variant had led to renewed restrictions and voluntary social distancing in many countries. However, the uncertainty relating to the economic impact of Omicron had declined, and its economic consequences were likely to be more limited and of shorter duration than had been anticipated at the time of the MPC's December meeting. Global cost pressures, arising from the strength in goods demand and supply chain disruptions as well as high energy prices, had remained elevated and had also weighed on activity over past months. Strong demand for goods, in particular in the United States, had appeared to have been a more important determinant of global bottlenecks than supply chain disruptions over recent months.3. According to the preliminary flash estimate, euro-area GDP had increased by 0.3% in 2021 Q4, such that output had returned to its 2019 Q4 level. This was weaker than had been expected in the November Report, due to tighter restrictions to address rising Covid case numbers in November and December in several countries, driven initially by the Delta variant and subsequently by Omicron. The unemployment rate had fallen to 7.0% in December, a historical low. Omicron case numbers had increased going into 2022 and, as a result, euro-area output was expected to contract slightly in the first quarter. Notwithstanding restrictions starting to ease in some countries, recent indicators had pointed to weakness in Covid-sensitive sectors with the flash services activity PMI falling back in January. The manufacturing output PMI had picked up, possibly suggesting some stabilisation in supply constraints, particularly in Germany. 4. According to the advance estimate, US GDP had grown by 1.7% in 2021 Q4, implying that output had been around 3% above its 2019 Q4 level. This had reflected a stronger recovery than had been anticipated in the November Report, as the economic impact of the Delta variant had waned. Growth in the fourth quarter had been accounted for primarily by stockbuilding. Consumption had also supported growth, and there had been evidence for a continuing rotation of household spending from goods to services. The labour market had appeared tight at the end of 2021. The unemployment rate had fallen to 3.9% in December, the lowest level since February 2020, as participation rates had remained below pre-Covid levels and the number of job vacancies had continued to be high relative to historical levels. More recent high-frequency card spending data suggested that there had been a relatively temporary disruption to spending related to Omicron around the turn of the year, with limited restrictions in place. In 2022 Q1, GDP was expected to grow by 0.5%. 5. In China, GDP had increased by 1.6% in 2021 Q4, stronger than had been expected in the November Report. Year-on-year industrial production growth had increased in December, reflecting an easing of power shortages and of some input constraints, as well as strong external demand. However, consumption indicators had continued to be somewhat weaker than measures of production, with year-on-year retail sales growth slowing, as localised Covid outbreaks and associated restrictions weighed on domestic demand. The recent outbreaks appeared to have had a relatively limited impact on the supply capacity of the economy but, looking ahead, there was uncertainty as to whether the more transmissible Omicron variant might cause greater supply disruptions, to the extent that China maintained its current Covid strategy. The housing market had continued to slow.6. Consumer price inflation had remained elevated in the euro area and the United States. Euro-area annual HICP inflation had increased to 5.1% in January, significantly above market expectations immediately ahead of the release, while core inflation had fallen to 2.3%. In the United States, annual PCE inflation had risen to 5.8% in December, with core inflation increasing to 4.9%. High energy prices had driven most of the pickup in consumer price inflation over the fourth quarter in the euro area, while price pressures were more broadly based in the United States, with strong contributions from energy, cars, accommodation and other core goods. This suggested that, in addition to high energy prices, pressures from global bottlenecks due to strong demand for goods and inelastic supply had been passing through to consumer prices. There had also been some divergence in wage growth between the United States and the euro area. According to the Federal Reserve Bank of Atlanta’s measure, US wage growth had continued to increase in the fourth quarter, to somewhat above its pre-Covid rate, while wage growth in the euro area had remained muted in the third quarter.7. The MPC discussed the central case for, as well as risks to, the global inflation outlook. In the near term, there would likely be further pass-through to consumer price inflation from past cost increases. Since the MPC’s December meeting, signals from cost indicators had been mixed. Energy prices had been volatile. Wholesale gas spot prices had initially fallen back in Europe from their peak in mid-December, but had recently risen again amid increasing geopolitical tensions. The Brent oil spot price had risen by $19 per barrel since the MPC’s previous meeting, to $91. Measures of shipping costs had been mixed, with some easing and others increasing once more. Indices of global input prices and delivery times had plateaued, suggesting some stabilisation in global bottlenecks at high levels. Overall, global bottlenecks were expected to ease over the next twelve months as spending in the United States rotated back to services, a little later than had been anticipated in the November Report. There was, however, a risk that the demand rotation could be delayed further, for example if consumer preferences had shifted more permanently. Supply chains could also be further disrupted in the event of widespread factory and port closures in China in response to Covid developments. Should these risks materialise, consumer prices could rise further than anticipated. Alternatively, it was possible that global cost pressures abated more quickly and to a greater extent in the medium term than expected, in which case consumer price inflation might moderate at a faster pace as well.Monetary and financial conditions8. Since the MPC’s previous meeting, advanced-economy government bond yields had risen significantly. Ten-year yields had increased by around 35 to 60 basis points in the United States, euro area and United Kingdom, reaching their highest levels since the onset of the pandemic. These increases had been accounted for primarily by real rates. The increases in nominal yields had reflected higher estimated term premia across countries, with a high degree of comovement between yields across different economies.9. The path for market-implied policy rates in the United States had risen significantly since the MPC’s previous meeting. At its 26 January meeting, the FOMC had left its target range for the federal funds rate unchanged and had continued to reduce the monthly pace of its asset purchases, as well as publishing additional information regarding its principles for significantly reducing the size of the Federal Reserve's balance sheet. The market-implied policy rate in the United States reached around 1¼% by end-2022, around 50 basis points higher than immediately prior to the MPC’s December meeting. In the euro area, the near-term market-implied path for policy rates had moved down a little over the same period. At its meeting on 16 December, the ECB Governing Council had left its key policy interest rates unchanged, and had announced a gradual reduction in the pace of net asset purchases.10. In the United Kingdom, market-implied expectations for the path of Bank Rate over the year ahead had risen, with market pricing consistent with an increase in Bank Rate of 0.25 percentage points, to 0.5%, at this MPC meeting. The February Monetary Policy Report was conditioned on a market-implied path for Bank Rate, based on the 15-working day average to 26 January, that rose to around 1½% by mid-2023. In the immediate run-up to the MPC’s February meeting, the market-implied path for Bank Rate had reached around 1.7% by mid-2023. The results of the Bank of England’s new Market Participants Survey, which would be published for the first time on the Friday following the release of these minutes, had painted a broadly similar picture of Bank Rate expectations: respondents had widely expected a 0.25 percentage point increase in Bank Rate at this meeting; a large majority expected Bank Rate to reach 1% within the next year; and respondents assessed that the balance of risks around this near-term path was skewed to the upside. Respondents expected reinvestments of the Bank’s holdings of UK government bonds to cease after the anticipated Bank Rate increase at this meeting. 11. Medium-term inflation compensation measures in the United Kingdom had increased slightly since the MPC’s previous meeting and had remained above their average levels of the past decade, in contrast to similar measures in the United States and the euro area, which had been around their average levels of the past decade. As the Committee had discussed previously, interpreting UK medium-term inflation compensation measures was not straightforward. Nevertheless, models that attempted to extract medium-term market expectations for CPI inflation, and intelligence gathered from market contacts, suggested that higher inflation expectations and greater perceived risks to inflation might have in part accounted for these above-average levels of medium-term inflation compensation measures, alongside other factors. This was consistent with results from the Market Participants Survey, which had suggested that respondents attributed these levels in part to elevated inflation expectations, but also to technical factors, such as those arising from the fact that inflation markets were used for hedging large pension liabilities, and an upside balance of risks around the inflation outlook.12. The sterling effective exchange rate had risen by around 2% since the previous MPC meeting. The US dollar had, in contrast, fallen by around ½%, despite a relatively large increase in US government bond yields.13. Equity prices had fallen after the MPC’s previous meeting, before recovering. The initial fall had reflected the increase in government bond yields, as well as the impact of geopolitical developments. Overall, equity prices had ended the period lower in the United States, while in the United Kingdom they had increased somewhat, cushioned by an estimated fall in equity risk premia. This in part had reflected the composition of the FTSE All Share index, including its skew towards sectors that had been supported by the recent rise in energy prices. Across countries, there had been stronger performance in those sectors more exposed to Covid, relative to those more exposed to higher interest rates. There had been less adjustment in the corporate bond market, as spreads had remained at historically low levels, having reversed the modest increases seen in response to the initial emergence of Omicron. 14. Lending rates on mortgages with loan-to-value (LTV) ratios at or below 75% had increased further since the MPC’s previous meeting. This was broadly consistent with a lagged response to the increases in risk-free rates in the fourth quarter of 2021, with around half of those increases having passed through to lending rates. The subsequent further increases in risk-free rates seen since the December MPC meeting would be expected to feed through to mortgage lending rates in due course. Other components of household borrowing, such as credit cards and personal loans had been less sensitive, as would be expected.Demand and output15. UK quarterly GDP growth in 2021 Q3 had been revised down slightly in the Quarterly National Accounts, from 1.3% to 1.1%. The level of GDP had, however, been revised up by around ½%, with that news more than accounted for by a higher path of household consumption throughout the pandemic. In the third quarter, consumption had risen by 2.7%, while the saving ratio had fallen back to 8.3%. Business investment had fallen by 2.5% in Q3, with particular weakness in the air transport sector, and had remained well below its pre-Covid level in 2019 Q4. 16. GDP was estimated to have risen by 0.9% in November, stronger than had been expected by Bank staff. Combined with the upward revisions to GDP, this meant that, prior to the onset of the Omicron variant, aggregate activity had regained its pre-pandemic level for the first time. GDP had been almost 1% higher than expected at the time of the November Monetary Policy Report. Within the November output data, activity had been stronger than expected across most sectors of the economy, including consumer-facing, transport and professional services. There had also been tentative signs in the manufacturing and construction sectors that supply disruptions were starting to ease, although monthly data could be volatile. 17. Bank staff expected GDP to have fallen by around ½% in December, largely due to the impact of the Omicron variant towards the end of the month, but to have risen by just over 1% during 2021 Q4 as a whole. Retail sales volumes had fallen quite sharply in December, according to official data, in part reflecting the unwind of previous strength, as consumers appeared to have brought forward some purchases ahead of the holiday season, and as Omicron had weighed on activity. Contacts of the Bank’s Agents had reported that shortages of some goods due to continuing supply-chain issues had not constrained aggregate spending by as much as had been anticipated. Nevertheless, staff shortages, exacerbated by absences due to sickness or self-isolation, were reported to have curtailed activity across a number of sectors.18. Having reached a very high level around the turn of the year, the number of Covid cases had fallen back, and had then appeared to have stabilised. On 21 December, the Chancellor of the Exchequer had announced that additional support would be available for businesses who were impacted by the Omicron variant, including one-off grants of up to £6,000 per premise for businesses in the hospitality and leisure sectors in England, and that the Government would cover the cost of Statutory Sick Pay for Covid-related absences for small and medium-sized employers across the United Kingdom. In the run-up to this MPC meeting, the UK Government and Devolved Administrations had announced a number of relaxations to Covid measures, some of which had been put in place in response to the Omicron variant. These had included the lifting of Plan B measures in England during the second half of January, and the removal of post-arrival testing requirements for fully vaccinated travellers into the United Kingdom from 11 February.19. Recent high-frequency indicators suggested that activity had rebounded somewhat since early January, including in consumer-facing services and work-related travel. This was consistent with intelligence from the Bank’s Agents that the peak economic impacts of the Omicron variant had passed quickly. GfK consumer confidence had nevertheless fallen in January, probably due to initial concerns around the impact of Omicron. Despite the incipient squeeze on real household disposable incomes, households’ views of their own financial situation had, so far, held up relatively well. Contacts of the Bank’s Agents had noted, however, that they expected pressure on household incomes to dampen consumer spending in the coming months. Overall, Bank staff expected GDP to recover further in February and March, such that the economy was projected to return to its pre-pandemic level of activity once again by the end of the first quarter, and that GDP on average would be unchanged between 2022 Q1 and 2021 Q4. Market sector GDP was expected to surpass its November 2021 level by March. 20. Although the number of companies reporting skilled labour shortages as a constraint on output in the January CBI Industrial Trends survey had remained very elevated, the number of companies reporting materials shortages as a factor limiting production had fallen back somewhat from its highest level since the mid-1970s, and the January manufacturing PMIs had suggested that supply constraints were not worsening as much as in previous months. Contacts of the Bank’s Agents expected only a slow improvement in supply chain disruption through 2022, and some continued to judge that problems could persist into 2023. There had also been increasing reports of slower investment growth due to shortages of goods, machinery and labour. There had, nevertheless, been widespread strength in investment intentions reported to the Agents, with contacts highlighting the reinstatement of projects that had been paused during the pandemic, and the need to increase capacity to meet demand. After weakening in December, the January Decision Maker Panel had reported a smaller drag from Covid on business investment over the first half of this year.Supply, costs and prices21. The Labour Force Survey (LFS) unemployment rate had fallen to 4.1% in the three months to November, 0.4 percentage points lower than had been expected at the time of the November Monetary Policy Report. The LFS employment rate had been broadly as expected, however, as inactivity had unexpectedly risen slightly. The number of inactive people who reported wanting a job had continued to fall. Her Majesty’s Revenue and Customs (HMRC) employee payrolls had risen by a further 184,000 in the single month of December, although these initial estimates had tended to be revised down somewhat. Bank staff judged that both the LFS employee and HMRC payroll series were around their 2019 Q4 levels after accounting for an unusually high number of individuals having switched from self-employment and onto payrolls, associated in part with tax reforms. Self-employment had remained weak even accounting for these estimates of switching, such that LFS employment was 1.4% below its 2019 Q4 level in the three months to November. Indicators of labour market tightness had nevertheless remained elevated. The ratio of vacancies to unemployment had increased to another record high since a consistent series had begun in 2001.22. Bank staff expected the LFS unemployment rate to fall further to 3.8% in 2022 Q1, despite the spread of Omicron weighing on activity at the beginning of the quarter. The flash composite employment PMI for January had been broadly unchanged on the month, remaining well above its past historical average. The Bank’s Agents had reported a modest easing in employment growth, in part due to recruitment difficulties having remained intense. High-frequency indicators of online vacancies had dipped during December and had begun to recover in January, but that profile had been comparable to the seasonal pattern prior to the pandemic. Instead of weaker labour demand, the main counterpart in the labour market to Covid-related weakness in activity had appeared to be an increase in staff absences due to sickness, self-isolation or caring responsibilities. The ONS Business Insights and Conditions Survey suggested that around 3% of the workforce had been absent for Covid-related reasons around the turn of the year. The Agents’ contacts had begun to see a reduction in absences, however, and generally viewed Omicron as a temporary issue. 23. Growth in private-sector regular Average Weekly Earnings (AWE) had slowed to 4.1% in the three months to November on a year earlier, broadly in line with Bank staff expectations ahead of the release. Pay growth had been boosted by the mechanical effects of the Coronavirus Job Retention Scheme and changes in the composition of the workforce, but those effects had waned in recent months. Adjusting for these effects, Bank staff estimated that underlying private-sector regular pay growth had remained at around 4 to 4½%, above pre-pandemic rates of around 3 to 3½%. The median of pay growth based on HMRC payrolls data was around 3%, comparable to pre-pandemic rates, implying that recent pay awards had been more skewed towards the upside than in the recent past. That was broadly consistent with the Bank’s Agents’ contacts reporting that pay increases had been significantly higher for workers with skills in short supply. 24. In the February Report projection, underlying private-sector pay growth was expected to pick up further in coming quarters. A special survey of firms conducted by the Bank’s Agents suggested that the average pay settlement was expected to rise to close to 5% in 2022, with the pickup broadly based across different sectors of the economy and firms of different sizes. Contacts had cited the ability to retain staff and recruit new workers, and increases in consumer price inflation, as factors that had pushed up their expectations for pay. The REC permanent staff salaries index, which measured the monthly pay growth of new permanent hires, had also remained close to record highs in December. Headline AWE growth was expected to be somewhat lower than the underlying rate, as the past boost to pay from compositional effects was assumed to continue to fade, although there was uncertainty around the precise scale and speed of any such unwind. 25. Twelve-month CPI inflation had risen to 5.4% in December, almost 1 percentage point above the November Report forecast. The upside news had been spread across a number of components, particularly within core goods. Strength in core goods prices, alongside higher energy prices, had also accounted for much of the absolute overshoot in inflation relative to the 2% target. Services price inflation had moved further above its pre-Covid rate. Price increases had been particularly acute for second-hand cars and hospitality, replicating trends in the United States. 26. CPI inflation was projected to increase further in coming months, to close to 6% in February and March and peaking at around 7¼% in April when higher utility price caps were due to be implemented. This projected peak was around 2 percentage points higher than had been expected in the November Report. In addition to the upside news in the CPI data to December, wholesale gas and electricity futures prices had increased further, putting upward pressure on utility prices. The costs of the Supplier of Last Resort mechanism, covering the losses that energy companies had incurred from taking on customers from failed suppliers, were also expected to begin to be passed on to household energy bills. The annual ONS update of the CPI weights was anticipated by Bank staff to lead to an increase in CPI inflation in the near term, in part due to greater weight being placed on energy prices. Certain contract prices, such as for telecommunication services, that were indexed to consumer price measures were also due to increase in coming months. 27. Survey indicators of costs and prices, such as the flash composite input and output price PMIs for January, had remained at historically elevated levels. The Bank’s Agents had reported that the costs of some raw materials and shipping rates on some routes appeared to be stabilising, but that higher energy and wage costs were putting additional upward pressure on prices. The Agents’ pay survey had suggested that around 70% of companies were expecting to increase their prices due to current wage pressures, although that share was lower among consumer-facing firms. 