IMF Speak on Policy ‘Normalisation’ as European ‘Populism’ Continues to Advance…


The International Monetary Fund recently released their Global Financial Stability Report for 2017, which contains a section titled, ‘Monetary Policy Normalization: A Two-Sided Risk‘. In it the IMF speak of the current global economy as being in the process of ‘recovery‘, one that has given rise to a change in behaviour of central banks from ‘ultra loose‘ monetary policy to the gradual process of ‘normalising‘ both interest rates and levels of stimulus. 

The Federal Reserve entered a sustained period of ‘normalisation‘ after Donald Trump was confirmed as the next President of the U.S., and began a course of rate hikes with inflation running at the central bank mandate of 2% (and continued in this vain even with inflation declining). They are now moving on to reducing the size of their $4.5 trillion dollar balance sheet, a programme which begins in October.

The Bank of England have taken longer to adopt a change in policy, but with inflation now reading 3% in the UK (with Brexit being used as the scapegoat) they have all but confirmed that rates will rise this year in either November or December.

That leaves the European Central Bank as one of the next in line to begin ‘normalising’ rates. The IMF state in relation to the ECB that, ‘subdued inflation points to the need for monetary policy to remain accommodative for an extended period‘. The ECB have long since communicated how rising interest rates will only materialise once asset purchases are gradually wound down. But the ‘inflation surprise‘ that the IMF posit presents an opening for rates to increase before the market generally expect. According to an article on CNBC, economists are ‘pricing in‘ a 10 basis point hike not until early 2019, and it apparently won’t be until 2020 that we see a 0.25% rise. This is the same market that thought the Bank of England wouldn’t move on rates for at least the next twelve to eighteen months. Markets like to think of themselves as a ‘forward looking indicator‘. It was they who originally thought that there was no chance the Fed would raise rates back in March, that the rise in June would be the last for 2017. More often than not they are wrong – especially in terms of central banks ‘normalising‘ policy – because they fail to see the broader picture.

As I have said before, the ‘normalisation‘ of monetary policy is a centralised directive. The ECB’s gradual scaling back of asset purchases began in 2016, and further cutbacks will be announced this week to start in 2018. Inflation currently stands at 1.5% in the Euro Area, but with the ever present risk of geopolitical dangers it is conceivable that they will breach the coveted 2% level before long. Then the calls will grow for rates to increase as the sentiment gradually starts to turn. I believe we will see a rise out of the ECB in 2018, much sooner than markets are presently anticipating.

Reuters: Italian regions start pursuing greater autonomy in shadow of Catalonia crisis

  • Political leaders in northern Italy claimed an overwhelming mandate on Monday to seek greater autonomy from Rome after referendums that did not go as far as the independence vote in Catalonia declared illegal by Spain.
  • Voters in Lombardy and Veneto, both run by the once openly secessionist Northern League, backed the party’s autonomy bid by more than 95 percent, although in Lombardy less than half of the electorate turned out.
  • Unlike the Catalonian referendum, which sparked a political crisis in Spain, the Italian votes were legal, but not binding on Rome. Foreign Affairs Minister Angelino Alfano said the government was ready to negotiate as long as the unity of the nation was not called into question.

BBC: Czech election: Billionaire Babis wins by large margin

  • Populist billionaire candidate Andrej Babis and his party have won the Czech Republic’s general election.
  • Mr Babis, 63, is the country’s second-richest man and campaigned on an anti-establishment and Eurosceptic platform.
  • With all votes counted, his centrist movement ANO (Yes) collected a share of almost 30% – nearly three times that of its closest rival.
  • He says he would not bring the Czech Republic in to the eurozone but he wants the country to stay in the EU, telling Reuters he would propose changes to the European Council on issues like food quality and a “solution to migration”.

BBC: Borrow more to boost building, says Sajid Javid

  • The government should borrow money to fund the building of hundreds of thousands of new homes, a cabinet minister says.
  • Communities Secretary Sajid Javid said taking advantage of record-low interest rates “can be the right thing if done sensibly”.
  • Asked about the change in tone from the Tories’ previous approach to borrowing, Mr Javid said a distinction should be drawn between “vitally important” deficit reduction and “investing for the future” in housing and infrastructure.
  • “So for example… you borrow more to invest in the infrastructure that leads to more housing – take advantage of some of the record-low interest rates that we have. I think we should absolutely be considering that,” he said.

Politico: Mnuchin pushing Trump to pick Jerome Powell for Fed

  • Treasury Secretary Steven Mnuchin is strongly pushing for the White House to name Jerome Powell as the next chair of the Federal Reserve, the most powerful economic job in the U.S. government, according to three people close to the selection process.
  • Mnuchin has privately recommended Powell to President Donald Trump, according to one adviser close to the administration.
  • The people familiar with the process indicated that Mnuchin, who knows Powell well, feels comfortable with him and feels that he is a safe pick over whom Mnuchin can exert some measure of influence.

Bloomberg: Trump Meets With Yellen as Conservatives Campaign Against Her

  • President Donald Trump concluded a White House meeting Thursday afternoon with Federal Reserve Chair Janet Yellen as House conservatives mounted a campaign to persuade him not to reappoint her.
  • Representative Warren Davidson, an Ohio Republican and member of the conservative House Freedom Caucus, is circulating a letter for colleagues on the House Financial Services Committee to sign against Yellen’s re-appointment, he said.
  • House Republicans have been among of the biggest critics of the Federal Reserve since the financial crisis, passing several pieces of legislation aimed at constraining the central bank, including requiring it to follow a policy rule and subjecting it to government oversight if there were deviations. Yellen reached out to lawmakers at the start of her term in 2014 but her relationship with conservatives has remained tense.

BIS: The state of global financial regulation

  • Speech by Mr William Coen, Secretary General of the Basel Committee, at the 2017 IIF Annual Membership Meeting, Washington DC, 13 October 2017.
  • I am acutely aware that we have recently marked a decade since the Great Financial Crisis began, and yet we are still working to finalise some of the reforms that respond to that crisis.
  • Basel Committee member jurisdictions have agreed on the importance of implementing the Basel global standards in full, in all jurisdictions.
  • We are now close to finalising these reforms, which will provide clarity and certainty to supervisors and market participants alike.

CNBC: ‘We are about to see massive disruptions’: IMF’s Lagarde says it’s time to get serious about digital currency

  • Global financial institutions are taking risks by not watching and understanding emerging financial tech products that are already starting to shake up the financial services and global payments system, according to IMF Managing Director Christine Lagarde.
  • “I think that we are about to see massive disruptions,” Lagarde told CNBC in a Facebook Live interview on the sidelines of the IMF Annual Meetings in Washington D.C.
  • Lagarde didn’t rule out that the IMF could at some point develop its own cryptocurrency. She pointed to the IMF’s Special Drawing Right (SDR), a currency the IMF created to serve as an international reserve asset, that could incorporate technology similar to cryptocurrencies.

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