Closed ECB, BoE, Turkey rate decisions – as it happened

MAS_centralbanksBlog

A live blog from FT.com


Hello and welcome to our live coverage of European Central Bank, Bank of England and Turkey’s central bank rate decisions which are due in the next couple of hours.
It’s not often that the Turkish central bank upstages the ECB and BoE but it has a good chance of doing so today.

The BoE is all but sure to leave interest rates on hold: since its quarter point hike in August, the economic data has been consistent with its forecasts, so there is little reason to change its view that further rate rises should be slow and gradual – with scope to delay them till after Brexit.

The European Central Bank is widely expected to confirm that it will wind down its asset purchase programme by the end of the year. It may change its assessment of the balance of risks to growth – given worries over tariffs, Italy’s fiscal stability and emerging market contagion. But a change in its guidance – of rates remaining on hold through the summer of 2019 – is seen as unlikely.

Turkey’s central bank, however, faces a crucial test of credibility. It has promised to act to prop up the lira – but with president Recep Tayyip Erdogan still calling for a rate cut, the fear is that it will do much less than is needed to convince the markets.


Turkey is certainly the big draw.
President Recep Tayyip Erdogan has cranked up the pressure on the central bank yet again, declaring with less than two hours to go before the big decision that “we should cut this high interest rate”. This has… not been helpful to the lira.


The lira has certainly suffered this summer


In fact, Turkey’s real interest rate is still negative, as Capital Economics has pointed out in a note today.
In previous EM currency crises, real interest rates have increased on average by 10.5 to 11 percentage points in the following year.
The CBRT raised its average cost of funding by 600 basis points in June – but real interest rates are still negative.
Argentina, which is also battling to shore up its currency, now has its key policy rate at an eye-watering 60 per cent – and real interest rates are also high by historical standards.


Going back to president Erdogan’s latest intervention… he has previously said interest rates are the “mother and father of all evil”.
There are two ways to read this: One is that he knows the central bank is about to jack up rates and he wants to make his objection known to his base support in advance. The other is that he’s warning the supposedly independent central bank against taking action to raise rates. So, no-one has a clue.
Markets are pricing in roughly 400bp (4 percentage points) of hikes from the central bank today. As Tim Ash at BlueBay Asset Management points out, market expectations range from zero to 700bp. That’s not a normal range. So as I say, no-one has a clue. Not a scooby.
Tim said: “I sense not many people would be surprised if they did nothing, which obviously would be a deja vu disaster for Turkey again. Surely the CBRT cannot be so stupid, again. It would be like Turkish ground hog day… Actually would be interested to know where the lira goes if they fail to hike – I would think 7+ again, and all hopes of stabilisation in the Turkey story are off.
If they hike 200-300+, likely lira rallies, and we can see light at the end of the tunnel given the obvious re-balancing. If they over-deliver, I could even see them cutting rates this side of local elections – in a positive outcome.
That said, the words “CBRT” and “over-delivery” rarely come in the same sentence, or not in the past 6-7 years.
Cannot remember a central bank in my 30 years covering EM which played a decent hand so utterly badly over the past 12 months.”
No pressure.

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ING has a nice read on what it’s (tentatively?) expecting here. It’s looking for 325bp of hikes to 21%. Hold on to your hats.


Just to put that lira fall into context. The only worse performer this year was…. the Argentine peso. Second from bottom in big EM currencies, well done.


Looking quickly at the Bank of England , which will struggle to compete for the limelight… MUFG’s Lee Hardman says: “We expect the BoE to maintain a more hawkish bias. Yet, the BoE could be reluctant to signal a more hawkish policy stance at the current juncture when Brexit negotiations are reaching a crescendo.” Check mate?


Just a reminder that president Erdogan’s last move before this meeting was to fire the entire management team of the country’s sovereign wealth fund, making himself chairman and his son-in-law (also finance and economy minister Berat Albayrak) deputy. Not the best optics, when it comes to institutional independence…


On that Brexit ‘crescendo’…. Moody’s warned earlier that a no-deal divorce is looking increasingly likely.
“The immediate impact would likely be seen first in a sharp fall in the value of the British pound, leading to temporarily higher inflation and a squeeze on real wages over the two or three years following Brexit. This in turn would weigh on consumer spending and depress growth, with a risk of the UK entering recession.” Here is the FastFT take on it.