28. Measures of households’ and companies’ short-term inflation expectations had risen further since the MPC’s previous meeting. The Citi/YouGov household measure of expectations for the year ahead had increased from 4.0% in December to 4.8% in January, although the five-to-ten year ahead measure was unchanged. Respondents to the Decision Maker Panel had increased their expectations for their own price increases over the next twelve months from 4.2% in the survey covering the three months to November to 4.5% for the three months to January. Professional forecasters continued to expect CPI inflation to be close to the 2% target two and three years ahead.The immediate policy decision29. The MPC sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment.30. The Committee reviewed recent developments against the backdrop of its updated central projections for activity and inflation as set out in the accompanying February Monetary Policy Report. The projections were conditioned on a market-implied path for Bank Rate that rose to around 1½% by the middle of 2023. Wholesale energy prices were assumed to follow their respective futures curves for the first six months of the projections and remain constant beyond that, in contrast to futures curves, which were downward sloping over coming years. There were material risks around this assumption.31. UK-weighted world GDP in 2021 Q4 was estimated to have grown in line with expectations in the November Report. In 2022 Q1, global GDP was expected to grow more slowly, but the uncertainty relating to the economic impact of Omicron had declined, and its economic consequences were likely to be more limited and of shorter duration than had been anticipated at the time of the MPC's December meeting. In the February Report projections, global activity continued to grow thereafter, but was restrained by higher global energy prices over the forecast period, and by the impact of ongoing supply chain constraints for tradable goods over the coming year.32. Consumer price inflation had risen further in the United States and the euro area since the Committee’s previous meeting. Global cost pressures, arising from the strength in goods demand and supply chain disruptions as well as high energy prices, had also remained elevated. Wholesale gas spot prices had initially fallen back in Europe from their peak in mid-December, but had recently risen again amid increasing geopolitical tensions. Oil prices had risen significantly. Strong demand for goods, in particular in the United States, had appeared to have been a more important determinant of global bottlenecks than supply chain disruptions over recent months. In the February Report projections, world export prices were expected to rise a little further in the near term. As global bottlenecks eased, global tradable goods prices were expected to fall a little over the forecast period, though to remain well above their pre-pandemic levels. 33. Since the MPC’s previous meeting, advanced-economy government bond yields had increased significantly. Market-implied expectations for the path of Bank Rate had risen, with market pricing consistent with an increase in Bank Rate of 0.25 percentage points, to 0.5%, at this MPC meeting. The results of the Bank of England’s Market Participants Survey, which would be published for the first time on the Friday following the release of these minutes, had painted a broadly similar picture of Bank Rate expectations.34. Having reached a very high level around the turn of the year, the number of Covid cases had fallen back in the United Kingdom, and had then appeared to have stabilised. In the run-up to this MPC meeting, the UK Government and Devolved Administrations had announced a number of relaxations to Covid measures, some of which had been put in place in response to the Omicron variant. The MPC’s projections were conditioned on the assumptions that no material restrictions on economic activity were re-imposed, and that there was no further widespread voluntary social distancing, following this wave.35. UK GDP was estimated to have risen by 0.9% in November. Combined with upward revisions to GDP, this meant that, prior to the emergence of the Omicron variant, aggregate activity had regained its pre-pandemic level for the first time. The Omicron variant was expected to have depressed activity somewhat in December and January. But its economic impact was likely to be limited and of short duration, and GDP was expected to recover in February and March such that output returned to its pre-pandemic level once again by the end of the first quarter. 36. The Labour Force Survey unemployment rate had fallen to 4.1% in the three months to November, 0.4 percentage points lower than had been expected at the time of the November Report. It was expected to fall further in the near term, to 3.8% in 2022 Q1, despite the spread of Omicron weighing on activity at the beginning of the quarter. The ratio of vacancies to unemployment had increased, to another record high. Most indicators of the balance of demand and supply in the economy suggested that there was currently a small margin of excess demand across the economy as a whole. 37. Beyond the near term, UK GDP growth was expected to slow to subdued rates. The main reason for that was the adverse impact of higher global energy and tradable goods prices on UK real aggregate income and spending.38. Consumption growth was expected to slow, as households cut back on spending in the face of the material adverse effects on their real incomes from the sharp rises in global energy and tradable goods prices, and the planned increase in national insurance contributions in April 2022. Although consumption growth therefore slowed materially over the first two years of the forecast period, it remained above income growth. That reflected an assumption that households would spend some of the significant additional savings that they had accumulated, in aggregate, during the pandemic. As a result, the household saving rate was expected to fall from 8.3% in 2021 Q3 to below 4% from the end of 2022. There were risks in both directions around this projection. Given the windfall nature of the excess savings built up during the course of the pandemic, households could be more willing to spend out of these to support their level of real consumption. Set against that, existing savings were more concentrated among higher earners, who might generally spend proportionately little out of their savings. Developments in energy prices in particular could also disproportionately affect those households with lower savings.39. In the February Report projections, a margin of excess supply was expected to emerge later this year and to build over the forecast period. In part, that was accounted for by some slack in the labour market, with the unemployment rate expected to rise to around 5% by the end of the projection.40. Underlying earnings growth was estimated to have remained above pre-pandemic rates, and was expected to strengthen over the coming year, to around 4¾%. This was consistent with the results of the Bank’s Agents’ annual pay survey, with the tight labour market, and with some temporary upward pressure on wage settlements from higher price inflation. 41. Twelve-month CPI inflation had risen from 5.1% in November to 5.4% in December, almost 1 percentage point higher than had been expected at the time of the November Report. The upside news had been spread across a number of components, particularly within core goods. Strength in core goods prices, alongside higher energy prices, had accounted for much of the absolute overshoot in inflation relative to the 2% target. Services price inflation had moved further above its pre-Covid rate.42. CPI inflation was expected to increase further in coming months, to close to 6% in February and March, before peaking at around 7¼% in April. This projected peak was around 2 percentage points higher than expected in the November Report. Three-quarters of the projected increase in inflation between December and April was expected to reflect higher contributions from energy and goods prices. Survey indicators of costs and prices had remained at historically elevated levels. 43. The HM Treasury representative had briefed the Committee on the Government’s policy plans in response to Ofgem’s forthcoming price cap announcement.44. In the February Report central projection, upward pressures on CPI inflation were expected to dissipate over time, as global energy prices were assumed to remain constant after six months, and as global bottlenecks eased and tradable goods prices fell back a little. Underlying wage growth was also projected to ease from 2023, as the labour market loosened gradually and inflation declined. Conditioned on the rising market-implied path for Bank Rate and the MPC’s current forecasting convention for future energy prices, CPI inflation was projected to fall back to a little above the 2% target in two years’ time and to below the target by a greater margin in three years. In projections conditioned on the alternative assumption of constant interest rates at 0.5%, CPI inflation was expected to be 2.6% and 2.1% in two and three years’ time respectively.45. In an alternative scenario that was conditioned on the market-implied path for Bank Rate and energy prices following forward curves throughout the forecast period, and as was set out in the February Report, excess supply was around ½ percentage point lower in the medium term than in the MPC’s central projection, and CPI inflation was around ¾ percentage point below the 2% target in two and three years’ time.46. Measures of households’ and companies’ short-term inflation expectations had risen further since the MPC’s previous meeting. Measures of inflation expectations two to three years ahead, as well as some longer-term measures derived from household surveys and financial markets, had also increased in recent months, but by less than short-term measures. Professional forecasters continued to expect CPI inflation to be close to the 2% target two and three years ahead. A risk to the inflation outlook was that longer-term inflation expectations evolved such that wage and price setting were not consistent with inflation returning to the 2% target in the medium term. Overall, the MPC judged that inflation expectations remained well anchored at present. The Committee would, nevertheless, continue to monitor measures of inflation expectations very closely. 47. In Box A of the August 2021 Monetary Policy Report, the Committee had set out its strategy for the mix of monetary policy instruments to deliver tighter policy, including its preference in most circumstances to use Bank Rate as its active policy tool when adjusting the stance of monetary policy. The Committee had noted that it intended to begin to reduce the stock of UK government bonds, by ceasing to reinvest maturing assets, when Bank Rate reached 0.5% and if appropriate given the economic circumstances. This would have the benefit of providing a predictable and gradual path for the reduction in the stock of government bonds. The MPC would also consider actively selling some of the stock of government bonds only once Bank Rate had risen to at least 1%, and depending on economic circumstances at the time. The Box had stated that the MPC would take a separate decision on the corporate bond portfolio in due course. 48. In the run-up to this MPC meeting, the Committee had considered its strategy for reducing the stock of sterling non-financial investment-grade corporate bond purchases. It judged that ceasing reinvestments and, in addition, initiating a programme of corporate bond sales at the point Bank Rate reached 0.5%, would appropriately reflect the specific characteristics of the Corporate Bond Purchase Scheme (CBPS). It also judged that this would not have implications for the unwinding of the UK government bond portfolio, which would continue to be governed by the framework set out in Box A in the August Report. 49. The CBPS, at £20 billion, was far smaller than the stock of UK government bonds held by the APF, both in absolute terms and as a proportion of their respective markets. The MPC therefore judged that the impact on monetary conditions of unwinding the stock of corporate bonds, at a time when markets were functioning normally, was likely to be relatively small.50. The Committee turned to its immediate policy decision.51. The MPC’s remit was clear that the inflation target applied at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework also recognised that there would be occasions when inflation would depart from the target as a result of shocks and disturbances. In the recent unprecedented circumstances, the economy had been subject to very large and repeated shocks. In particular, should recent movements prove persistent, the sharp rises in prices of global energy and tradable goods of which the United Kingdom was a net importer, would necessarily weigh on UK real aggregate income and spending. This was something monetary policy was unable to prevent. The role of monetary policy was to ensure that, as such a real economic adjustment occurred, it did so consistent with achieving the 2% CPI inflation target sustainably in the medium term, while minimising undesirable volatility in output. 52. Given the current tightness of the labour market and continuing signs of greater persistence in domestic cost and price pressures, all members of the Committee judged that an increase in Bank Rate was warranted at this meeting. Different members placed different weights on the arguments for an increase in Bank Rate of 0.25 or of 0.5 percentage points at this meeting.53. Five members judged that a 0.25 percentage point increase in Bank Rate was warranted at this meeting. The February Report projections implied that some tightening in monetary policy was required to bring inflation back to the 2% target sustainably in the medium term. However, the forecast also incorporated a material trade-off related to the continuing global energy and tradable goods price shock, with CPI inflation expected to remain materially above the target in the first half of the forecast, at the same time as a margin of spare capacity was opening up. After the second year, conditioned on the market path for Bank Rate, CPI inflation was projected to fall below the target due to that widening margin of spare capacity. In the scenario in which energy prices followed their forward curves throughout the forecast period, inflation was projected to undershoot the target by ¾ percentage point in two and three years’ time. These members recognised the risks from the possibility of stronger domestic wage and price pressures in the near term, but also saw a need to balance this against the potential for inflation to fall more quickly and to a greater extent than expected if energy and other tradable goods prices followed a lower path than in the MPC’s central projection. There was also a case for moving Bank Rate in small increments; a larger increase at this meeting could have an outsized impact on expectations for the further path of policy, which was already sufficient, in the central projection, to push inflation well below the target in year three of the forecast.54. Four members judged that a 0.5 percentage point increase in Bank Rate was warranted at this meeting. Monetary policy had been very accommodative, and capacity pressures were now widespread, especially in the labour market. The projected path for CPI inflation was again being revised up over the first two years of the forecast period, while medium-term inflation expectations remained relatively high and on some measures had increased further. Companies responding to the Decision Maker Panel had indicated that they expected to raise prices significantly in 2022. The strong pickup in pay settlements reported to the Bank’s Agents, and the recent broadening from goods price to services price inflation, suggested that these developments were now being reflected in domestic costs and prices, which could make CPI inflation more persistent than was expected in the February Report central projection. Monetary policy should tighten to a greater extent at this meeting in order to reduce the risk that recent trends in pay growth and inflation expectations became more firmly embedded and thereby help to bring inflation back to the target sustainably in the medium term. 55. Consistent with the MPC’s guidance set out in the August 2021 Report, and given that financial markets were functioning normally, the Committee agreed at this meeting that the Bank of England should cease to reinvest any future maturities falling due from its stock of UK government bond purchases. This reflected the MPC’s intention to reduce its holdings of government bonds in a gradual and predictable manner. 56. In addition, the Committee agreed that the Bank of England should cease to reinvest any maturities falling due from its stock of sterling non-financial investment-grade corporate bond purchases, and that it should initiate a programme of corporate bond sales to be completed no earlier than towards the end of 2023 that should unwind fully the stock of corporate bond purchases. 57. The decision to initiate this programme of corporate bond sales reflected the specific characteristics of the corporate bond market and the MPC’s involvement in it, and should not be taken as a signal regarding the commencement, scale or duration of any potential future UK government bond sales programme. The Committee reaffirmed that it would consider beginning the process of actively selling UK government bonds only once Bank Rate had risen to at least 1%, and depending on economic circumstances at the time. 58. The Committee also reaffirmed its preference in most circumstances to use Bank Rate as its active policy tool when adjusting the stance of monetary policy. The Committee agreed that, as a matter of course, it would not continue to vote at each meeting on propositions regarding the stock of purchased assets, at least until any decision concerning sales of UK government bonds. If potential movements in Bank Rate were judged insufficient to achieve the inflation target, or if prevailing conditions were ones in which asset purchases might be particularly effective, the reductions in the stock of purchased assets could be amended or reversed. 59. The extent of any further tightening in monetary policy would depend on the medium-term prospects for inflation. The MPC judged that, if the economy developed broadly in line with the February Report central projections, some further modest tightening in monetary policy was likely to be appropriate in the coming months. The Committee continued to judge that there were two-sided risks around the medium-term inflation outlook, primarily from wage developments on the upside and from energy and global tradable goods prices on the downside. The Committee would update its assessment on the balance of the risks to medium-term inflation in light of the relevant data as they emerged.60. The Chair invited the Committee to vote on the propositions that:Bank Rate should be increased by 0.25 percentage points, to 0.5%;The Bank of England should begin to reduce the stock of UK government bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets;The Bank of England should begin to reduce the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets and by a programme of asset sales to be completed no earlier than towards the end of 2023 that should unwind fully the stock of corporate bond purchases. Five members (Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill and Silvana Tenreyro) voted in favour of the first proposition. Four members (Jonathan Haskel, Catherine L Mann, Dave Ramsden and Michael Saunders) voted against this proposition, preferring to increase Bank Rate by 0.5 percentage points, to 0.75%.The Committee voted unanimously in favour of the second and third propositions.Operational considerations61. At its September 2021 meeting, the MPC had agreed to reinvest the cash flows associated with reductions in the stock of sterling non-financial investment-grade corporate bond purchases held by the Asset Purchase Facility (APF) back into eligible corporate bonds, commencing in November 2021. The Committee had been briefed at its February meeting on this programme of reinvestments completed in the run-up to the meeting and undertaken in line with the approach to greening set out in the Bank of England's announcement in November 2021.62. As of 2 February 2022, the total stock of assets held in the APF was £895 billion, comprising £875 billion of UK government bond purchases and £20 billion of sterling non-financial investment-grade corporate bond purchases. 63. Consistent with the Committee’s decision at this meeting to begin to reduce the stock of UK government bond purchases, the £27.9 billion of cash flows associated with the redemption of the March 2022 gilt held by the APF would not be reinvested.64. In total over 2022 and 2023, just over £70 billion of UK government bonds held by the APF would mature, and over 2024 and 2025 around a further £130 billion of bonds would mature. Details of the full maturity profile of APF-owned government bonds would be set out on the Bank of England’s website, which would be kept updated to ensure that the general public and financial markets had clear information on how the size of the APF was scheduled to evolve.65. As the stock of purchased assets began to fall, the Bank of England would continue to monitor money market functioning closely, and would stand ready to adjust reserves in either direction if judged necessary to facilitate the smooth transmission of monetary policy.66. Consistent with the decision at this meeting to begin to reduce the stock of sterling non-financial investment-grade corporate bond purchases, the Committee asked Bank staff to design a programme of corporate bond sales, details of which would be announced within three months. The programme would be designed so as not to disrupt the functioning of the sterling investment-grade corporate bond market. Further details, including the initial schedule of operations, would be set out in a Market Notice to be published ahead of the start of sales.67. The Governor had written a letter to the Chancellor of the Exchequer setting out some of these considerations. In addition, the letter highlighted that it was appropriate for the Government indemnity associated with the APF to reduce in size progressively, in line with the reduction in the stock of purchased assets.68. The following members of the Committee were present:Andrew Bailey, ChairBen BroadbentJon CunliffeJonathan HaskelCatherine L MannHuw PillDave RamsdenMichael SaundersSilvana TenreyroClare Lombardelli was present as the Treasury representative.69. As permitted under the Bank of England Act 1998, as amended by the Bank of England and Financial Services Act 2016, Ron Kalifa was also present on 26 and 28 January, as an observer for the purpose of exercising oversight functions in his role as a member of the Bank’s Court of Directors."    www.CentralBankNews.info

