In Europe, the year ended a controversial program of quantitative easing the European Central Bank head Mario Draghi. The head of the main Bank of the region in January announced the intention to launch a quantitative easing program.
MOSCOW, 28 Dec. Central banks around the world in the past year traditionally remained one of the main actors on the economic scene. Some kept the intrigue up to the stems, others right from the beginning, was surprised by his unexpected decisions, and some initially fueled expectations, and then logically justify them.
The U.S. Federal reserve in December had completed its policy of “zero interest rates”, while Central banks in Europe, the UK and Japan have kept rates low or negative, and, in most cases, have taken extraordinary steps to support the economy.
“There were definitely some surprises. We had to get used to the fact that Central banks are more powerful”, — quotes the Financial Times investment Director GAM Adrian Owens (Adrian Owens).
Quantitative easing Draghi
In Europe, the year began and ended a controversial program of quantitative easing, the head of the European Central Bank (ECB) Mario Draghi. The head of the main Bank of the region in January announced his intention to begin a program of quantitative easing (QE). The launch occurred in March 2015 with the redemption of bonds in the amount of 60 billion euros per month, without the acquisition of more than 25% of each issue and more than 33% of each Issuer. The duration of the program was limited by September 2016 and the coming inflation in the Euro area to the target of 2%. In this message, the Euro-dollar has updated a minimum since the autumn of 2003, falling to 1,1452 dollar.
However, the program did not help the regulator to bring the inflation to the goal rate: the annual growth of prices in the 19 Eurozone countries in November, according to preliminary estimates, amounted to 0.1% as in October. In December, the ECB extended the program in the amount of 60 billion euros per month until March 2017 with possibility of further extension.
Given the weak statistical data, the market participants expected a significant increase in the existing volume, and the regulator’s decision has caused a mixed market reaction. So, European stocks and the single currency — has collapsed.
According to investment Director of AJ Bell Russa Mold (Russ Mould), Draghi’s “doing everything possible to win some time so that countries can carry out their reforms”. The expert believes that 2015 is a good lesson for the markets, showing that they “should not believe in salvation by Central banks, as regulators always have their own agenda”, writes portal Moneymarketing.
The dominant role of the ECB and the effects of its policies on the single currency entails serious implications for Central banks of Switzerland, Sweden, Denmark and Norway. As reported by the Financial Times, senior analyst at Nordea in Helsinki Aurelia Augulyte (Aurelija Augulyte), the ECB may start a gradual change in its policy next year.
Together with the history of QE, the European regulator during the current year provided support to Greek banks. Thus, four memory Bank of Greece, Alpha Bank, National bank of Greece (NBG), Piraeus and Eurobank requested the provision of liquidity in the framework of the ECB’s ELA (emergency liquidity assistance). Upon receipt of liquidity through the ELA banks are much higher costs — they get money with an interest rate of 1.55% compared to 0.05% for conventional funding.
An Unexpected Swiss Central Bank
The Swiss Central Bank began 2015 with an unexpected step: 15 January, he refused introduced in 2011 the “ceiling” rate of the national currency to the Euro at 1.2 francs, as the costs to maintain the course could be considerably higher than the potential benefits of this policy. At the same time the regulator has reduced the negative interest rates from minus 0.25% to minus 0.75%, which was the lowest level not only for Switzerland but also in General for the whole world.
The markets reacted very violently to this news. Major jumps were observed in the EUR / USD: the level of 1.2 francs per Euro in a moment she fell almost 30%, to 0.85, and then recovered. However, only the Swiss assets has not been limited, the Euro against the dollar fell to a more than 10-year low in the district 1,1570 dollar.
Actually the January decision was the only surprise from the Swiss Central Bank, although by the end of the year as investors expect that after the European Central Bank it may also soften its monetary policy. In November, these expectations took the Euro to the dollar to the lowest level since 2010 in 1,0328 francs per dollar.
The recent decision of the regulator, which he did in December, was the preservation rate at minus 0.75%. While the Central Bank maintained its forecast that in 2016 the country will be fixed deflation at the level of 0.5%. According to the Central Bank, the growth of Swiss GDP will accelerate from 1% to 1.5%. As if this forecast is going to operate the controller, and what do you expect from the markets?