The currency market is pretty quiet in the run-up to the decisions this morning.
The euro is trading in the upper end of the $1.1525-$1.1650 trading range. Marc Chandler, of Brown Brothers Harriman, points out that the euro has generally fallen on ECB meeting days this year and the last two meetings in 2017 – perhaps a sign of Mario Draghi’s ability to impart a dovish spin.
Sterling is range-bound – in the first session since August 2 when it has not traded below $1.30. It is also posting gains for the fourth consecutive session.


A quick look at the Turkish central bank’s website offers an immediate reminder of what the market has been led to expect. The homepage reads: “Monetary policy will be adjusted at the September meeting in view of the latest developments.”


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As expected, the BOE leaves rates on hold, with the MPC unanimous.


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Turkey hikes.
“The Monetary Policy Committee (the Committee) has decided to increase the policy rate (one week repo auction rate) from 17.75 percent to 24 percent.”


The Turkish statement is here.


Highlights from the Turkish central bank’s statement:
“Recent developments regarding the inflation outlook point to significant risks to price stability… Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement.”


Here’s how that Turkish rate rise looks in context


Tim Ash at BlueBay: “Huge move…well done to the CBRT! That could be game changing for Turkey, and EM. Next stop the CBR in Russia.”


The lira has jolted higher on the news, leaving it up 5.5 per cent against the US dollar at TL6.02.


Here is the essence of the BoE’s statement.
Recent UK data leaves the BOE’s August forecasts broadly on track. Downside risks to global growth have increased slightly but global growth is still above trend. Everything still depends on Brexit and uncertainty is growing. But for now, the existing guidance holds good – future rate rises are likely to be gradual and limited.


Our colleague Roger Blitz points out that the Turkish move has sent ripples across EMFX: “The lira’s 5 per cent bounce helped other emerging market currencies to rally. South Africa’s rand moved around 1 per cent higher, while the Russian rouble gained around half a per cent.”


That noise you can hear is a massive sigh of relief that Turkey has taken the plunge.
Aberdeen Standard Investments Head of Emerging Market Debt Brett Diment says:

“It is pleasing to see common sense prevail… hiking today does get Turkey on the slow road to recovering some monetary policy credibility, and that is critical. If they hadn’t hiked today then the real risk was that the lira would sell-off sharply again and the country would swiftly head towards a balance of payments and even banking crisis.”


Here’s the link to the BOE’s statement


Our Laura Pitel in Ankara writes:
The bank has faced mounting doubts about its independence in recent months, stunning investors by keeping rates on hold even as inflation has soared into the double digits and the lira has lost 40 per cent of its value against the dollar.
Markets were pessimistic that the bank would deliver on an usual promise, issued last week, that its monetary stance would be adjusted after new figures showed inflation hit 18 per cent in August. The median estimate in a survey of economists by Bloomberg was for an increase of 325 basis points to the one-week repo rate, to 21 percent.
The bank beat those expectations on Thursday with much a larger hike.
The Turkish president, who has long been a self styled “enemy” of high interest rates, repeated his unorthodox view that high interest causes rather than curbs inflation. “Interest is the cause, inflation is the result,” he said in a speech in Ankara. “If you are saying the opposite, my friend, you don’t understand the issue.”


The lira rallied immediately following the Turkish Central Bank’s announcement


The BOE has released some data alongside its decision – including a relatively new business survey that shows 40 per cent of companies think Brexit will hit exports.


Adam Posen at the Peterson Institute is on the wires saying he’s glad Turkey’s central bank had “the guts” for its 625bp rate rise.
Worth pointing out that Turkish stocks are also up 1.1%.
What’s more, the Bist 100 banks index is up a hefty 4.2%.
Massive sigh of relief, this.


OK. Two down, one to go. Are you not entertained?
The ECB is up next with a 12:45 decision and a 13:30 presser. (London times)


UBS is here with suitable levels of hype:
“The ECB is now essentially on autopilot. In the absence of big surprises, the ECB can maintain a steady hand and proceed in line with its monetary policy guidance from June and July, namely: phase out QE by the end of 2018, and then decide – in a data-dependent fashion – on the timing and size of its first deposit rate hike during the summer or autumn of 2019.”