Posted on: 3 February 2022 | 3:07 pm

Brazil raises rate 8th time, to slow pace of tightening

      Brazil's central bank raised its main interest rate for the 8th time and while it said it will persist in tightening monetary policy until inflation decelerates and inflation expectations anchor around its target, it also said it would reduce the size of rate increases in future policy decisions.     The Central Bank of Brazil (CBC) raised its Selic interest rate by another 1.50 percentage points to 10.75 percent and has now raised it 8.75 percentage points since it began raising the rate in March last year and followed this up with rate hikes in May, June, August, September, October, December and today.      After raising its rate by by 75 basis points each in its first three rate hikes, CBC accelerated the pace of tightening by raising the rate by 100 points in August and September last year before it then raised the rate by 150 points in October, December and then today.      The central bank's policy-making committee, Copom was again unanimous in its decision.     "The Committee considers that, given the increase in its inflation projections and in the risk of a de-anchoring of long-term expectations, it is appropriate to advance the process of monetary tightening significantly into the restrictive territory," CBC said.     However, Copom also said the cumulative impact of past rate hikes was expected to begin to manifest themselves and " for its next steps, the Committee foresees as adequate, at this moment, a reduction in the pace of adjustment of the interest rate."      Brazil's inflation rate decelerated to 10.06 percent in December from a 18-year high of 10.74 percent in November and CBC said various measures of underlying inflation remain above the range that is compatible with meeting the inflation target of 3.75 percent, plus/minus 1.5 percentage points.      Based on interest rate expectations in the bank's Focus survey, Copom expects inflation of 5.4 percent for 2022 and 3.2 percent for 2023, under the assumption the Selic rate rises to 12 percent in the first half of 2022 before ending the year at 11.75 percent.     In 2023 Selic is expected to decline to 8.0 percent.     The Central Bank of Brazil issued the following statement:     "​I n 24 4 th meeting, the Cop om continuously decided to increase the Selic rate by 10.75 % paThe following observations provide an update of the Copom's reference scenario:Regarding the global outlook, the environment remains less favorable. More persistent inflation increases the chances of faster monetary tightening in the US, turning financial conditions more challenging for emerging economies. In addition, the recent Covid-19 wave adds uncertainty about the pace of activity, and at the same time could delay the normalization of the global supply chains;Turning to the Brazilian economy, growth indicators of the Q4 posted a slightly better than expected evolution, especially in labor market data;Consumer inflation continued to surprise negatively. These surprises occurred both in the more volatile components and particularly on the items associated with core inflation;The various measures of underlying inflation are above the range compatible with meeting the inflation target;Inflation expectations for 2022 and 2023 collected by the Focus survey are around 5.4%, and 3.5%, respectively; andThe Copom's inflation projections in its reference scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.45* and evolving according to the purchase power parity (PPP), stand around 5.4% for 2022 and 3.2% for 2023. This scenario assumes a path for the Selic rate that rises to 12% in the first half of 2022, ends the year at 11.75%, and drops to 8.00% during 2023. In this scenario, inflation projections for administered prices are 6.6% for 2022 and 5.4% for 2023. The energy flag is assumed to be "red level 1" in December of 2022 and 2023.The Committee emphasizes that risks to its reference scenario remain in both directions.On the one hand, a possible reversion, even if partial, of the increase in the price of international commodities measured in local currency would produce a lower-than-projected inflation in the reference scenario.On the other hand, fiscal policies that imply additional impulses to aggregate demand or deteriorate the future fiscal path may have a negative impact on prices of important financial assets as well as pressure the country's risk premium.In spite of the more favorable public accounts data, the Committee assesses that the uncertainties regarding the fiscal framework maintain elevated the risk of deanchoring inflation expectations and, therefore, the upward asymmetry in the balance of risks. This implies a higher probability of inflation paths above the one projected under the reference scenario.Taking into account the balance of risks, and the broad array of available information, the Copom Committee referenced scenario decided to increase the Selic rate by 1.50 pp to 10.75% pa The judges that this decision reflects its reference for prospective inflation, a higher-than-usual variance in the balance of policy risks and is consistent with the convergence of inflation to its target throughout the relevant horizon for monetary policy, which includes 2022 and to a larger degree, 2023. Without compromising its fundamental objective of ensuring inflation price stability, this decision also implies smoothing of economic fluctuations and fosters full employment.The Committee considers that, given the increase in its inflation projections and in the risk of a deanchoring of long-term expectations, it is appropriate to advance the process of monetary tightening significantly into the restrictive territory. The Committee emphasizes that it will persist in its strategy until the disinflation process and the expectation anchoring around its targets consolidate.For its next steps, the Committee foresees as adequate, at this moment, a reduction in the pace of adjustment of the interest rate. This indication reflects the stage of the tightening cycle as its cumulative effects will manifest themselves over the relevant horizon. The Copom emphasizes that its future policy steps could be adjusted to ensure the convergence of inflation towards its targets and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy.The following members of the Committee voted for this decision: Roberto Oliveira Campos Neto (Governor), Bruno Serra Fernandes, Carolina de Assis Barros, Fernanda Magalhães Rumenos Guardado, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso, and Paulo Sergio Neves de Souza."     www.CentralBankNews.info 

Posted on: 2 February 2022 | 4:48 pm

Georgia holds rate after 4 hikes, retains tightening bias

     Georgia's central bank left its benchmark interest rate steady after raising it four times but said it would "keep a tightening bias until the risks of rising inflation expectations are sufficiently mitigated" as the risks remain high, both risks from geopolitical tensions as well as faster-than-expected tightening of global financial conditions.     The National Bank of Georgia (NBG) kept its refinancing rate at 10.50 percent after raising it 2.50 percentage points from March through December last year, leading to a tight monetary policy stance which NBG said it would maintain to ensure high inflation doesn't raise long-term inflation expectations.     Georgia's inflation rate rose to 2021-high of 13.9 percent in December from 12.5 percent in November but the central bank said the main driver of the increase in those two months was the base effect of subsidies on utility bills in 2020 and this will impact will persistence in January and February this year.      NBG said it expects inflation to start to decline gradually from this spring and approach the bank's target of 3.0 percent by the end of the year, with the tighter monetary policy, along with the fading of one-factors and fiscal consolidation, contributing to this easing of inflation.          The National Bank of Georgia issued the following statement:"The National Bank of Georgia keeps its monetary policy rate unchanged at 10.5 percent On February 2, 2022, the Monetary Policy Committee of the National Bank of Georgia decided to keep the refinancing rate unchanged. The monetary policy rate is 10.5 percent. The extraordinary situation caused by the pandemic has led to many uncertainties in the world economy, have emerged in stages and challenged policymakers. Particularly concerning among them is a high inflation environment, which is especially relevant for Georgia - in December, the annual inflation rate rose to 13.9 percent. The base effect of the 2020 subsidy on utility bills was the main driver for this increase since the month before. As mentioned in the previous press releases of the Committee, this effect will temporarily persist in January-February this year as well. Overall though, since the first half of 2021, high inflation has been driven by globally rising prices for food, oil and shipping. Consequently, high inflation is largely due to imported goods, that reflect increased US dollar prices in international markets. However, It should be noted, that the recent strengthening of the nominal effective GEL exchange rate has somewhat eased the pressure from international markets. In addition, both core and monthly inflation in recent months have shown early signs of stabilization. According to the current forecast, other things being equal, inflation will start to decline gradually from spring of this year and will approach the target by the end of the year. Tighter monetary policy, along with the fading out of one-off factors and fiscal consolidation, will contribute to this reduction in inflation. As for aggregate demand, according to the preliminary data, real GDP growth was 10.6 percent in 2021. The economic activity in 2021 is a result of pent-up demand since the period of pandemic-related restrictions, continued high credit activity and fiscal stimulus. According to the baseline scenario, economic growth is projected at 5 percent in 2022. Against the backdrop of rising risks of inflation expectations, the gradual increase in the monetary policy rate over the past year led to tight monetary policy stance. It is still important that, in the face of strong supply shocks, persistently high inflation does not raise long-term inflation expectations. At the same time, risks are apparent in terms of both geopolitical tensions as well as faster-than-expected tightening of global financial conditions. Taking into account these factors, the Committee maintained tight monetary policy. Monetary policy will keep a tightening bias until the risks of rising inflation expectations are sufficiently mitigated. In the wake of the global economic recovery, foreign demand continues to grow. According to the preliminary data, exports in December 2021 increased by about 29 percent annually, while the increase compared to the corresponding period of 2019 is 6 percent. Revenues from international travelers increased annually approximately 9-fold in December, although it is still well below 2019 December level (by 42 percent). Imports have also increased against the backdrop of higher domestic demand: in December 2021, year-on-year growth was 26 percent, while the increase compared to the corresponding period of 2019 is about 7 percent.The NBG continuously monitors the developments in the economy and financial markets and will use all available tools to ensure price stability. The next meeting of the Monetary Policy Committee will be held on March 30, 2022.""    www.CentralBankNews.info

Posted on: 2 February 2022 | 11:41 am

Armenia raises rate 8th time on upward inflation risks

     Armenia's central bank raised its benchmark interest rate for the 8th time, saying the risks of inflation deviating from its projected trajectory are mainly upwards and if these risks materialize, it would respond "accordingly and ensure the goal of price stability."    The Central Bank of Armenia (CBA) raised its refinancing rate by a further 25 basis points to 8.0 percent and has now raised it a total of 3.75 percentage points since it began tightening in December 2020 and followed this up with rate hikes in February, May, June, August, September and December last year and today.    CBA said the latest wave of the COVID-19 pandemic was spreading "rapidly," but its impact on the economy is assessed as weak."     Inflation in Armenia fell to 7.7 percent in December from a 2021-high of 9.6 percent in November but due to rising energy prices and disruptions to supply chains in international commodity and food markets, CBA said there is a persistent high inflationary environment, which is leading central banks in partner countries to tighten monetary conditions faster than expected.     "As a result, the external sector will continue to have an inflationary impact on the Armenian economy," CBA said, adding it considered it appropriate to raise the interest rate further so inflation gradually declines toward the target level of 4.0 percent.     www.CentralBankNews.info    

