Hello and welcome to our live coverage of the key interest rates of the European Central Bank, the Bank of England and the Turkish Central Bank, which are due in the next few hours.
It is not often that the Turkish central bank is bridging the ECB and the BoE, but it has a good chance of doing so today.
The BoE is keeping interest rates low: since its quarterly rate hike in August, economic data is in line with its projections, so there is little reason to change its view that further rate hikes should be slow and gradual – with room for maneuver to delay to Brexit.
It is widely expected that the European Central Bank will confirm that it will reduce its asset purchase program by the end of the year. It could change its assessment of the balance of risks to growth, given concerns over tariffs, Italy's budgetary stability and the contagion of emerging economies. A change in guidance – with interest rates remaining unchanged until the summer of 2019 – is considered unlikely.
However, the Turkish central bank is facing a crucial test of credibility. She has promised to support the lira – but President Recep Tayyip Erdogan is still calling for a rate cut, which is worried that it will do much less than is necessary to convince the markets.
Turkey is certainly the big attraction.
President Recep Tayyip Erdogan has reiterated the pressure on the central bank to declare that it should be decided in less than two hours before the big decision "we should lower this high interest rate" should be made. That did not help … the lira.
The lira certainly suffered this summer
In fact, the real interest rate in Turkey is still negative, as Capital Economics highlighted in a note today.
In previous EM currency crises, real interest rates rose by an average of 10.5 to 11 percentage points in the following year.
The CBRT increased its average financing cost by 600 basis points in June – but real interest rates are still negative.
Argentina, which is also struggling to shore up its currency, now has a benchmark interest rate of nearly 60 percent – and real interest rates are also high by historical standards.
Back to President Erdogan's last intervention … he said earlier that interest rates are the "mother and the father of all evil".
There are two ways to read this: First, that he knows that the central bank is about to raise interest rates and that he wants to announce his opposition in advance with his basic support. The other is that he warns the allegedly independent central bank against taking action to raise interest rates. Well, no one has any idea.
Markets today praise about 400 basis points (4 percentage points) of interest rate reversal at the central bank. Market economy expectations are between zero and 700bps, as Tim Ash of BlueBay Asset Management points out. This is not a normal area. As I say, no one has any idea. No Scooby.
Tim said, "I sense that not many people would be surprised if they did not do anything, which would of course be a deja vu disaster for Turkey again." Surely the CBRT can not be so stupid again, it would be like a Turkish one Ground Hog Day … Actually, it would be interesting to know where the lira goes if they are not wandering – I would think again 7+, and all hopes for a stabilization in Turkey's history are gone.
If they wander 200-300+, lira rallies are likely to turn up, and we can see light at the end of the tunnel in the face of the obvious rebalancing. If they deliver too much, I could even see that they lower interest rates on this side of the local elections – in a positive outcome.
That is, the words "CBRT" and "tradition" rarely come in the same sentence or in the last 6-7 years.
I can not remember a central bank that has played such a bad hand over the past 12 months in the 30 years that I have been coaching EM. "
ING has a nice read about what (provisionally?) Awaits here. It is at 325 bp of hikes to 21%. Stop your hats.
Just to put this lira in context. The only worse performance this year was … the Argentine peso. Second in big European currencies, well done.
Quick on the Bank of England "We expect the BoE to maintain a more restrictive stance, but the BoE may be reluctant to signal a more restrictive political stance in the Brexit negotiations at the time," said Lee Hardman of MUFG crescendo. "Check buddy?
Just a reminder that President Erdogan's last step before that meeting was to dismiss the entire management team of the country's sovereign wealth fund, making him chairman and son-in-law (including Minister of Finance and Economics Berat Albayrak). Not the best look when it comes to institutional independence …
On this United Kingdom and Gibraltar European Union membership referendum "Crescendo" …. Moody's warned that a no-deal divorce is becoming more and more likely.
"The immediate effects are likely to be felt first in a sharp fall in the value of the British pound, which in the two or three years after Brexit would lead to temporarily higher inflation and a decline in real wages, which in turn would weigh on consumer spending The UK is slowing down, with the risk that the UK is going into recession. "Here is the FastFT study.