Here’s the take from our Claire Jones in Frankfurt, as she asks: How bad do things have to get to convince the ECB to keep buying bonds?
The press conference could generate interesting questions on the EM shake-out (and any spillovers to the eurozone) and also on Italian politics. (If you were a betting person, you’d wager that Mario Draghi will dodge that one.)


The real question is how the ECB can justify staying on autopilot when eurozone growth is slowing and worries are growing about Italy’s finances and the impact of tariffs. Economists at RBC Capital have an answer.
They think that even if the ECB changes its assessment of the balance of risks, there will be no change in its guidance.

Why? In a word because of wages… with euro area unemployment continuing to fall (to 8.2% in July) wage growth is now beginning to pick-up, in particular negotiated wage growth which is one of the ECB’s preferred indicators… Expect President Draghi to focus in his Q&A on those wage developments as the main reason why the GovCo remains confident that euro area inflation is on a sustainable adjustment towards the target thanks to its policy measures.


Key from the ECB will be the growth and inflation forecasts from the central bank’s staff. Right now, they expect real GDP growth of 2.1% in 2018, moderating to 1.7% in 2020. HICP inflation is expected to be 1.7% in each of the forecast years, albeit with some wobbles from one quarter to the next.


There’s another tweak from the Turkish central bank that investors will welcome – it is restoring the one-week repo as the main policy tool, simplifying a system of multiple rates adopted after the currency crisis blew up last month.
The FT’s Laura Pitel writes:
“In August, the central bank shut off borrowing at the one-week repo rate and instead forced banks to turn to a higher overnight lending rate, effectively imposing a small backdoor rate hike.
The tactic was criticised by international investors, who described it as a sticking plaster rather than a lasting solution to the lira’s woes. With its announcement on Thursday, the bank restored the one-week repo as the main rate.”


The lira rally, meanwhile, is losing a little steam. Our Roger Blitz notes:
“The lira has come off its big 5 per cent bounce, pulling back to around TL6.15, which represents a jump of 2.7 per cent since the start of the day. The last time the currency traded at that level was on August 28. That leaves it in the middle of the volatile range it traded when the lira crisis intensified last month.”


The ECB’s setting itself up to unwind quantitative easing in December of this year. The slow-but-sure offloading of assets from its enormous balance sheet has been carefully telegraphed for months to avoid a repeat of the ‘taper tantrum’ of 2013. No one expects Draghi to deviate from his usual cut-and-paste press conference text. With more than €4.5 trillion on the books, this is all very carefully choreographed.


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And third out of the blocks is the European Central Bank, which has played it straight. No change to rates, and tapering on track:
“After September 2018, the Governing Council will reduce the monthly pace of the net asset purchases to €15 billion until the end of December 2018 and anticipates that, subject to incoming data confirming the medium-term inflation outlook, net purchases will then end.”


The ECB’s statement is here.


The ECB’s guidance on interest rates is unchanged too – expected to remain at present levels “at least through the summer of 2019″.


A round of applause for the ECB from ING here:
“When does a central banker know that he (or she) has done an immaculate job? When QE is brought to an end and financial markets could hardly care less. According to this definition, the ECB should be extremely satisfied with the outcome of today’s meeting.”


BoE’s decision to hold rates wasn’t earth-shattering news for sterling. Shrug.


ECB president Mario Draghi’s press conference will be all about the details. As Pantheon Macroeconomics points out:
“Markets will be listening closely to Mr. Draghi’s economic assessment for signs that recent soft economic data and rising external risks—trade wars and emerging market volatility — have shifted risks “to the downside” instead of being ‘broadly balanced’. A slightly more dovish version is a good bet today, which likely will be accompanied by a marginal downgrade to the central bank’s growth and near-term inflation forecasts. That said, we don’t think this will change the key story. QE will end later in Q4, as already signalled, and rates will remain on hold until ‘at least through the summer of 2019′.”