The recent statements of representatives of the Board of governors of the Central Bank that the regulator intends to maintain the negative rates unchanged next year, given the franc, which is considered to be still “significantly overvalued”, despite the measures taken. Analysts against this background, expect that the authorities will continue to intervene in the currency market, but until a bid to touch they will not.
According to the Financial Times, once in October have started to strengthen expectations of new monetary policy easing by the ECB, the value of the franc to the Euro has risen 8%. “Currency jumps forced Switzerland to fluctuate between deflation and inflation, economic growth and recession. The authorities are desperate for sales of the franc”, — the newspaper quoted a currency strategist at Bank of New York Mellon, Neil Mellor (Neil Mellor).
Thus, if we put all these factors together and to summarize, it is possible that the Swiss national Bank unexpectedly again surprise the markets with new measures in the new year.
A surprise from the Central Bank of Japan
During the year the policy of the Bank of Japan remained relatively predictable for investors. In 2013 he began a program of quantitative easing, to bring the country out of deflation and achieve the target of growth in consumer prices to 2% within two years.
However, the goal was not achieved by the target date due to a number of factors, including low commodity prices and weakening purchasing power of consumers. The regulator did not reject the program, and now the desired parameters are expected in the 2016-2017 fiscal year (beginning with April). However, at the last meeting of the Bank of Japan surprised market participants, unexpected additional measures. He said he will introduce a new programme for purchases of securities exchange-traded funds and extend the average maturity of securities up to 7-12 years from the beginning of next year. The decision was made after the U.S. Federal reserve for the first time in almost a decade has increased the base interest rate.
“For the market it was a surprise, but the impact of the measures is unclear,” — said the Agency DW chief economist at Dai-ichi Life Research Institute Hideo Kumano (Kumano Hideo).
The results of the meeting of the regulator caused a significant growth of quotations on the Asian stock exchange. However, after it became clear that the measures are relatively small, the performance returned to previous levels. As stated by the CB, now the Japanese economy continues a moderate recovery, although exports and industrial production was affected by the slowing growth in the emerging economies.
The regulator will buy government bonds at such a rate that their number in circulation will increase annually by about 80 trillion yen. He also intends to maintain the number of corporate bonds in circulation at the level of 2.2 to 3.2 trillion yen.
According to the government forecast, the growth of the Japanese economy in the 2016-17 financial year will amount in real terms by about 1.7% due to revival of demand and investment. In nominal expression GDP will grow by 3.1% to reach a record level for the last 19 years in 518,8 trillion yen (a 4.3 trillion dollars). The government of Japan expects growth of prices of about 1.2% compared to the current year, mainly due to the fall in oil prices. The Bank of Japan, inflation in the country may reach 2%.
Analysts have their forecasts for monetary policy in Japan next year. Ten of the 25 economists surveyed by Bloomberg believe that the July expansion of the stimulus program, and one expects a softening in January 2017. The remaining 14 don’t expect any additional measures in the foreseeable future.
A welcome boost by the fed
The volatility in the market this year, often provided by the Federal reserve system (FRS) the USA. For nearly ten years, the benchmark interest rate in the country has not improved under the programme to stimulate economic growth. However, since the beginning of January 2015, the fed began to hint at a possible increase, provided that the country’s economic indicators will exhibit strong growth.
The first potential rate hike, investors waited in anticipation of the July fed meeting. Oil markets, currency and precious metals fluctuated in anticipation of the decision of the regulator. Analysts ‘ forecasts were constantly changing, even among fed officials, there was no consensus. But then the members of the Federal open market Committee decided not to raise rates due to external and internal risks.
The second wave of expectations took place in the early autumn — September, but then the rate remains at a historic low. Fed Chairman Janet Yellen explained by the fact that the regulator is not confident in the willingness of the economy to such a step, as the level of inflation in the country has not yet approached the target mark of 2%.
As we approach the last this year of the fed meeting in December, market participants have almost no doubt that the rate will be increased. The long-awaited decision was made on December 16: the regulator increased the key rate to 0.25-0.5% per annum with a record low level of 0-0. 25%, despite the fact that one of the most important indicators – 2% inflation — to achieve and failed.