The currency market is pretty quiet ahead of the decisions this morning.
The Euro is trading at the upper end of the 1.1525-1.1550 trading range. Brown Brothers Harriman's Marc Chandler points out that the euro generally fell on the ECB session this year and the last two meetings in 2017 – perhaps a sign of Mario Draghi's ability to make a defensive turn.
The pound sterling is banded – in the first session since 2 August, when it was not trading below 1.30. It also lists gains for the fourth consecutive meeting.
A quick glance at the website of the Turkish Central Bank offers an immediate reminder of what the market has expected. The homepage states: "Monetary policy will be adjusted in September in the light of recent developments."
As expected, the BOE leaves interest rates unchanged, with the MPC being unanimous.
"The Monetary Policy Committee (the committee) has decided to raise its key interest rate (one week repo auction rate) from 17.75 percent to 24 percent."
The Turkish statement is here.
Highlights from the statement of the Turkish Central Bank:
"The recent developments in the inflation outlook indicate significant risks to price stability … The determined monetary policy stance will remain crucial until the inflation outlook shows a significant improvement."
This is the Turkish increase in interest rates in the context
Tim Ash at BlueBay: "Great move … well done for the CBRT! That could mean a game change for Turkey and the European Championship, and next stop the CBR in Russia."
The lira has slipped higher in the news, rising 5.5 percent against the US dollar to 6.02 TL.
Here is the core of the statement of the BoE.
Recent data from the UK largely leaves the BOE forecasts in August. The downside risks to global growth have risen slightly, but global growth is still above trend. Everything still depends on Brexit and uncertainty is growing. But for the moment, the existing guidance applies – future rate hikes are likely to be gradual and limited.
Our colleague Roger Blitz points out that the Turkish move has caused EMBX waves: "The 5% recovery of the lira helped other emerging market currencies recover, with South Africa's rand up 1%, while the Russian ruble was up a half percent increase in cents. "
This noise you can hear is a big sigh of relief that Turkey has taken the plunge.
Aberdeen Standard Investments Head Emerging Market Debt Brett Diment says:
"It's nice to see common sense prevail … Hiking today puts Turkey on the slow path to restoring some monetary credibility, and that is crucial. If they had not hiked today, the real risk would be that the lira would sell out again and the country would quickly move towards a balance of payments and even a banking crisis. "
Here is the link to the statement of the BOE
Our Laura Pitel in Ankara writes:
The bank has increasingly expressed doubts about its independence in recent months, amusing investors by putting interest rates on hold despite double-digit increases in inflation and 40 percent lira lost to the dollar ,
Markets were pessimistic that the bank would fulfill a normal promise last week that its monetary policy would be adjusted after new data showed that inflation reached 18 percent in August. The average estimate in a survey by Bloomberg economists was for an increase of 325 basis points to the one-week repo rate to 21 percent.
The bank exceeded these expectations on Thursday with a much larger hike.
The Turkish president, who for a long time was a self-proclaimed "enemy" of high interest rates, reiterated his unorthodox view that high interest rates slowed rather than slowed inflation. "Interest is the cause, inflation is the result," he said in a speech in Ankara. "If you say the opposite, my friend, you do not understand the problem."
The lira recovered immediately after the announcement of the Turkish central bank
The BOE has released some data in addition to its decision – including a relatively recent company survey, which shows that 40 percent of companies believe that Brexit will affect exports.
Adam Posen of the Peterson Institute says he is glad that the central bank of Turkey "has the courage" to raise its interest rates by 625 bp.
It should be noted that Turkish equities also rose 1.1%.
The index of Bist 100 banks has even increased by 4.2%.
Massive sigh of relief, that.
OK. Two down, one forward. Are not you entertained?