Posted on: 1 February 2022 | 2:59 pm

Lesotho raises rate 2nd time but cuts growth outlook

       Lesotho's central bank raised its main interest rate for the second time, saying this is to "ensure that the domestic costs of funds remains aligned with the rest of the region."      The Central Bank of Lesotho (CBL) raised its CBL rate by another 25 basis points to 4.0 percent and has now raised it 50 points following the first rate hike in 3 years in November 2021 and today.     CLB also revised upwards its target floor for Net International Reserves to US$$790 million from $760 million to maintain the exchange rate peg of Lesotho's loti with the South African rand.     CBL's rate hike comes after the South African Reserve Bank (SARB) also raised its rate by 25 basis points on Jan. 27, SARB's second rate hike after a first hike in November last year.     CBL's objective of price stability is achieved by ensuring the peg between the loti and the rand, known as an exchange rate targeting monetary policy framework.  CBL maintains enough foreign currency reserves to guarantee every loti issued.      The monetary tightening comes as CBL revised downwards its forecast for domestic economic growth by an average of 0.2 percent points for the medium term, saying "risks to the domestic economic outlook included an unpredictable path of COVID-19 pandemic and uncertain fiscal outlook."     The Central Bank of Lesotho issued the following statement:"The Central Bank of Lesotho (CBL) Monetary Policy Committee (MPC) held its 93rd meeting on February 1, 2022 to assess the adequacy of monetary policy targets. During the meeting, the Committee considered international, regional and domestic economic developments and financial markets conditions.Global economy continues to remain under pressure from the prolonged effects of COVID-19. The International Monetary Fund (IMF) World Economic Outlook, released in January 2022, projected global growth at 4.4 per cent in 2022, a downward revision from 4.9 per cent estimated in October 2021. This was largely reflective of the continued emergence of new COVID-19 variants and on-going supply chain bottlenecks. Risks to the outlook were tilted to the downside and include new COVID- 19 variants, supply chain disruptions, energy price volatility and rising debt levels.Preliminary data indicated a strong growth in the United States (US) during the last quarter of 2021. Economic activity was supported by higher performance of manufacturing and services sectors, coupled with high personal consumption expenditure. On the contrary, the preliminary indicators pointed to slower growth in the Euro Area due to sluggish performance in manufacturing and services sectors. Growth in the UK was also expected to slow down during the fourth quarter of 2021, on account of resurgence of COVID-19 cases and a fall in consumer spending. In China, economic activity slowed to 4.0 per cent in the fourth quarter of 2021, compared to a growth of 4.9 per cent in the preceding quarter.The global labour market conditions were expected to have worsened during the fourth quarter of 2021 on the back of subdued economic activity. In relation to price developments, inflation rose in many economies as a result of continued supply chain disruptions and rising energy prices. The monetary policy stance was tightened in some economies, as some central banks withdrew their stimulus on concerns of rising inflationary pressures.Global financial markets indicators displayed elevated market risk amid fears around falling real wages. Yields in emerging markets, particularly in South Africa, remained largely unchanged with slight improvements on both the short and long ends of the curve. While foreign investors were net buyers of South African bonds and equity, the rand is expected to remain under pressure during the first quarter of 2022 due to the expected rate hikes in the US, policy uncertainty as well as energy supply challenges.Domestic economic activity, as measured by the Monthly Indicator of Economic Activity (MIEA), was estimated to have improved by 12.2 per cent between October and November 2021, following five (5) consecutive months of negative growth. This was mainly due to improvements in both demand and production sides of the economy. The domestic economic growth is estimated to average 3.3 per cent over the medium term. Going forward, the major drivers of economic activity will be construction and the services industry.While the domestic labour market conditions displayed mixed signals during the third quarter of 2021, the majority of the sectors recorded job losses. This was largely due to low external demand coupled with supply side disruptions. The domestic inflation rate, as measured by the year-on-year percentage change in the consumer price index (CPI), closed the year at 6.8 per cent. Contrary to the previous inflationary phases that were driven by food prices, the current phase is driven by energy and transport costs, with food prices somehow moderating the acceleration. The inflation rate is expected to average 5.2 percent over the medium-term. However, the possible adverse effect of recent heavy rains on food production and elevated prices of petroleum products present upward pressure to the inflation outlook.The broad measure of money supply (M2) rose by 9.1 per cent during the fourth quarter of 2021 relative to a moderate growth of 0.3 per cent during the previous quarter. This was due to an increase in both the net foreign assets (NFA) and net domestic assets (NDA) during the review period. Credit to the private sector grew during the last quarter of 2021, albeit at a slower pace compared to the preceding quarter. Credit extended to the households grew by 3.2 per cent as a result of an increase in both personal loans and mortgages. This was, however, moderated by a 5.4 per cent decline in loans extended to business enterprises.During the third quarter of 2021, the current account registered a deficit equivalent to 7.4 per cent of GDP, following a larger deficit of 10.2 per cent of GDP observed in the second quarter. This was driven mainly by improvements in the goods account driven by increased exports of diamonds, clothing and textiles, water and some agricultural products. However, poor performance of the services account, as well as the income accounts, dampened this improvement.The Government budgetary operations recorded a surplus equivalent to 5.0 per cent of GDP during the last quarter of 2021 compared to a deficit of 11.7 per cent of GDP in the previous quarter. The stock of public debt was estimated at 57.2 per cent of GDP, compared to 59.5 per cent of GDP in the previous quarter.In summary, notwithstanding the progress most countries made in vaccinations and policy support, the global economy enters 2022 in a weaker position than previously expected with risks to the outlook tilted to the downside. In particular, the global growth was vulnerable to new COVID-19 variants, supply chain disruptions, volatility of energy prices and rising debt levels. The outlook for the domestic economic growth has been revised downwards by an average of 0.2 percentage points in the medium term. Risks to the domestic economic outlook included an unpredictable path of COVID-19 pandemic and uncertain fiscal outlook.Having considered the Net International Reserve (NIR) developments and outlook, regional inflation and interest rate outlook, domestic economic conditions and the global economic outlook, the MPC decided to:Revise upwards the current NIR target floor of US$760 million to US$790 million. At this level, the NIR target will remain consistent with the maintenance of the exchange rate peg between the loti and the South African rand.Increase the CBL rate from 3.75 per cent per annum to 4.00 per cent per annum. The rate, set at this level, will ensure that the domestic cost of funds remains aligned with the rest of the region.The Committee will continue to monitor the global developments and their likely impact on domestic macroeconomic conditions, especially the net international reserves (NIR), to take corrective action when needed."    www.CentralBankNews.info

Posted on: 1 February 2022 | 2:42 pm

Dominican Rep. raises rate 3rd time as it normalizes

     The central bank of the Dominican Republic raised its monetary policy rate for the third time, saying this move is part of a normalization of monetary policy aimed at moderating shocks on prices and help inflation converge toward the target range within the context of "highly dynamic economic activity."     The Central Bank of the Dominican Republic (BCRD) raised its monetary policy interest rate by a further 50 basis points to 5.0 percent and has now raised the rate 2 percentage points following rate hikes in November and December last year and Jan. 31, 2022.     BCRD said it had also significantly reduced the excess liquidity in the financial system, especially through open market operations, to mitigate additional inflationary pressures and prevent an overheating of the economy in the future.     The central bank noted headline inflation ended 2021 at 8.50 percent and core inflation hit 6.87 percent, which reflects the second-round effects on production associated with supply shocks.    BCRD said it expectations inflation to converge to its target range of 4.0 percent, plus/minus 1 percentage point during the monetary policy horizon, but this is slower than originally expected.    www.CentralBankNews.info    

Posted on: 1 February 2022 | 9:13 am

Kyrgyzstan raises rate 5th time to curb inflation

     The central bank of Kyrgyzstan raised its benchmark interest rate for the fifth time in a year as it continues to tighten monetary conditions to curb high inflationary pressures and said it would make additional adjustments to its policy if necessary.     The National Bank of the Kyrgyz Republic raised its discount rate by a further 50 basis points to 8.50 percent and has now raised it 3.50 percentage points since it began the monetary tightening cycle in February 2021.     "This decision was made in order to minimize the negative effect of external shocks on the current dynamics of inflation and inflation expectations in the Kyrgyz Republic," the central bank said.     www.CentralBankNews.info

Posted on: 1 February 2022 | 8:54 am

Ghana holds rate, fiscal cuts to lower inflation risks

     Ghana's central bank left its policy rate unchanged at 14.50 percent, saying the "dynamics associated with the November 2021 policy rate hike are yet to be fully transmitted and expects the decisive implementations of the fiscal correction measures, especially the 20 percent cut in expenditure to help moderate the upside risks to the inflation outlook."     Herewith an updated table with this week's policy decisions by central banks.     The table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.WEEK 5JAN 31 - FEB 5, 2022GHANA31-Jan14.50%15:000014.50%         FMBULGARIA31-Jan0.00%000.00%         FMKYRGYZSTAN31-Jan8.00%5005.50%AUSTRALIA1-Feb0.10%14:30000.10%         DMARMENIA1-Feb7.75%5005.50%LESOTHO1-Feb3.75%2503.50%GEORGIA2-Feb10.50%14:005008.00%ALBANIA2-Feb0.50%000.50%BRAZIL2-Feb9.25%18:3015002.00%         EMUNITED KINGDOM3-Feb0.25%12:001500.10%         DMEURO AREA3-Feb0.00%13:45000.00%         DMCZECH REPUBLIC3-Feb3.75%14:3010000.25%         EMEGYPT3-Feb8.25%008.25%         EM    www.CentralBankNews.info

Posted on: 31 January 2022 | 8:22 am

This week in monetary policy: Ghana, Bulgaria, Kyrgyzstan, Australia, Armenia, Lesotho, Georgia, Albania, Brazil, UK, ECB, Czech Rep. & Egypt

    This week - January 31 through February 5 - central banks from 13 countries or jurisdictions are scheduled to decide on monetary policy: Ghana, Bulgaria, Kyrgyz Republic, Australia, Armenia, Lesotho, Georgia, Albania, Brazil, United Kingdom, euro area, Czech Republic and Egypt.    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, 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 be accessed by clicking on This Week. WEEK 5JAN 31 - FEB 5, 2022GHANA31-Jan14.50%15:00100014.50%         FMBULGARIA31-Jan0.00%000.00%         FMKYRGYZSTAN31-Jan8.00%5005.50%AUSTRALIA1-Feb0.10%14:30000.10%         DMARMENIA1-Feb7.75%5005.50%LESOTHO1-Feb3.75%2503.50%GEORGIA2-Feb10.50%14:005008.00%ALBANIA2-Feb0.50%000.50%BRAZIL2-Feb9.25%18:3015002.00%         EMUNITED KINGDOM3-Feb0.25%12:001500.10%         DMEURO AREA3-Feb0.00%13:45000.00%         DMCZECH REPUBLIC3-Feb3.75%14:3010000.25%         EMEGYPT3-Feb8.25%008.25%         EM     www.CentralBankNews.info

Posted on: 31 January 2022 | 8:11 am

Azerbaijan raises rate 4th time, rising inflation pressure

      Azerbaijan's central bank raised its benchmark interest rate for the fourth time, saying inflationary pressures have continued to rise and "the country's economy will face unprecedented inflationary pressures."     The Central Bank of the Republic of Azerbaijan (CBA) raised its discount rate by 25 basis points to 7.50 percent and has now raised it 1.0 percentage points following earlier rate hikes in September, October, December and today.     The lower limit of CBA's interest rate corridor is now 6.0 percent and the upper limit 9.0 percent.     "According to the Central Bank's baseline forecast, inflation is expected to approach the upper limit of the target range by the end of 2022 and the center of the target range in 2023," CBA said.     Azerbaijan's inflation rate rose to a 2021-high of 6.7 percent in December from 6.2 percent in November and 3.3 percent in January.      CBA, which targets inflation of 2.0-6.0 percent, forecast inflation in 2022 between 6.6 and 7.1 percent before decelerating into the bank's target range in the first quarter of 2023.     CBA said the level of inflation is affecting inflation expectations, with households's expectations topping its forecast and inflation expectations by businesses are also rising.     "As the pandemic continues and the effects of price liberalization imposed by government regulation continue, rising domestic producer prices are also fueling the costs factors in inflation," CBA said, estimating the impact of government-regulated prices on inflation exceeds 20 percent.     Economic activity in Azerbaijan topped expectations in 2021, with gross domestic product estimated to have expanded 5.6 percent in real terms, including 7.2 percent in the non-oil sector.     From the beginning of the third quarter, the country's output exceeded its level prior to the COVID-19 pandemic, employment continues to approach the level prior to the pandemic and the loan portfolio of commercial banks rose 17.7 percent in 2021.      CBA also said the dollarization of the country's economy is continuing to decline, with deposits denominated in U.S. dollars down 9.8 percentage points to 41 percent and loans in dollars down 4 percentage points to 25.8 percent.      The central bank also said it had maintained a balanced foreign exchange market, ensuring a stable exchange rate so external inflation is neutralized, and its interventions in the currency market amounted to US$245 million last year.    www.CentralBankNews.info    

Posted on: 28 January 2022 | 3:58 pm

Colombia raises rate 4th time, inflation forecast raised

      Colombia's central bank raised its key interest rate for the fourth time - the sixth central bank to raise rates this week and the 16th this year - citing higher-than-expected inflation and a "significant" increase in inflation expectations.     The Central Bank of Colombia (CBC) raised its interest rate by 1 percentage point to 4.0 percent - the most aggressive rate hike since it began raising rates in September last year - and has now raised it by a total of 2.25 percentage points.     In September last year CBC raised its rate by 25 basis points and then followed this up with 50 point hikes in both October and December before today's 100 point hike.    "This decision is compatible with the dynamism of an economy that has recovered rapidly and does not require the same degree of monetary stimulus that the Bank duly provided throughout the crises caused by COVID-19," CBC said.     Today's rate hike comes after Colombia's government raised minimum wages by 10 percent - the highest raise in 50 years - which analysts said added pressure on the central bank to raise rates faster.     CBC has now almost fully unwound its 7 rate cuts in 2020 from February to September in response to the pandemic, with the cuts totaling 2.50 percentage points.     The bank's board was split in its today's decision, with five voting for the 100-point rate hike while two board members voted for a 75-point increase.     The board was also split in December, when four members voted for the 50-point rate hike while three members voted for a 75-point hike.      Inflation in Colombia rose to a 2021-high of 5.62 percent in December, 30 basis points higher than the central bank's staff had forecast, while the measure of basic inflation, which excludes food and regulated items, ended the year at 2.49 percent.     "The results of inflation in 2021 induced a significant increase in inflation expectations measured from various sources, including non-food inflation," said CBC, which targets inflation of 3.0 percent.     The bank's staff raised its forecast for headline inflation in 2022 to 4.3 percent from an earlier 3.7 percent and forecast core inflation of 4.5 percent.     In 2023 CBC expects headline inflation of 3.4 percent and core inflation of 3.6 percent.     Colombia's economy has recovered swiftly from the pandemic and CBC said indicators for November show continued expansion, which confirms the bank's forecast for growth of close to 10 percent in 2021.     Economic output last year thus exceeds that of 2019 and excess capacity is close to being eliminated, the central bank added, forecasting growth in 2022 of around 4.3 percent.     CBC also said the current account deficit would end 2021 around 5.7 percent of gross domestic product, slightly up from the December estimate of 5.6 percent.     This year, however, CBC expects the deficit to ease to 4.9 percent of GDP.     Today's rate hike comes after Colombia's government raised minimum wages by 10 percent - the highest raise in 50 years - which analysts said added pressure on the central bank to raise rates faster.     The Central Bank of Colombia issued the following statement:"The board voted 5-2 to raise the benchmark interest rate to 4.0%; two board members voted for a 75-basis point increase.The decision was based on the following considerations:Headline inflation continued on an upward trajectory, rising 0.73% in December and outpacing the technical staff's projection by 30-basis points. As a result, overall consumer inflation ended the year at 5.62%. Core inflation, measured excluding food and regulated items, closed the year at 2.49%, while the year-end average of core inflation indicators was 3.45%.Inflation results in 2021 led to a significant increase in inflation expectations from a variety of sources, among them inflation excluding food. The technical staff revised its headline and core inflation forecasts upward to 4.3% and 4.5% respectively in 2022, and to 3.4% and 3.6% in 2023.Data from the monthly economic tracking indicator (ISE) suggests that economic activity continued to expand in November. As a result, the technical staff was able to reaffirm its GDP growth forecast for 2021, at close to 10%. With this, annual GDP in 2021 would surpass 2019 levels, and remaining excess capacity in the economy would nearly be overcome. GDP growth in 2022 would be projected at around 4.3%.The current account balance of payments is expected to close 2021 with a deficit of around 5.7% of GDP. This would be expected to moderate in 2022 to 4.9%, as international financial conditions tighten due to the acceleration of monetary policy normalization in the United States and other advanced economies.With this decision, the BDBR has reiterated its commitment to the 3% annual inflation target. The increase in the benchmark interest rate takes into account the current dynamism of Colombia's economy, which has recovered quickly from the effects of the pandemic and no longer requires the same degree of monetary stimulus that has been administered over the course of the COVID-19 crisis."     www.CentralBankNews.info     