The euro maintains its .16 handle following ECB’s business-as-usual announcement. Still, investors will be looking for hints in Draghi’s press conference in 15 minutes.


Turkey’s central bank is getting further praise for raising rates by 625 basis points, which was at the higher end of analysts’ expectations, writes the FT’s currency correspondent, Roger Blitz.

Charles Robertson at Renaissance Capital said he would have liked it to publish bank stress test parameters and plans for fiscal tightening, coping with corporate defaults and bad loans.

“But hats off to the CBRT – they made a big important first step,” he said.

He pointed out that the lira was still around 40 per cent below its long-term value and more than 20 per cent below the value of the next cheapests emerging market currency. With the trade deficit shrinking and likely to continue doing so, the trends “should already be helping the lira”, he said.

Paul Greer, portfolio manager at Fidelity International, said the central bank had taken “ a sizable step towards re-anchoring the lira”.

Although the move would temper inflation, it would also speed up the slowdown in growth and push Turkey towards recession, Mr Greer added. “The next challenge for Turkey will be how does the economy deal with this slowdown, particularly in the banking sector where capital ratios have been eroded and asset quality will further diminish.”


OK. ECB press conference now under way.


An early note of caution from Mario Draghi, who has said in his prepared remarks that “rising protectionism” and stress in EM and financial markets have “gained more prominence recently”.


Here’s the economic analysis. Despite some moderation of strong growth at the end of 2017, the latest indicators confirm ongoing broadbased growth. Our nonetary policy measures continue to underpin domestic demand. Private consumption is supported by employment gains. Business investment is fostered by easy financial conditions, rising profitability and solid demand. Housing investment is robust. The global economy is still expanding, supporting exports.


Annual real GDP forecast to rise 2 per cent this year, 1.8 per cent next year and 1.7 per cent in 2019. Compared with June forecasts, outlook revised down slightly for this year and next, mainly due to weaker contribution from foreign demand.


Inflation likely to hover around the current level until the end of the year. Domestic cost pressures are strengthening, with labour markets tightening and pushing up wage growth. Uncertainty around the inflation outlook is receding. Underlying inflation expected to pick up towards end of year and increase gradually thereafter.


Annual inflation projections are unchanged at 1.7% for 2018 – 2020


ECB expects inflation to stay flat until 2020 and economic growth to slow to 1.7% in the same timeframe (unchanged from June’s predictions). But they now expect growth to slow at a faster rate in ’18-’19 than they had predicted earlier this year.


Draghi: “The broad-based expansion calls for rebuilding fiscal buffers. This is particularly important in countries where government debt is high and for which full adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions.”

The key here is whether his fellow Italians are listening.


First question: why have you not confirmed asset purchases will definitely finish at the end of the year?
Mr Draghi’s reply: we haven’t elaborated on what’s in the text of the statement. Accommodation will remain significant even after the end of asset purchases through our reinvestment policy and forward guidance.


A question from the FT’s Claire Jones: was there any discussion on the reinvestment policy? And what is your personal view on the idea of an “Operation Twist” tailored to the needs of member states?


Draghi: We’ve not discussed either of these. But the capital key will remain the guiding principle.


Draghi just took a question on whether the decision to reel in QE is consistent with the inflation forecasts, which as you can see below, are for a 1.7% rate over the next two-and-a-bit years.
His answer, in short: yes.
9.2m jobs have been created since 2013 and with rising wages too, he said. “We are confident that our stance is consistent with our aim.”
(As a reminder, the ECB targets inflation that is ‘close to but below’ 2%.)


Question: will Italy be abandoned at the end of QE?
Draghi: Our mandate is medium term price stability. Not to protect bankers’ profits. And not to ensure government deficits will be financed under all conditions.


So, how worried is Draghi about EM?
“[it]… is one factor that adds to the uncertainty in world markets but so far the spillovers from Turkey and Argentina have not been substantial”


Of all the risks in the global economy right now, rising protectionism tops the list, Draghi says.


Question: what do you think of Juncker’s call for the euro to be an international reserve currency rivalling the dollar? And what have the biggest challenges been for you in the decade since the global crisis?
Draghi: we’re ready to work with the EU Commission but this is not part of our mandate. What I would like to remember from the crisis (which started before me) is the “extraordinary effort of international cooperation at world level”.