The ECB is next with a 12:45 decision and a 13:30 press. (London Times)
UBS is here with appropriate hype:
"The ECB is now largely on autopilot, and with no big surprises in store, the ECB can keep a steady hand and act in line with its monetary policy guidelines from June to July: end the QE by the end of 2018 and then decide – depending on data – on the timing and amount of the first rate hike in the summer or fall of 2019. "
Here's the shot of our Claire Jones in Frankfurt asking, "How bad does it have to convince the ECB to continue buying bonds?
The press conference could raise interesting questions about the eradication of the EM (and all the spillover effects in the euro area) and also about Italian politics. (If you were a betting person, you would bet Mario Draghi will dodge it.)
The real question is how the ECB can justify staying on autopilot as Eurozone growth slows and worries about Italy's finances and the impact of tariffs increase. The economists at RBC Capital have an answer.
They believe that their guidelines will not change even if the ECB changes its risk assessment.
Why? In a word, because of wages … unemployment in the euro area continues to fall (to 8.2% in July), wage growth is now starting to pick up, in particular wage growth, which is one of the ECB's preferred indicators … Expects President Draghi In its questions and answers to these wage developments, the main reason why GovCo remains optimistic is that euro area inflation, thanks to its policies, achieves a sustainable adjustment to the target.
Key from the ECB will be the growth and inflation forecasts of central bank employees. Currently, they expect real GDP growth of 2.1% in 2018 and a slowdown to 1.7% in 2020. HICP inflation is expected to reach 1.7% in each of the forecast years, albeit from quarter to year Quarter slightly fluctuating.
There is one more improvement from the Turkish central bank that investors will welcome: it will restore the one-week repo as the main political instrument and simplify a multi-rate system introduced after last month's currency crisis.
The FT Laura Pitel writes:
"In August, the central bank cut borrowing at the one-week repo rate, forcing the banks to use a higher overnight rate, implying a small rate hike.
The tactics were criticized by international investors, who described it as a plaster rather than a permanent solution for the lira. With the announcement on Thursday, the bank has restored the one-week repo as the main refinancing rate. "
Meanwhile, the Lira Rally loses some steam. Our Roger Blitz notes:
"The lira has strayed from its large 5% recovery and has moved back up to around 6.15 TL, which is an increase of 2.7% since the start of the day, the last currency traded at this level August 28, putting it in the middle of the volatile range that it was when the lira crisis intensified last month. "
The ECB decided in December of this year to lift quantitative easing. The slow but secure outsourcing of assets from their massive balance sheet was carefully telegraphed for months to avoid repeating the taper tantrum of 2013. Nobody expects Draghi to deviate from his usual press conference text. With more than 4.5 trillion euros, everything is planned carefully.
And third, out of the blocks is the European Central Bankthat it just played. No change in rates and tapering on the track:
"After September 2018, the Governing Council of the ECB will reduce the monthly pace of net asset purchases to EUR 15 billion by the end of December 2018 and expect net purchases to end when the incoming data confirm the medium-term inflation outlook."
The statement of the ECB is here.
The ECB Guideline on interest rates is also unchanged – it is expected to remain "at least until the summer of 2019".
An applause for the ECB from ING here:
"When does a central banker know that he (or she) has done an impeccable job? When QE comes to an end and the financial markets can hardly care anymore, the ECB should be extremely pleased with today's outcome."
The BoE's decision to hold interest rates was not shocking news for the pound sterling. Twitch.
The press conference of ECB President Mario Draghi is all about details. As Pantheon Macroeconomics points out:
"Markets will closely monitor Mr. Draghi's economic view to see that recent weak economic data and rising external risks – trade wars and emerging market volatility – have shifted risks downwards rather than being" largely balanced " The expansionary version is now a good bet that is likely to be accompanied by a marginal downgrade of the Central Bank's growth and short-term inflation forecasts, but we do not believe this will change the key story QE will end later in Q4 as previously announced, and the Interest will be held until "at least until the summer of 2019."
The euro retains its .16 handle following the announcement of the ECB, as usual. However, investors in Draghi's press conference will be looking for clues in 15 minutes.