Posted on: 28 January 2022 | 2:34 pm

South Africa is 15th central bank to raise rates in 2022

      South Africa became the fifth central bank to raise its main interest rate this week and the 15th central bank to raise rates so far in 2022 as monetary authorities worldwide continue last year's tightening of monetary conditions to dampen inflationary pressures as the global economy continues to heal from the COVID-19 pandemic.      Central banks have raised their benchmark interest rates by a total of 11.25 percentage points so far, boosting the average interest rate by the 104 central banks tracked by Central Bank News to 5.58 percent this week from 5.51 percent at the end of 2021 and 4.18 percent at the end of 2020.      Meanwhile, three central banks - Congo, South Sudan and China - have cut rates a total of 4.10 percentage points.     As part of its coverage of global monetary policy, Central Bank News publishes a Global Interest Rate Monitor (GIRM) that tracks changes to central banks' interest rates.      GIRM is continuously updated and can always be accessed on the Central Bank News website under the section for Interest Rates.     The first section of the table shows changes to policy rates in the current month, including the name of the country that changed its rate, the current policy rate, the latest change in the policy rate in basis points, the date of the change, the year-to-date net change and the change in basis points in the earlier years of 2021, 2020 and 2019.    The second section of the table shows changes year-to-date, starting with the Global Monetary Policy Rate (GMPR), or the average nominal rate of the 104 central banks covered by Central Bank News.     This is followed by the change in GMPR year-to-date, and the date for the latest change. It also shows the total change in GMPR in basis points in 2021, 2020 and 2019.CHANGES IN JANUARY COUNTRYRATECHANGEDATE2022202120202019SOUTH AFRICA4.00%2527-Jan-222525-300-25COSTA RICA1.75%5026-Jan-225050-200-250CHILE5.50%15026-Jan-22150350-125-100HUNGARY2.90%5025-Jan-2250180-300KAZAKHSTAN10.25%5024-Jan-225075-250PARAGUAY5.50%2521-Jan-2225450-325-125UKRAINE10.00%10020-Jan-22100300-750-450SRI LANKA (deposit)5.50%5020-Jan-2250.0050-250-100CHINA3.70%-1020-Jan-22-10-5-30-16SOUTH KOREA1.25%2514-Jan-222550-75-50MOLDOVA8.50%2013-Jan-22200385-285-100SOUTH SUDAN12.00%-30011-Jan-22-300000ROMANIA2.00%2510-Jan-222525-1000PERU3.00%506-Jan-2250225-200-50ARGENTINA 40.00%2006-Jan-222000-1700-750URUGUAY6.50%755-Jan-227512500POLAND2.25%504-Jan-2250165-1400CONGO, DEM. REP.7.50%-1002-Jan-22-100-1000950-500CHANGES YEAR TO DATE:COUNTRYRATECHANGEDATEYTD202120202019GLOBAL (GMPR)5.58%727-Jan-227157765-16233-7276ALBANIA0.50%-5025-Mar-200-500ANGOLA20.00%4502-Jul-214500-100ARGENTINA 40.00%2006-Jan-222000-1700-750ARMENIA7.75%5014-Dec-21250-25-50AUSTRALIA0.10%-153-Nov-200-65-75AZERBAIJAN7.25%2517-Dec-21100-125-225BAHAMAS4.00%-5022-Dec-16000BAHRAIN1.00%-7516-Mar-200-125-50BANGLADESH4.75%-5029-Jul-200-1250BARBADOS2.00%-50030-Mar-200-5000BELARUS9.25%7515-Jul-21150-125-100BOTSWANA3.75%-508-Oct-200-100-25BRAZIL9.25%1508-Dec-21725-250-200BULGARIA0.00%-129-Jan-16000CANADA0.25%-5027-Mar-200-1500CAPE VERDE1.00%-45026-Mar-200-4500CEN. AFRICAN STS.3.25%-2527-Mar-200-250CHILE5.50%15026-Jan-22150350-125-100CHINA3.70%-1020-Jan-22-10-5-30-16COLOMBIA3.00%5017-Dec-21125-2500CONGO, DEM. REP.7.50%-1002-Jan-22-100-1000950-500COSTA RICA1.75%5026-Jan-225050-200-250CROATIA2.50%-25020-Oct-15000CZECH REPUBLIC3.75%10022-Dec-21350-17525DENMARK -0.60%-1030-Sep-21015-10DOMINICAN REP.4.50%10030-Dec-21150-150-100EAST. CARIBBEAN 2.00%-4503-Apr-200-4500EGYPT8.25%-5012-Nov-200-400-450ESWATINI3.75%-2524-Jul-200-275-25EURO AREA0.00%-510-Mar-16000FIJI0.25%-2518-Mar-200-250GAMBIA10.00%-20028-May-200-250-100GEORGIA10.50%508-Dec-21250-100200GHANA 14.50%10022-Nov-210-150-100GUATEMALA1.75%-2525-Jun-200-1000HONDURAS3.00%-7523-Nov-200-2500HONG KONG0.86%-6416-Mar-200-114-75HUNGARY2.90%5025-Jan-2250180-300ICELAND 2.00%5017-Nov-21125-225-150INDIA4.00%-4022-May-200-115-135INDONESIA 3.50%-2518-Feb-21-25-125-100ISRAEL0.10%-156-Apr-200-150JAMAICA 2.50%5020-Dec-212000-125JAPAN -0.10%-2029-Jan-16000JORDAN2.50%-10016-Mar-200-150-75KAZAKHSTAN10.25%5024-Jan-225075-250KENYA7.00%-2529-Apr-200-150-50KUWAIT1.50%-10016-Mar-200-125-25KYRGYZSTAN8.00%5029-Nov-2130075-50LESOTHO3.75%2522-Nov-2125-300-25LIBERIA20.00%-50020-Aug-21-500-5000MACAU0.86%-6416-Mar-200-114-75MACEDONIA1.25%-2510-Mar-21-25-100-25MALAWI12.00%-1506-Nov-200-150-250MALAYSIA1.75%-257-Jul-200-125-25MAURITIUS1.85%-10016-Apr-200-150-15MEXICO5.50%5016-Dec-21125-300-100MOLDOVA8.50%2013-Jan-22200385-285-100MONGOLIA6.00%-20023-Nov-200-5000MOROCCO1.50%-5016-Jun-200-750MOZAMBIQUE13.25%30027-Jan-21300-250-150MYANMAR7.00%-15027-Apr-200-3000NAMIBIA3.75%-2519-Aug-200-275-25NEW ZEALAND0.75%2524-Nov-2150-75-75NIGERIA11.50%-10022-Sep-200-200-50NORWAY0.50%2516-Dec-2150-15075PAKISTAN9.75%10014-Dec-21275-625325PAPUA NEW GUINEA3.00%-20030-Mar-200-200-225PARAGUAY5.50%2521-Jan-2225450-325-125PERU3.00%506-Jan-2250225-200-50PHILIPPINES2.00%-2519-Nov-200-200-75POLAND2.25%504-Jan-2250165-1400QATAR2.50%-10016-Mar-200-175-75ROMANIA2.00%2510-Jan-222525-1000RUSSIA8.50%10017-Dec-21425-200-150RWANDA4.50%-5030-Apr-200-50-50SAMOA0.14%-11-Jul-16000SAUDI ARABIA1.00%-7516-Mar-200-125-75SERBIA1.00%-2510-Dec-200-125-75SEYCHELLES2.00%-10030-Jun-21-100-200-50SIERRA LEONE14.25%2524-Dec-2225-2500SOUTH AFRICA4.00%2527-Jan-222525-300-25SOUTH KOREA1.25%2514-Jan-222550-75-50SOUTH SUDAN12.00%-30011-Jan-22-300000SRI LANKA (deposit)5.50%5020-Jan-225050-250-100SWEDEN0.00%2519-Dec-190025SWITZERLAND-0.75%-5015-Jan-15000TAIWAN1.125%-2519-Mar-200-250TAJIKISTAN13.25%2522-Oct-21250-150-175THAILAND0.50%-2520-May-200-75-50TRINIDAD & TOBAGO3.50%-15017-Mar-200-1500TUNISIA6.25%-5030-Sep-200-100100TURKEY14.00%-10016-Dec-21-300500-1,200UAE1.25%-7516-Mar-200-125-75UGANDA6.50%-5016-Jun-21-50-200-100UKRAINE10.00%10020-Jan-22100300-750-450UNITED KINGDOM0.25%1516-Dec-2115-650URUGUAY6.50%755-Jan-227512500UNITED STATES0.25%-10015-Mar-200-150-75UZBEKISTAN14.00%-10010-Sep-200-2000VIETNAM4.00%-5030-Sep-200-200-25WEST AFRICAN STATES2.00%-5022-Jun-200-500ZAMBIA9.00%5024-Nov-21100-350175ZIMBABWE60.00%200028-Oct-21250000     www.CentralBankNews.info