Draghi says current developments (in bank regulation) are also worth looking at. Should we fear backtracking to a world with less regulation? In the EU we don’t see that danger. The banks are stronger today. But can we be complacent? No, because in the meantime a lot of this business has migrated… to shadow banking. The next step is to ensure that equally strong regulation and supervision would be applied to non banks.


Question: did you discuss changing your assessment of the balance of risks to the economy? And how are rising Italian bond yields affecting financing conditions?

Draghi says no, there is no change in the balance of risks – still broadly balanced, although risks on protectionism and EM are more prominent. Set against this, upside risks include less neutral fiscal policy in several eurozone countries. More important, the underlying strength of the economy – especially the improvement in labour market and wages – makes us this it can withstand these risks.


What happens in Italy stays in Italy, notes Draghi.
Asked about the recent market stress surrounding the new coalition government, the ECB chief noted that “it has remained pretty much an Italian episode”. Still, “words have created some damage”, he said.


A follow up question on Italy: could the ECB take measures next year so that Italy does not become a source of contagion? And is Italy a problem for the EU?

Draghi: We haven’t seen any contagion yet. The ECB will stay with what the Italian PM and ministers have said, that Italy will respect the rules.


EUR is ticking up as Draghi talks up the economy and in reaction to keeping 2020 growth forecast where it was back in June.


Draghi has “stuck to the script” says Marc Chandler at BBH:

Draghi identified risks coming from rising protectionism, emerging markets, and financial market volatility. Nevertheless, he reiterated that the risks to growth are broadly balanced. There was little recognition of the recent high-frequency data, especially from Germany and Italy, that badly missed expectations. He also emphasized the continued improvement in the labor market and rising wages.


Question: your predecessor, Jean-Claude Trichet, has called attention to high levels of debt. Is this a trigger for a new crisis?
Yes, the IMF has been saying for several months that debt levels remain high. For the euro area, however, things are slightly different. Debt is high… but private debt has actually gone down. Significant deleveraging has taken place and balance sheets (financial and non financial) are much stronger. That is why we say countries with high public debt should be the first to rebuild fiscal buffers.


Draghi bats back questions on the outlook for rates after its current guidance runs out. It’s not been discussed.


More questions on the balance of risks – did some on the governing council think they are turning negative? And were there concerns over the euro’s strength?

Draghi: all members agreed the risks to the growth forecasts were balanced. Turkey’s currency depreciation is the main change affecting demand for euro area exports so far.


Fiera Capital’s Candice Bangsund agrees with Draghi’s reading of the economic tea leaves:

We believe that this marginal adjustment to the GDP forecast is unlikely to alter the current plan to taper and cease asset purchases later this year, while we expect the ECB to leave rates unchanged until the summer of 2019.


Our currencies correspondent Roger Blitz writes:
The euro is up around half a per cent against the dollar, although that may not be exclusively related to the ECB meeting.
Mr Draghi began his press conference at the same time that data was published showing US core inflation slipping slightly in August. The dollar has fallen against a range of currencies, including the euro, the pound and the yen, as well as a number of emerging market currencies.
The effect has been to pull down the index that measures the dollar against its peers by 0.25 per cent.


Final question. Are the risks to inflation forecast evenly balanced? And is reinvestment mainly a technical process?

Draghi: Inflation forecasts are the result of two components: we project slightly lower oil prices but significantly stronger core inflation because of economy’s underlying strength and rising wages. But we don’t do the same risk analysis for inflation forecasts as we do for growth.

On reinvestment, it must be worked out well technically before we can discuss it in the governing council.


And that wraps up today’s central banker triple whammy.
Turkey stole the show with a thumping 6.25 percentage-point rise in rates, a move that has particular resonance given president Erdogan’s fresh call for a cut just two hours before the decision.
The ECB was next in terms of excitement levels, reaffirming its plan to trim and then halt bond purchases and managing to marry up confidence on the recovery with concern over EM and protectionism.
And the Bank of England kept any fireworks under wraps with an on-hold decision, albeit with a similar note of caution on global trade.