The Central Bank of Turkey praises the 625 basis point hike in key interest rates, which is at the upper end of analysts' expectations, writes FT's currency correspondent Roger Blitz.
Renaissance Capital's Charles Robertson said he would have liked to release banks' stress test parameters and plans for tightening tax policies, tackling corporate failures and bad loans.
"But hate the CBRT – they made a big, important first step," he said.
He pointed out that the lira is still about 40 percent below its long-term value and more than 20 percent below the value of the next cheapest emerging market currency. As the trade deficit shrinks and is likely to continue, trends should "help the lira," he said.
Paul Greer, portfolio manager at Fidelity International, said the central bank had "taken a significant step toward re-anchoring the lira".
Although this would ease inflation, it would also accelerate the slowdown in growth and drive Turkey into recession, Greer added. "The next challenge for Turkey will be how the economy cope with this slowdown, especially in the banking sector, where capital ratios have been undermined and asset quality continues to decline."
OK. ECB press conference is running.
An early precautionary measure by Mario Draghi, who said in his prepared remarks that "rising protectionism" and stress in emerging and financial markets have "come to the fore lately".
Here is the economic analysis. Despite moderately strong growth at the end of 2017, the latest indicators confirm continued broad growth. Our non-monetary policies continue to support domestic demand. Private consumption is supported by employment growth. Business investment is driven by simple financial conditions, increased profitability and solid demand. Housing investments are robust. The global economy continues to expand and support exports.
The annual per capita GDP forecast will increase by 2 percent this year, by 1.8 percent next year and by 1.7 percent in 2019. Compared to June forecasts, the outlook for this and next year fell slightly, mainly due to a weaker contribution from foreign demand.
Inflation is expected to fluctuate around the current level by the end of the year. Domestic cost pressure is increasing, labor markets are becoming closer and wage growth is rising. The uncertainty regarding the inflation outlook is decreasing. Underlying inflation is likely to pick up towards the end of the year and then gradually increase.
The annual inflation projections for 2018-2020 remain unchanged at 1.7%
The ECB expects that inflation will remain stable until 2020 and that economic growth will slow to 1.7% over the same period (unchanged from the June outlook). But they now expect growth to slow faster in the years 18-19 than they had predicted earlier this year.
Draghi: "The broad expansion requires the rebuilding of fiscal buffers, which is particularly important in countries where sovereign debt is high and where full compliance with the Stability and Growth Pact is crucial to securing sound fiscal positions."
The key here is whether his Italian compatriots are listening.
First question: Why did not you confirm that the asset purchases will definitely be completed by the end of the year?
Mr. Draghi's answer: We have not stated what is in the text of the declaration. The property will continue to be significant after the end of asset purchases through our reinvestment policy and forward guidance.
A question from the FT Claire Jones: Was there any discussion about the reinvestment policy? And how do you personally assess the idea of an "Operation Twist" tailored to the needs of the Member States?
Draghi: We did not discuss both. But the key to capital will remain the guiding principle.
Draghi has just wondered if the QE decision is consistent with inflation forecasts, which, as you can see below, will be 1.7% over the next two and a few years.
His answer, in short: yes.
9.2 million jobs have been created since 2013, and with rising wages too, he said. "We are confident that our attitude meets our goal."
(Remember, the ECB is targeting inflation close to but below 2%.)
Question: Will Italy be abandoned at the end of QE?
Draghi: Our mission is medium term price stability. Not to protect the profits of the bankers. And not to make sure that the state deficits are funded under all conditions.
So how worried is Draghi about EM?
"[it]… is one factor contributing to uncertainty in world markets, but so far the spillover effects from Turkey and Argentina have not been significant "
Of all the risks in the global economy, increasing protectionism is currently the top priority, according to Draghi.
Question: What do you think of Juncker's claim that the euro is an international reserve currency that competes with the dollar? And what were the biggest challenges for you in the decade since the global crisis?
Draghi: We are ready to work with the EU Commission, but that is not part of our mission. What I want to remember from the crisis that started before me is the "extraordinary effort of world-class international cooperation".