Posted on: 27 January 2022 | 5:00 pm

South Africa raises rate 2nd time, upside inflation risks

      South Africa's central bank raised its main interest rate for the second time and said a gradual rise in rates will be sufficient to keep inflation expectations well anchored and thus moderate the future path of rates given the expected trajectory in inflation and upside risks.      The Reserve Bank of South Africa (SARB) raised its repurchase rate by another 25 basis points to 4.0 percent and has now raised it 50 points following a similar-sized rate hike in November, the bank's first rate hike in 3 years.      Four members of the central bank's monetary policy committee voted for the rate hike while one member want to maintain the rate.      Although SARB's quarterly projection model shows the repo rate ending this year at 4.91 percent, then 5.84 percent in 2023 and 6.55 percent in 2024, the path is lower than forecast in November and the central bank reiterated the projection is only a broad guide to policy and changes with new data and risks.    "In this uncertain environment, policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook," SARB said, adding it would continue to look through temporary prices shocks and focus on potential second-round effects.     "Current repurchase rate levels reflect and accommodative policy stance through the forecast period, keeping financial conditions supporting of credit demand as the economy continues to recover," SARB said, adding adjusted for inflation the repo rate is projected to rise to 0.0 percent this year from minus 1.4 percent last year, then 1.0 percent in 2023 and 1.8 percent in 2024.     South Africa's economy rebounded strongly from the COVID-19 pandemic but SARB said damage to the economy from unrest in July 2021, cyber attacks and strikes had dented activity and it lowered its estimate of growth in 2021 to 4.8 percent from an earlier 5.2 percent.     Mirroring the expected slowdown in global growth this year after the strong bounce-back in 2021, SARB expects South Africa's gross domestic product to slow to growth of 1.7 percent this year, then 1.8 percent in 2023 and 2.0 percent in 2024.     "Global economic conditions are less supportive of emerging and developing economies now than they were for most of this past year," SARB said, saying higher global inflation is likely to accelerate the normalization of interest rates and balance sheet reductions by major central banks.     It cautioned that economies that failed to take advance of better global conditions or to reduce large macroeconomic balances remain vulnerable.     Like most countries, South Africa's inflation rate trended upwards in 2021 and hit a year-high of 5.9 percent in December from 5.5 percent in November, in the upper end of SARB's target range of 3.0 to 6.0 percent.     "The risks to the inflation outlook are assessed to the upside," SARB said, pointing to global producer prices and food prices, which could surprise again, while oil prices are well above forecasts.     Additional upside risks stem from higher domestic import tariffs, stronger services inflation and higher wage demands, with a particular risk from a faster normalization of global policy rates and quantitative tightening, which could lead to a reversal of capital flows from riskier assets, such as emerging market debt.      Inflation averaged 4.5 percent in 2021 and SARB raised its forecast for inflation this year to 4.9 percent from an earlier 4.3 percent, with inflation in the first quarter of this year peaking at 5.6 percent.     For 2023 inflation is seen easing to 4.5 percent and remaining the same for 2024.              The South African Reserve Bank issued the following statement by its governor, Lesetja Kganyago:"Over the past year, rising vaccination rates have sustained confidence and the global economic recovery, despite the rapid spread of the Omicron virus. Looking ahead to this year, global growth will be slower as the rebound from the pandemic fades. Growth in emerging market and developing economies will continue to lag that in advanced economies, due to a slower pace of vaccinations and other headwinds. South Africa’seconomy rebounded strongly from the pandemic in 2021, but going forward the growth rate will, like global growth, slow and remain subject to various risks.The International Monetary Fund’s (IMF) forecast for global gross domestic product (GDP) is unchanged at 5.9% in 2021. Global growth is expected to slow to 4.4% in 2022 (down from 4.9%). The SARB’s forecast for global growth in 2021 sits at 6.2% (down from 6.3%), and is unchanged for 2022 and 2023, at 4.4% and 3.3%,respectively.1 GDP growth in our trading partners in 2024 is forecast to be 2.7%. Global economic conditions are less supportive of emerging and developing economies now than they were for most of this past year.Although policy settings in advanced economies remain accommodative, higher global inflation is likely to accelerate normalisation of interest rates and balance sheet reductions by major central banks. It is less certain how far the normalisation process will go and the exact timing, and this uncertainty continues to cause financial market turmoil and capital flow volatility. Risk aversion in financial markets has increased. Economies that failed to take advantage of better global conditions or to reduce large macroeconomic imbalances remain vulnerable.Last year saw the ongoing recovery of the South African economy from the pandemic, but also the damage caused by the July unrest, cyber attacks and strikes. Those factors led to a downward revision to the growth forecast for the year as a whole, from the 5.2% forecast in November to 4.8%.2This year and next, economic growth will remain well above a low rate of potential growth.3 GDP is expected to grow by 1.7% in 2022. The deceleration in growth from 2021 to 2022 is primarily a result of the fading rebound from the pandemic, alongside a climbdown from high export prices. GDP growth is forecast to be 1.8% in 2023 and 2.0% in 2024.4With lower export prices the economy’s future demand will depend more on investment and household spending. Sustained low borrowing costs and faster economic growth have strengthened private sector investment somewhat, despite ongoing constraints from loadshedding and policy uncertainty. Household spending remains supportive, as a result of good growth in disposable income, rising asset prices, and more credit demand.Overall, and after revisions, the risks to the medium-term domestic growth outlook are assessed to be balanced.With the downward revision to GDP growth for 2021, the output gap is more negative over the forecast period compared to the November meeting. However, as the economy is forecast to grow faster than potential, the output gap closes steadily through to 2024.While important commodity export prices such as for coal, iron ore, platinum, and rhodium generally decreased in the latter half of 2021, in recent weeks some prices and export values have been more buoyant. As a result, the current account surplus of the past year is expected to decline at a slower pace than at the time of the November meeting.5 The current account deficit in 2023 and 2024 is, at this stage, forecast to be smaller than previously expected.Although fiscal risk has eased, financing conditions remain volatile and the yield curve for rand-denominated bonds remains steep. Ten-year bond yields remain at about 9.4%.For much of 2021, strong commodity export prices and generally favourable global financial and economic conditions strengthened the currency above its long-run equilibrium level. In recent months, global and domestic factors contributed to a weaker rand exchange rate and the rand now sits somewhat below its equilibrium level. The implied starting point for the rand forecast is R15.60 to the US dollar, compared with R15.10 at the time of the previous meeting.6Over the past year and into this year, global supply shortages and strong demand have caused a wide range of prices to accelerate, including raw materials, intermediate inputs and food.7 Some of these price increases have passed-through to consumer prices in major economies. Our estimate for inflation in the G3 was revised higher to 3.1% in 2021 and 2022 (up from 2.9% and 2.4%), and is revised slightly lower to 1.7% in 2023.8 For 2024, G3 inflation of 1.6% is forecast, unchanged from the previous meeting.Oil prices are revised up for this year, and fuel price inflation is higher at 13.7% (up from 4.6%).9 Local electricity price inflation for 2021 was 10.2%, while the forecast for 2022 is revised up to 14.5% (from 14.4%) and remains at 12.4% in 2023. For 2024, electricity price inflation of 10% is expected, unchanged from the previous meeting.Headline inflation in 2021 came out at 4.5%. The Bank’s forecast of headline inflation for this year is revised higher to 4.9% (from 4.3%). Headline inflation is expected to be 4.5% in 2023 and in 2024.Core inflation was 3.1% in 2021, and is forecast to rise to 3.8% in 2022 (up from 3.7%). With the economy expanding faster than potential over the forecast period, core inflation is projected to rise to 4.5%, despite a still low rate of services price inflation and unit labour costs. Core inflation forecasts for 2023 and 2024 are unchanged at 4.4% and 4.5%.The risks to the inflation outlook are assessed to the upside. Global producer price and food price inflation continued to surprise higher in recent months and could do so again. Oil prices increased strongly through 2021 and are up sharply year to date. Current oil prices sit well above forecasted levels for this year. Electricity and other administered prices continue to present short- and medium-term risks. Given the moderate medium and long-term inflation projections set out above, higher domestic import tariffs, stronger services inflation, and higher wage demands present additional upside risks to the inflation forecast.A particular risk arises from the possibility of a faster normalisation of global policy rates than is currently built into the forecast, which assumes some rate hikes to begin around June of 2022. Added to this is the risk that quantitative tightening will occur more quickly than previously expected, leading to stronger capital flow reversals from riskier assets such as emerging market debt.Average surveyed expectations of future inflation have increased to 4.8% for 2022 (from 4.4%). Market-based surveyed expectations for inflation have also increased to 4.8%.10In the near term, headline inflation has increased well above the mid-point of the inflation target band, and returns close to the mid-point in the fourth quarter of 2022. Some risks to the inflation outlook, like food and fuel, have been realised, and other risks, such as currency volatility and capital flow reversals, have become more pronounced.Against this backdrop, the MPC decided to increase the repurchase rate by 25 basis points to 4% per year, with effect from the 28th of January 2022. Four members of the Committee preferred an increase and one member preferred an unchanged stance.The implied policy rate path of the Quarterly Projection Model (QPM) indicates gradual normalisation in the first quarter of 2022, and into 2023 and 2024, given the inflation forecast. As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks.Given the expected trajectory for headline inflation and upside risks, the Committee believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates. However, economic and financial conditions are expected to remain more volatile for the foreseeable future. In this uncertain environment, policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook. The MPC will seek to look through temporary price shocks and focus on potential second round effects.Current repurchase rate levels reflect an accommodative policy stance through the forecast period, keeping financial conditions supportive of credit demand as the economy continues to recover.11 The Bank has ensured adequate liquidity in domestic markets and will continue to closely monitor funding markets for stress. In addition, regulatory relief provided to banks continues to support lending to households and firms.Better anchored expectations of future inflation should keep interest rates lower for longer, and can be realised by achieving a prudent public debt level, increasing the supply of energy, moderating administered price inflation and keeping wage growth in line with productivity gains. Such steps will enhance the effectiveness of monetary policy and its transmission to the broader economy."Notes:1 Global growth in the QPM model is a trade-weighted average of South Africa’s trading partners.2 In the third quarter of 2021, economic growth was -5.8%, compared to our previous estimate of -2.5%. For the fourth quarter, we expect a GDP outcome of 5.5%, compared to the previous 2.6%. On a not-annualised basis, the quarter-on-quarter growth rate for the third quarter was -1.5%, compared to our estimate of -0.6%. The fourth quarter is expected to be 1.4%, compared to 0.6%.3 Potential growth for 2022 and 2023 is estimated at 0.8%, rising to 1.1% in 2024. 4 The growth forecast includes expected changes in the policy rate.1 Global growth in the QPM model is a trade-weighted average of South Africa’s trading partners.2 In the third quarter of 2021, economic growth was -5.8%, compared to our previous estimate of -2.5%. For the fourth quarter, we expect a GDP outcome of 5.5%, compared to the previous 2.6%. On a not-annualised basis, the quarter-on-quarter growth rate for the third quarter was -1.5%, compared to our estimate of -0.6%. The fourth quarter is expected to be 1.4%, compared to 0.6%.3 Potential growth for 2022 and 2023 is estimated at 0.8%, rising to 1.1% in 2024. 4 The growth forecast includes expected changes in the policy rate.6 The rand has appreciated by about 1.5% to the US dollar since the November meeting.7 World food prices continue to rise. The assumption used for the forecast for USD-denominated world food prices increased from 13.4% in September to 25.4% for November and to 28% for the January meeting.8 The G3 comprises the United States, the Eurozone, and Japan. The latest CPI inflation in the respective components sits at 7%, 5% and 0.6%.9 For 2023 and 2024, petrol price inflation is expected to be -0.1% and 1.7%, respectively. Our assumptions are now for oil prices to average $75 per barrel in 2022 and $72 per barrel in 2023. An average price of $70 per barrel is expected in 2024.10 The (Q4) Bureau for Economic Research (BER) survey expectations rose above the target midpoint to 4.8% (4.4%) for 2022 and 4.7% (4.5%) for 2023. Market analysts (Reuters Econometer) in January expect inflation to be higher at 4.8% (4.5%) in 2022, 4.5% (4.3%) in 2023 and 4.4% in 2024. Market-based rates are calculated from the break-even inflation rate, which is the yield differential between conventional and inflation-linked bonds. These now sit at 4.8% for the 5-year and 5.93% on the 10-year breakeven. 15-year breakeven inflation sits at 6.4%.11 This implies a rise in the inflation-adjusted repo rate from -1.4% for 2021 to 0.0% for 2022, 1.0% for 2023, and 1.8% in 2024. The real repurchase rate calculation here is based on the 1-quarter ahead inflation forecast."    www.CentralBankNews.info

Posted on: 27 January 2022 | 3:58 pm

Costa Rica raises rate 2nd time and sees more hikes

      Costa Rica's central bank raised its main interest rate for the second month, saying the risks to inflation remain titled to the upside and it expects to continue to raise the rate gradually to reach a neutral monetary policy stance.     The Central Bank of Costa Rica (BCCR) raised its policy rate by another 50 basis points to 1.75 percent and has now raised it 1 percentage point following the rate hike in December and today.    "With these adjustments, the monetary policy stance of the Central Bank remains expansive, but is approaching a position of neutrality," the bank's board of directors said.     The monetary tightening cycle in Costa Rica now under way follows 11 rate cuts totaling 4.50 percentage points from January 2019 through the COVID-19 pandemic until June 2020 after which then rate was maintained at 0.75 percent until December last year.     Inflation in Costa Rica is relatively mild compared with many other countries and at 3.3 percent in December, it remains within the bank's target range of 3.0 percent, plus/minus 1 percentage point.     "Although the projected inflation is within the tolerance range, given the upward risks in the inflation projections, the Board of Directors considers it opportune to continue with the normalization process of the TPM and to gradually and orderly move it to a neutral position" to maintain inflation within the tolerance range in a 24-month horizon," BCCR said.     The central bank expects headline and core inflation to remain within its tolerance range in 2022 and 2023 but said it could top the range in the first half of this year and the risk to its forecast are tilted to the upside.     BCCR pointed to four reasons for these upside risks, including producer prices, which rose 13.9 percent in December. With declining slack in production there is a greater probability higher prices being passed onto consumer prices.     Secondly, although 12-month inflation expectations were only 1.1 percent in December, surveys of financial analysts and businesses showed expectations in the upper limit of the tolerance range of 3.8 percent.      Thirdly imported inflation has been growing and is persistent and if it continue to rise this could affect inflation expectations. Fourthly, wage pressures could rise as production improves.     In line with the improvement in the international economy, Costa Rica's economy has recovered better than expected, BCCR said, pointing to the trend in the monthly index of economic activity - which rose 9.8 percent in November - and strong economic growth in the second half of 2021, which has resulted in the negative output gap being close to eliminated.     Costa Rica's gross domestic product grew 10.29 percent year-on-year in the third quarter of last year, up from 9.81 percent in the second quarter.     In addition to the hike in the monetary policy rate, BCCR said it would return to a symmetrical interest rate corridor in its liquidity operations and this puts the rate on its permanent credit facility at 75 basis points above the policy rate and the rate on its permanent deposit facility at minus 75 points.     www.CentralBankNews.info

Posted on: 27 January 2022 | 9:41 am

Chile raises rate 5th time, significant risks to inflation

     Chile's central bank raised its policy interest rate for the fifth time, saying there are still significant risks of higher inflation as the most recent data on economic activity and inflation are somewhat above the latest forecast in December at the same time inflationary pressures from abroad have increased.     The Central Bank of Chile (CBC) raised its monetary policy interest rate by 1.50 percentage points to 5.50 percent and has now raised it 5 percentage points since it began raising rates in July 2021.     It is the first time in the current monetary tightening cycle CBC has raised its rate so sharply but minutes from its December meeting showed a 150 basis point rate hike had been considered before the board decided on a 125 point rate hike, as in October and December last year.     The bank's board was once again unanimous in its decision although the current governor, Mario Marcel, did not participate after being picked last week as finance minister by Chile's President-elect Gabriel Boric.     The departure of Marcel from comes only three months after he was named for a second 5-year term as governor of the central bank.     "The risks for the evolution of inflation continue to be significant and its eventual materialization becomes especially relevant in a context in which both the annual variation of the CPI and its prospects are already high," CBC said, adding the decision was consistent with a rate trajectory that would be around the upper edge of the rate corridor outlined in the December policy report.      In December the central bank raised its inflation forecast for 2021 to 6.9 percent from an earlier 5.7 percent and the 2022 forecast to 3.7 percent from 3.5 percent, and has said the policy interest rate would need to reach as much as 6 percent to curb inflation.     Chile's inflation rate rose to a 2021-high of 7.2 percent in December, the highest since 2008 and more than twice the central bank's 3.0 percent target.     Chile's economy has recovered swiftly from the COVID-19 pandemic and CBC said activity and demand was consistent with the upper range of its forecast for 2021.      In December CBC raised its estimate of 2021 economic growth to between 11.5 and 12.0 percent with growth then seen slowing to 1.5 to 2.5 percent in 2022.         The Central Bank of Chile released the following statement:"At its Monetary Policy Meeting, the Board of the Central Bank of Chile agreed to increase the monetary policy interest rate by 150 base points, up to 5.5%. The decision was adopted unanimously by the Directors present.Externally, the world economy has lost some of its dynamism, but the outlook for the year shows no major changes. The rise in Covid-19 infections has been significant in many countries and although a decrease in mobility has been observed, its effects on activity have been limited. In any case, the risks around China increase due to the greater intensity of the restrictions and their potential impact on the persistence of bottlenecks at a global level. Inflation has continued to rise in various economies, with central banks intensifying the move towards withdrawing monetary stimulus. Geopolitical risks have increased, especially in Europe. In this context, financial markets report a cross-sectional rise in long-term interest rates, the appreciation of a significant number of currencies against the dollar and falls in stock markets, particularly developed ones. In turn, the price of a barrel of oil has risen significantly, reaching around US$85 a barrel (+19% since the last Meeting, for the WTI-Brent average), while the price of copper stands at around US$4.5 a pound.The evolution of the Chilean financial market has been marked by both external and internal factors, although with a predominance of the latter, possibly associated with a decrease in internal uncertainty. Since the previous meeting, the peso appreciated about 5%, the stock market rose around 5%, long-term interest rates, although with ups and downs, are at similar levels and the country risk (CDS) fell back close to 10 basis points (bp). On the other hand, short-term interest rates rose in response to higher effective inflation and higher monetary policy rate expectations. In any case, the levels of uncertainty continue to be high in historical comparison and long-term interest rates maintain a relevant differential with respect to their external peers.In the aggregate, the activity and demand indicators are consistent with the upper part of the projection range for 2021 considered in the December Report. In November, activity increased 14.3% annually —0.3% monthly for the seasonally adjusted series—, highlighting the contribution of service activities and, to a lesser extent, commerce. In demand, the sustained dynamism of imports of all types of goods stands out. Private expectations (EES) continue to predict GDP growth rates of around 2% for 2022 and 2023. The labor market continues to show a gradual recovery, with a supply that remains contained by households and high levels of demand for company work. Bank credit, in general, maintains a limited dynamism, prevailing demand factors.The annual variation of the IPC reached 7.2% in December, exceeding market expectations and the projection of the last Report. The rise in prices was generalized among the different items in the basket. Once again, the increase in core inflation —CPI without volatiles— stands out, standing at 5.2% annually, driven by both the prices of goods —which surprised on the rise— and services. In the volatile component, the contribution of fuels and the evolution of some specific items continued to stand out. Private inflation expectations remain above 3% two years ahead.The risks for the evolution of inflation continue to be significant and its eventual materialization becomes especially relevant in a context in which both the annual variation of the CPI and its prospects are already high. In particular, the recent evolution of activity and inflation is somewhat above what was forecast in the December Report and the inflationary pressures derived from the international scenario have increased. The Board's decision is consistent with a monetary policy trajectory that, in the short term, would be around the upper edge of the rate corridor considered in the last Report. A new evaluation of this will be carried out in the next Report.The minutes corresponding to this Monetary Policy Meeting will be published at 8:30 a.m. on Thursday, February 10, 2022. The next Monetary Policy Meeting will be held on Tuesday, March 29, 2022 and the respective statement will be published as of 6 p.m. that day."    www.CentralBankNews.info