According to the forecasts of the fed, two percent inflation is achievable only in the medium term. But more on this indicator is affected not by the state of the U.S. economy, and the external factor is the decline in oil prices. This, in turn, is reflected in the strengthening of the dollar and energy costs in production. It is quite natural that the situation on the oil market seriously constrains inflationary processes in the country. The fed also reaffirmed its forecast for growth in the economy in 2015 at 2.1%. The inflation forecast for the current year is confirmed at 0.4%. The unemployment forecast has not changed and amounted to 5%.
Later, Yellen stated that the fed plans to increase the base rate to 1.5% in 2016 and 2.5% in 2017, but it will depend on the economic situation in the world. Many economists expect the pace of normalization of monetary policy will be moderate: according to their forecasts, the fed in January 2016 to modify a bid will not be, but in March the regulator could take a second step towards a rate hike. “We expect the pace of rate increases will gradually increase”, — quotes the edition of USA Today the opinion of the chief economist of Freddie Mac, Becketti Sean (Sean Becketti).
According to the forecasts of international rating Agency Fitch, the growth rate of US GDP in 2016 will be 2.5%, remaining at the expected level in 2015. Credit ratings from Fitch USA are at a maximum level “AAA”. The Agency adds that the country’s economy, despite this rating, there is one weak trait: a relatively high debt load. Fitch forecasts that the budget deficit of the USA in 2016 fengdu to fall to 2.3% of GDP from 2.5% of GDP in 2015.
The people’s Bank of China VS. economic slowdown
The outgoing year was marked by an unexpected event: it turned out that the second largest economy in the world — China — is slowing. In this regard, the people’s Bank of China began to take concerted action for the liberalization of monetary policy and achieving the target growth of 7% per year.
Policy of the regulator in this direction was the most aggressive since the global financial crisis of 2008-2009. Each time when the markets were confident that the Central Bank will suspend action on mitigation of monetary policy, the Bank surprised all with the next portion of the measures.
Among the most brilliant actions of the Chinese Central Bank was lowering the reference rate of the national currency. The Chinese currency weakened by 0.2% to the lowest level since July 2011. The most drastic decline occurred in August 2015 — the yuan within three days fell by 4.6%. After the last decrease rate was 6,4495 yuan per dollar.
In addition, the regulator has repeatedly cut interest rates, lowering her in October to 4.35%. Deposit rate was cut by 0.25 percentage points to 1.5%. October change rates was the sixth since November 2014. In addition, in September the Central Bank lowered the reserve requirements for banks by 0.5 percentage points, which increased the liquidity for Bank lending.
“Given the strong barriers to economic growth, we can see further reductions in required reserve regulations and reduced rates. Thus, we maintain our forecast that in 2016 there four reduction rules and two rates”, — said the chief economist of Nomura China Yan Zhao (Zhao Yang) portal TodayOnline.com.
All these actions led to the strongest decrease in the indices of stock exchanges in the region, and is also reflected in the auction world stock exchanges. In addition, the monetary policy of the PRC has caused a fall in the value of copper by 29% since the beginning of this year and lowered it by almost 57% below its highs of 2011.
The Communist party of China notes that there are two goals of the century. The first is the 100th anniversary of the founding of the CPC, in 2020, double the GDP of 2010 and to double the income of urban and rural population. The second goal — the 100th anniversary of the founding of the PRC, the middle of the 21st century, to build a modern, strong, prosperous socialist country that will become a symbol of the “great revival” of the Chinese nation.
“The government can accept slow growth and allow the inventory to shrink, but it will not remain indifferent and aims to support the economy”, — quotes Agency Bloomberg opinion of ANZ Banking Group economist Liu Ligan (Liu Jing Hua). The expert is sure that in 2016 monetary policy of China will remain adaptive, but fiscal policy will become much more active.
At the same time, the international rating Agency Fitch notes that the financial reform of China in 2016 can exert strong pressure on the profitability of Chinese banks, however, expects the continued state support of the sector. Fitch forecasts that the non-use of coercive measures will continue to support the reduction in the value of assets, and that regulators will not weaken the reserve requirement ratio, despite the increasing pressure on asset quality.