Draghi says current developments (in banking regulation) are also worth a look. Should we be afraid to return to a world of less regulation? In the EU we do not see this 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 equal regulation and oversight is also applied to non-banks.
Question: Have you talked about changing your assessment of risk to the economy in a balanced way? And how do rising Italian bond yields affect financing conditions?
Draghi says no, there is no change in risk levels – still largely balanced, although the risks to protectionism and emerging markets are more pronounced. Against this background, upside risks exist in a less neutral fiscal policy in some Eurozone countries. More importantly, the underlying strength of the economy – especially the improvement of the labor market and wages – makes us resist these risks.
What happens in Italy remains in Italy, notes Draghi.
Asked about the current market harassment surrounding the new coalition government, the head of the ECB noted that "it has remained an Italian episode". Still, "words have done some damage," he said.
A follow-up to Italy: Could the ECB take action next year to prevent Italy from becoming a source of infection? And is Italy a problem for the EU?
Draghi: We have not seen any infection yet. The ECB will stick to what the Italian Prime Minister and the ministers have said that Italy will respect the rules.
The EUR rises as Draghi recruits the economy and in response to leaving the growth forecast for 2020 where it was in June.
Draghi "stuck to the script," says Marc Chandler of BBH:
Draghi identified risks stemming from increasing protectionism, emerging markets and volatility in financial markets. Nonetheless, he reiterated that the risks to growth are largely offset. The latest high-frequency data, especially from Germany and Italy, which had missed the expectations, were barely noticed. He also stressed the continued improvement of the labor market and rising wages.
Question: Your predecessor, Jean-Claude Trichet, has drawn attention to high debts. Is this a trigger for a new crisis?
Yes, the IMF has been saying for several months that debt is high. However, things are a little different for the euro area. Debt is high … but private debt has actually fallen. Significant deleveraging has taken place and the balance sheets (financial and non-financial) are much stronger. That's why we say that high-public-sector countries should be the first to rebuild fiscal buffers.
Draghi is raising questions about interest rates after the current guidelines expire. It was not discussed.
More questions about risk balancing – did some in the government council believe that they are becoming negative? And was there any concern about the strength of the euro?
Draghi: All members agreed that the risks to growth projections were balanced. The currency devaluation of Turkey is the biggest change that has affected the demand for exports in the euro area.
Candice Bangsund of Fiera Capital agrees with Draghi's reading of the economic tea leaves:
We believe that this small adjustment to the GDP forecast is unlikely to change the current plan for tapering and cessation of asset purchases later this year, while we expect the ECB to keep interest rates unchanged until the summer of 2019.
Our currency correspondent Roger Blitz writes:
The euro has risen by about half a percent against the dollar, though this may not be entirely related to the ECB meeting.
Mr. Draghi started his press conference at the same time as data was released showing that US core inflation eased slightly in August. The dollar has fallen against a number of currencies, including the euro, the pound and the yen, as well as a number of emerging market currencies.
The effect was to lower the index, which measures the dollar against its competitors, by 0.25 percent.
Last question. Are inflation risks balanced? And is reinvestment mainly a technical process?
Draghi: Inflation forecasts are the result of two components: we expect slightly lower oil prices, but much stronger core inflation due to the underlying strength of the economy and rising wages. But we do not do the same risk analysis for inflation forecasts as for growth.
For reinvestment, it has to be worked out technically well before we can discuss it in the government council.
And that's the threefold blow of today's central bankers.
Turkey At a whopping 6.25 percentage points, prices rose, which speaks in the light of President Erdogan 's new demand for a special response cut nur zwei Stunden vor der Entscheidung.
The ECB Als nächstes gab es eine Aufregung hinsichtlich der Aufregung und bekräftigte seinen Plan, die Anleihekäufe zu kürzen und dann zu stoppen und das Vertrauen in die Erholung mit Sorge um EM und Protektionismus zu vereinen.
And the Bank of England hielt ein Feuerwerk mit einer Warteschleife zurück, wenn auch mit einer ähnlichen Vorsicht im globalen Handel.