Posted on: 26 January 2022 | 5:38 pm

Fed maintains rate but to end QE and raise rate 'soon'

      The U.S. Federal Reserve left its key interest rate unchanged but said "with inflation well above 2 percent and a strong labor market, the Committee (the Fed's policy-making body) expects it will soon be appropriate to raise the target range for the federal funds rate," a message financial markets expected.      The Federal Open Market Committee (FOMC) also said it had decided to "reduce the monthly pace of its net asset purchases, bringing them an an end in early March," with a reduction in the size of its balance sheet to begin after the benchmark federal funds rate has been raised.      The Fed kept its target for the federal funds at 0.0 to 0.25 percent, unchanged since March 2020 when the rate was lowered twice in a single month by a total of 1.50 percentage points.      Today's statement continues the Fed's pivot toward monetary tightening after the policy stance was kept ultra easy for five quarters while economic activity gradually recovered from the devastating hit from the COVID-19 pandemic and inflation rose.       In November 2021 the Fed finally joined the global trend toward monetary tightening - central banks raised rates 124 times last year to combat rising inflation - and trimmed its monthly purchases of Treasury securities and mortgage-backed securities.      In December last year the Fed then sped up the pace of monetary tightening further by trimming asset purchases even more and dropped its description of inflation as "transitory" as it raised its forecast for inflation and projected three rate hikes of 25 basis points each in 2022 and another three in 2023.      With inflation continuing to rise - headline inflation hit 7 percent in December, the highest since June 1982 from 6.8 percent - Fed Chairman Jerome Powell this month kept up his hawkish message, describing inflation as a "severe threat" to a Senate hearing on Jan. 11, boosting market expectations the Fed may even raise rates four times this year.      Today marks another critical step forward in the normalization of global monetary policy and follows on the heels of the Bank of Canada's message earlier today that interest rates need to be raised.      As in December, the Fed said economic activity and employment have continued to improve though there are still risks to the outlook from new variants of the virus, such as the Omicron variant.     However, the Fed also acknowledged inflation is "well above" its 2 percent target and the labor market was strong, the two conditions it had laid out in order to tighten monetary policy.      To wrap up its asset purchases - known as Quantitative Easing (QE) and used as an addition tool to ease policy -  the Fed said it would purchase at least $20 billion of Treasury securities at least $10 billion of agency mortgage-backed securities in February to continue to smooth market functioning and support the flow of credit.     However, next month will be the final month of asset purchases that will end in early March.     The Fed said a reduction of its balance sheet - which contains some $8.8 trillion of bonds and securities - "will commence after the process of increasing the target range for the federal funds rate has begun."          The Board of Governors of the Federal Reserve System issued the following two statements by the Federal Open Market Committee:    "Indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting."Principles for Reducing the Size of the Federal Reserve's Balance Sheet     "The Federal Open Market Committee agreed that it is appropriate at this time to provide information regarding its planned approach for significantly reducing the size of the Federal Reserve's balance sheet. All participants agreed on the following elements:The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.The Committee will determine the timing and pace of reducing the size of the Federal Reserve's balance sheet so as to promote its maximum employment and price stability goals. The Committee expects that reducing the size of the Federal Reserve's balance sheet will commence after the process of increasing the target range for the federal funds rate has begun.The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments."    www.CentralBankNews.info     

Posted on: 26 January 2022 | 1:54 pm

Canada maintains rate but says rates need to rise

      Canada's central bank left its key interest rates steady but took another major step forward toward normalizing its monetary policy and raising interest rates rate by dropping its previous guidance that the economy still needs considerable monetary policy support and policy rates would be kept unchanged.     The Bank of Canada (BOC) left its benchmark target for the overnight rate at the effective lower bound of 0.25 percent, unchanged since it was cut three times in March 2020 at the height of the COVID-19 pandemic.     BOC also left its bank rate at 0.50 percent and the deposit rate at 0.25 percent.     "With overall economic slack now absorbed, the Bank has removed its exceptional forward guidance on its policy interest rate," BOC said, paving the way for interest rate hikes as soon as its next meeting in March.     At the press conference, BOC Governor Tiff Macklem added the emergency monetary measures that helped support the economy during the pandemic were no longer needed and interest rates will need to rise to control inflation.    "Second, we want to clearly signal that we expect interest rates will need to increase," Macklem said, adding inflation will come down as the pandemic fades and conditions normalize.     BOC said it was still in a phase of reinvesting in government bonds by keeping its overall holdings roughly constant, at least until it begins to raise the policy interest rate.      At that point BOC - which in April last year began reducing its weekly bond purchases and then ended them in October - said it will consider "reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds."      In recent years central banks have adopted forward guidance as a monetary tool to affect expectations and prices in financial markets, and BOC at its last policy meeting in December reiterated the economy still required considerable support and interest rates would be held at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is achieved.     Since then it has become clear Canada's economy performed better than expected in the second half of last year and inflation is now at highs not seen for 30 years.     "While COVID-19 continues to affect economic activity unevenly across sectors, the Governing Council judges that overall slack in the economy is absorbed, thus satisfying the conditions outlined in the Bank's forward guidance on its policy interest rate," BOC said, adding:     "The Governing Council therefore decided to end its extraordinary commitment to hold its policy rate at the effective lower bound."     The timing and pace of future rate increases will now be guided by the bank's commitment to achieving the 2.0 percent inflation target, within a range of 1-3 percent.     BOC's step-by-step tightening of its monetary policy stance since April last year takes place against a backdrop of estimated growth of 4.5 percent in 2021 and the economy entered 2022 with considerable momentum, such as strong employment growth and a tightening labour market, that shows economic slack is absorbed.     Although the Omicron variant of COVID-19 is weighing on economic activity, BOC said its impact is expected to be less severe and economic growth is expected to bounce back and remain robust, helped by consumer spending on services, exports and investment.     BOC forecast economic growth in 2022 of 4.0 percent in its latest monetary policy report, down from 4.3 percent previously forecast, and about 3.5 percent in 2023, down from an earlier 3.7 percent.     Inflation has remained above the upper limit of BOC's target range since April last year and rose to 4.8 percent in December, the highest since September 1991, and BOC expects inflation to remain close to 5 percent in the first half of this year due to persistent supply constraints and higher food and energy prices.     But as these supply shortages ease, inflation is expected to decline to about 3 percent by the end of this year and gradually ease toward the target.    "The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation," BOC said.     BOC raised its forecast for 2022 headline inflation to 4.2 percent from an earlier 3.4 percent while the 2023 forecast was unchanged at 2.3 percent.      The Bank of Canada released the following statement:"The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ %, with the Bank Rate at ½ % and the deposit rate at ¼ %. With overall economic slack now absorbed, the Bank has removed its exceptional forward guidance on its policy interest rate. The Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant.The global recovery from the COVID-19 pandemic is strong but uneven. The US economy is growing robustly while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector. Strong global demand for goods combined with supply bottlenecks that hinder production and transportation are pushing up inflation in most regions. As well, oil prices have rebounded to well above pre-pandemic levels following a decline at the onset of the Omicron variant of COVID-19. Financial conditions remain broadly accommodative but have tightened with growing expectations that monetary policy will normalize sooner than was anticipated, and with rising geopolitical tensions. Overall, the Bank projects global GDP growth to moderate from 6¾ % in 2021 to about 3½ % in 2022 and 2023.In Canada, GDP growth in the second half of 2021 now looks to have been even stronger than expected. The economy entered 2022 with considerable momentum, and a broad set of measures are now indicating that economic slack is absorbed. With strong employment growth, the labour market has tightened significantly. Job vacancies are elevated, hiring intentions are strong, and wage gains are picking up. Elevated housing market activity continues to put upward pressure on house prices.The Omicron variant is weighing on activity in the first quarter. While its economic impact will depend on how quickly this wave passes, it is expected to be less severe than previous waves. Economic growth is then expected to bounce back and remain robust over the projection horizon, led by consumer spending on services, and supported by strength in exports and business investment. After GDP growth of 4½ % in 2021, the Bank expects Canada’s economy to grow by 4% in 2022 and about 3½ % in 2023.CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.While COVID-19 continues to affect economic activity unevenly across sectors, the Governing Council judges that overall slack in the economy is absorbed, thus satisfying the condition outlined in the Bank’s forward guidance on its policy interest rate. The Governing Council therefore decided to end its extraordinary commitment to hold its policy rate at the effective lower bound. Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.The Bank will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds."    www.CentralBankNews.info 

Posted on: 26 January 2022 | 9:52 am

Hungary raises rate 8th time, will continue with hikes

     Hungary's central bank raised its benchmark interest rates for the 8th month in row and said it "will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy."     The National Bank of Hungary, or Magyar Nemzeti Bank (MNB) in Hungarian, raised its base rate by a further 50 basis points to 2.90 percent and has now raised it 2.30 percentage points since it began a monetary tightening cycle in June last year.     MNB also raised its other key rates by 50 basis points, putting the overnight deposit rate at 2.90 percent, the overnight and one-week collateralized lending rates at 4.90 percent.     "Inflation risks warrant a further tightening of monetary conditions," the central bank's monetary council said, adding mitigating second-round inflation risks and driving expectations have necessitated continuing the rate hike cycle and in greater increments than in December, when it was raised 30 basis points.      In addition to its base rate, which is decided monthly, MNB uses the weekly tender for its one-week deposit facility to respond quickly to short-term changes in financial market conditions and has raised this rate seven times since mid-November in response to the rise in inflation.     At the last tender on Thursday, Jan. 20, the one-week deposit rate was maintained at 4.0 percent for the third week in a row.     Although MNB said risks in financial markets had eased since December, it added the sharp increase in core inflation signaled an increase in "persistent inflationary pressures" and the base rate should catch up to the level of the one-week deposit rate in coming months.     "Accordingly, the council will continue the cycle of base rate hikes at a monthly frequency and in larger increments than in December," with MNB adding it will also raise the one-week deposit rate.     Hungary's headline inflation rate was steady at 7.4 percent in December from November - but the highest since 2007 - while the core inflation rate rose to 6.4 percent from 5.3 percent.     The central bank targets inflation of 2.0 to 4.0 percent around a 3.0 percent midpoint.     While headline inflation may have peaked in December, the central bank said it may begin to decline later than it had expected and core inflation is expected to pick up in coming months as companies reprice their goods amid strong demand to reflect higher commodity prices and wages.     Hungary's economy grew throughout last year and MNB said 2021 growth may have exceeded the 6.3-6.5 percent level it projected in December as data suggest activity in the fourth quarter was strong.     For 2022 the central bank forecast growth of 4.0-5.0 percent as domestic demand offsets the negative impact of disruptions in International production chains and rising commodity, crop and energy prices.     An increase in the minimum wage during a tight labor market will also maintain rapid wage growth and in the second half of this year exports are expected to rebound as external markets and supply chains recover.         The National Bank of Hungary issued the following statement:     "The primary objective of the Magyar Nemzeti Bank (MNB) is to achieve and maintain price stability. Without prejudice to its primary objective, the Magyar Nemzeti Bank preserves financial stability and supports the Government’s economic policy, as well as its policy on environmental sustainability.The global economic recovery has slowed in recent months. Meanwhile additional waves of the coronavirus pandemic have led to a renewed increase in risks surrounding the recovery. Inflation rose to levels not seen for several decades in a number of countries, which was further aggravated by disruptions in supply across a growing range of markets, in addition to persistent rises in commodity, crop and energy prices.Global investor sentiment has been mixed since the Council’s previous policy decision. Risk appetite has been driven by rising inflation, movements in commodity and energy prices, and the spread of the Omicron variant of coronavirus. Global gas and electricity prices fell significantly from their peak reached at the end of the year. After a temporary reversal in December, the global market price of crude oil rose sharply in January and it remains significantly above its level a year earlier. The US dollar showed a mixed performance against developed market currencies and mostly depreciated against emerging market currencies.The monetary policy stances of the world’s leading central banks have become tighter. At its December meeting, the Federal Reserve decided to phase out its asset purchase programme at a faster pace, which therefore may be entirely discontinued already in March 2022. Based on market expectations, the base rate will be raised four times this year. In December, the European Central Bank decided to slow the pace of its asset purchases. In the CEE region, the Czech, Polish and Romanian central banks raised their policy rates, and further interest rate hikes are expected by the market.The Hungarian economy grew strongly throughout 2021. High frequency data suggest strong economic activity in the fourth quarter of 2021. In November, industrial output picked up, again exceeding its pre-pandemic levels; however, the global shortage of semiconductors continues to pose a risk. Based on business surveys, industrial production remained strong in December. In addition, the sectors linked to domestic demand (construction, retail sales) also grew at a fast rate. Annual GDP growth in 2021 may have exceeded the 6.3–6.5 percent level projected in the December Inflation Report. The unemployment rate remains low in international comparison.The Hungarian economy has a strong ability to recover. GDP is expected to rise by 4.0–5.0 percent in 2022, which is at the forefront in the EU. The structure of economic growth shows a dual nature, which is likely to persist in the coming period. The further strengthening in domestic demand is offsetting the negative growth effects resulting from disruptions in international production chains and rising commodity, crop and energy prices. Household consumption growth continues, supported by the increase in the minimum wage and the government measures aimed at boosting household income. In addition to the increase in the minimum wage, the tight labour market also helps to maintain rapid wage growth. Higher commodity and energy prices, coupled with weaker external demand, are likely to hold back corporate investment activity in 2022. However, the investment rate is expected to stabilise at a high level in EU comparison. As a result of the temporary slowdown in exports, reflecting the effects of external factors, and stronger domestic demand, net exports are likely to have a nearly neutral impact on GDP growth in 2022. In the second half of 2022, Hungarian exports are expected to rebound quickly as external markets and supply chains recover, which will also be supported by new export capacities.In December 2021, annual inflation was 7.4 percent and core inflation stood at 6.4 percent. Headline inflation remained unchanged and core inflation rose by 1.1 percentage point compared with the previous month. A highly unusual repricing pattern was observable in December, which appeared in a wide range of goods and services. Inflationary pressures have strengthened, and inflation expectations rose in previous months. The rate of increase in food prices accelerated significantly, while the inflation of goods and services rose to a lesser degree. The contribution of fuel prices to annual inflation continued to be strong. Overall, consumer prices rose by 5.1 percent and average core inflation stood at 3.9 percent in 2021.Inflation and core inflation are expected to follow divergent paths in the coming months. Inflation may have approached its peak in December; however, it may begin to decline later than previously expected. Core inflation is expected to pick up further in the coming months. Companies are repricing their goods and services at short notice amid strong domestic demand in order to reflect rises in commodity prices and wage costs. The degree to which repricings take place during the beginning of the year will determine the yearly dynamics of both inflation and core inflation.According to available data, the government deficit and the government debt-to-GDP ratio shifted to a declining path in 2021. The Government lowered its 2022 budget deficit target from 5.9 percent to 4.9 percent by rolling over certain government investments, which, along with stronger-than-expected GDP growth, enables a faster decline in the government debt ratio. In November, the trade balance turned into a surplus, reducing the current account deficit, which was around 3 percent in 2021. The balance is likely to deteriorate due to the temporary effects of the pandemic, but to increase from the second half of 2022 as external markets and supply chains recover, which will be supported by new export capacities built up in recent years. At the same time, the economy’s net lending is likely to increase following a temporary decline in 2021 and 2022, and is expected to be around 1 percent of GDP at the end of the forecast horizon.Inflation risks warrant a further tightening of monetary conditions. By setting the one-week deposit rate, the MNB responded quickly and firmly to risks in financial and commodity markets of recent months. These risks have abated since December, while the sharp increase in core inflation signals an increase in persistent inflationary pressures. In the Monetary Council’s assessment, the catching up of the base rate to the level of the one-week deposit rate is warranted. Accordingly, the Council will continue the cycle of base rate hikes at a monthly frequency and in larger increments than in December. Meanwhile, the Bank will further tighten monetary conditions by raising also the one-week deposit rate. The MNB remains ready to respond quickly and flexibly by changing the one-week deposit rate, if warranted by an increase in short-term risks in financial and commodity markets.In order to anchor inflation expectations and mitigate second-round inflation risks, the Monetary Council started the catching up of the base rate to the one-week deposit rate at its meeting today. According to the January decision, the central bank base rate was raised by 50 basis points to 2.90 percent. The overnight deposit rate was increased by 50 basis points to 2.90 percent, and the overnight and the one-week collateralised lending rates were increased by 50 basis points to 4.90 percent. The MNB will continue to set the one-week deposit rate at weekly tenders and will stand ready to raise it further if necessary.In the Monetary Council’s assessment, the MNB, through an active market presence, cushioned the spillover of tensions in international swap markets to the domestic market at end of 2021 and facilitated the efficient sterilisation of financial system liquidity, thereby contributing to the tightening of monetary conditions. It remains a key priority for the MNB that short-term rates in every sub-market and at all times should develop consistently with the level of short-term rates deemed optimal by the Monetary Council. Rising yields as a result of the interest rate hikes and the expected gradual fall in inflation are likely to lead to a continuous increase in real interest rates this year.The Monetary Council attaches great importance to ensuring that all elements of the Bank’s monetary policy toolkit support the return to price stability as soon as possible. The Bank completed the withdrawal of its crisis management programmes in December 2021. Consistent with this, the MNB has not purchased government securities since December. The Monetary Council still finds it crucial to maintain stability in the government securities market. Accordingly, the Council is ready to intervene with occasional and targeted government securities purchases if necessary, which does not imply a change in the monetary policy stance.In the Council’s assessment, the risks to inflation continue to be on the upside. Based on incoming data, the risk of the alternative scenario related to higher external inflation environment has increased. Persistently high commodity, crop, food and energy prices and elevated international freight costs continue to point to sustained external inflationary pressures. At the same time, the tight labour market, coupled with accelerating wage growth and a higher inflation environment, may lead to a further rise in inflation expectations and an increase in second-round inflation risks.Mitigating second-round inflation risks and driving expectations appropriately have necessitated the continuation of the base rate tightening cycle on a monthly basis and in greater increments than in December. As a result, the base rate will catch up gradually to the one-week deposit rate evolving in the coming months. However, by setting the one-week deposit rate, the MNB continues to stand ready to respond quickly and flexibly to short-term risks in financial and commodity markets if necessary. The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy.The abridged minutes of today’s Council meeting will be published at 2 p.m. on 9 February 2022."    www.CentralBankNews.info

Posted on: 25 January 2022 | 4:00 pm

Singapore tightens policy 2nd time, inflation seen higher

     Singapore's central bank tightened its monetary policy stance for the second time in four months in an unscheduled decision, saying it considered it "appropriate to make another pre-emptive adjustment" at this juncture as the inflation outlook had shifted further upward amid the confluence of recovering global demand and persistent supply-side frictions.     The Monetary Authority of Singapore (MAS), which targets the value of the Singapore dollar against a basket of currencies to control inflation, said it would "therefore raise slightly the rate of appreciation of the S$NEER policy band," while leaving the width of the band and level at which it is centered unchanged.     "This move builds on the pre-emotive shift to an appreciating stance in October 2021 and is appropriate for ensuring medium-term price stability," said MAS, adding SN$NEER (the Nominal Effect Exchange Rate) had broadly appreciated within the upper half of the policy band in the last three months.      MAS normally decides monetary policy twice a year,  in April and October, but on occasions it will take an off-cycle decision.      The tightening in October also took most analysts by surprise but since then inflation has continued to accelerate and an expected increase in Goods and Services Taxes (GST) this year, which would pass-through to core inflation, raised expectations MAS would tighten policy in April.      Singapore's all-items inflation rate rose to a 2021-high of 4.0 percent in December from 0.2 percent in January while MAS core inflation rose to 2.1 percent from 1.6 percent, driven by an increase in services inflation from higher airfares.      For the full year, headline inflation rose to 2.3 percent from minus 0.2 percent while core inflation rose to 0.9 percent from minus 0.2 percent in 2020, MAS and the Ministry of Trade and Industry said Jan. 24.     "There remain upside risks to inflation arising from the impact of pandemic-related and geopolitical shocks on global supply chains," said MAS, adding the domestic labour market has tightened and wage growth is above its historical average, which has boosted prices more than forecast.     MAS said it expects core inflation to pick up further in the near term and could reach 3 percent by the middle of this year and raised its forecast for this year to 2.0-3.0 percent from 1.0-2.0 percent expected in October last year.     It also raised the forecast for all-time inflation, or headline inflation, to 2.5-3.5 percent from an earlier forecast of 1.5-2.5 percent.     In 2021 the economy of the city-state expanded at its fastest pace since 2010 as gross domestic product grew 7.2 percent after contracting 5.4 percent in 2020.    For this year MAS said Singapore's economy remains on track to grow 3.0-5.0 percent, with the output gap turning slightly positive.     "Global economic prospects remain largely intact," MAS said, adding the Omicron variant may temporarily dampen some clusters of activity but was unlikely to derail the broader economic recovery.            The Monetary Authority of Singapore issued the following statement:1.   Since the last Monetary Policy Statement in October 2021, there has been a further upward shift in Singapore’s inflation outlook, reflecting both global and domestic factors. MAS has therefore assessed that it is appropriate to make another pre-emptive adjustment in its monetary policy stance at this juncture.2.   In its October 2021 Monetary Policy Statement, MAS shifted to a gradual appreciation path for the S$NEER policy band, from zero percent previously. There was no change to the width of the policy band or the level at which it was centred. While monetary policy settings globally remained highly accommodative, MAS had assessed that a shift in its policy stance was necessary to ensure price stability in light of accumulating external and domestic cost pressures, even as the strength of the economic recovery remained uncertain.Chart 1S$ Nominal Effective Exchange Rate (S$NEER)3.   Over the last three months, the S$NEER has broadly appreciated within the upper half of the policy band. The three-month S$ Singapore Interbank Offered Rate (SIBOR) was unchanged at 0.4%, while the three-month compounded Singapore Overnight Rate Average (SORA) edged up slightly to 0.2% in January this year.OUTLOOK Growth Backdrop and Outlook4.   Global economic prospects remain largely intact. The Omicron variant that emerged in late 2021 may temporarily dampen specific clusters of activity, but is unlikely to derail the broader ongoing economic recovery. Accordingly, global GDP is still forecast to expand at an above-trend pace for a second consecutive year in 2022, even as uncertainties remain.5.   Based on the Advance Estimates released by the Ministry of Trade and Industry on 3 January 2022, the Singapore economy grew by 2.6% on a quarter-on-quarter, seasonally-adjusted basis in Q4 2021, stronger than the 1.2% expansion in Q3. The economic recovery, which has thus far been led by the trade-related and modern services sectors, should extend to the domestic-oriented and travel-related sectors over the course of this year as domestic safe management measures and border restrictions are progressively eased. Barring fresh disruptions, the 2022 GDP growth forecast remains unchanged at 3–5%. Inflation Trends and Outlook6.  The outlook for Singapore’s inflation has shifted higher since the last Monetary Policy Statement in October 2021, amid the confluence of recovering global demand and persistent supply-side frictions. There remain upside risks to inflation arising from the impact of pandemic-related and geopolitical shocks on global supply chains.7.   MAS Core Inflation stepped up over October to December last year. Energy prices have risen further while imported food inflation remains elevated due to regional supply disruptions. The CPI for airfares has also increased sharply, mostly reflecting the cost of COVID-19 testing requirements for international travel. The domestic labour market has tightened, with the resident unemployment rate now close to its pre-pandemic level and wage growth above its historical average. Against this backdrop, price increases across a broad range of goods and services have been stronger than forecast.8.  The factors that drove global and regional inflation higher in late 2021 are likely to remain in play for a period. Domestic inflation will be exposed to these external pressures as well as the tight labour market.9.  MAS Core Inflation is hence forecast to pick up further in the near term, and could reach 3% by the middle of the year before moderating. The ongoing external supply constraints should ease in the second half of 2022, leading to some moderation in imported inflation, although there is risk of further supply shocks. The domestic labour market should continue to tighten and lead to strengthened wage pressures. Cost increases are likely to filter through to higher services prices in the face of a pickup in private consumption. Car and accommodation cost increases are also likely to remain firm in the near term and drive an increase in CPI-All Items inflation.10.  Taking these developments into account, MAS is revising its inflation forecasts for 2022. MAS Core Inflation is now projected to be 2.0–3.0% this year, from the 1.0–2.0% expected in October. Meanwhile, CPI-All Items inflation is expected to be 2.5–3.5%, from the earlier forecast range of 1.5–2.5%.MONETARY POLICY11.  The Singapore economy remains on track to grow at a creditable pace of 3–5% this year. The output gap is expected to turn slightly positive.12.  MAS Core Inflation is forecast to be higher in the near term in view of rapidly accumulating external and domestic cost pressures. While core inflation is expected to moderate in the second half of the year from the elevated levels in the first half as supply constraints ease, the risks remain skewed to the upside.13.  MAS will therefore raise slightly the rate of appreciation of the S$NEER policy band. The width of the policy band and the level at which it is centred will be unchanged. This move builds on the pre-emptive shift to an appreciating stance in October 2021 and is appropriate for ensuring medium-term price stability."    www.CentralBankNews.info

Posted on: 25 January 2022 | 8:13 am

Kazakhstan raises rate 4th time to lower inflation

     Kazakhstan's central bank raised its benchmark interest rate for the fourth time, saying it was continuing to tighten its monetary policy stance to reduce inflation expectations and bring inflation back into its target range of 4.0 to 6.0 percent by the end of 2022.     The National Bank of the Republic of Kazakhstan (NBK) raised its base rate by a further 50 basis points to 10.25 percent and has now raised it 1.25 percentage points following rate hikes in July, September, October and today.     After raising its rate sharply in March 2020 to curb inflation, NBK had to change course the following month due to the COVID-19 pandemic and cut its rate in April and July by a total of 3 percentage points.     At its previous meeting in early December 2021, the bank's monetary policy committee maintained the rate due to a slowdown in inflation and uncertainty about the impact of the Omicron variant of COVID-19.      However, NBK also said it would continue to tighten its policy stance "more decisively" if the decline in inflation and inflation expectations did not stabilize.     "The internal situation, despite the presences of disinflationary precesses in recent months, is characterized by the presence of significant pro-inflationary risks both on the demand and supply side," NBK said, adding inflation continues to be elevated in most countries around the world.     Kazakhstan's inflation rate eased for the second month to 8.4 percent in December from a 2021-high of 8.9 percent in September and October, helped by the government's anti-inflationary measures, which helped food inflation decelerate.     However, the cost of other non-food items rose, with gasoline prices up 19.6 percent and diesel fuel up 46.5 percent.     "The trajectory of core inflation points to the instability of the slowdown in inflationary processes," NBK said, adding most respondents in its survey still expect the current rise in prices to continue or accelerate in the next 12 months.     To help lower inflation, the central bank said it had already withdrawn from programs that support the economy and confirmed it still expects inflation to decelerate to around 6.0 to 6.5 percent by end-2022.     However, the central bank there may be an increase in inflationary pressures in the first quarter of this year due to the comparison with a relatively low base in the first half of 2021 and "in connection with the tragic events in Kazakhstan in early January this year."      Protests and rioting broke out in the capital of Almaty in early January over fuel prices that only ended after the president declared a nationwide state of emergency and ordered security forces to shoot to kill without warning. The official death toll hit 225.     www.CentralBankNews.info     

Posted on: 24 January 2022 | 12:19 pm

This week in monetary policy: Kazakhstan, Pakistan, Hungary, Nigeria, Kenya, Canada, Mozambique, USA, Chile, South Africa, Malawi, Angola & Colombia

     This week - January 24 through January 29 - central banks from 13 countries or jurisdictions are scheduled to decide on monetary policy: Kazakhstan, Pakistan, Hungary, Nigeria, Kenya, Canada, Mozambique, United States, Chile, South Africa, Malawi, Angola and Colombia.     Following table includes the name of the country, the date of the next policy decision, the current policy rate, the local time a policy decision is announced, 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 be accessed by clicking on This Week.WEEK 4JAN 24 - JAN 29, 2022KAZAKHSTAN24-Jan9.75%15:00009.00%         FMPAKISTAN24-Jan9.75%10007.00%         EMHUNGARY 25-Jan2.40%3000.60%         EMNIGERIA25-Jan11.50%0011.50%         FMKENYA26-Jan7.00%007.00%         FMCANADA26-Jan0.25%10:00000.25%         DMMOZAMBIQUE26-Jan13.25%16:000013.25%UNITED STATES26-Jan0.25%14:00000.25%         DMCHILE26-Jan4.00%18:0012500.50%         EMSOUTH AFRICA27-Jan3.75%2503.50%         EMMALAWI28-Jan12.00%0012.00%ANGOLA28-Jan20.00%0015.50%COLOMBIA28-Jan3.00%5001.75%         EM      www.CentralBankNews.info

Posted on: 22 January 2022 | 8:00 am