Federal Reserve Bank of San Francisco President John Williams played down a “low” reading on second-quarter U.S. growth and said the economy could still warrant as many as two interest-rate increases this year — or none.
“There’s definitely a data stream that could come through in the next couple of months that I think would be supportive of two rate increases,” Williams told reporters Friday after speaking in Cambridge, Massachusetts. “There’s data that we could get that wouldn’t be supportive of that — it could be one, maybe, or none. Time will tell.”
Williams was the first Fed official to speak publicly since policy makers held interest rates steady on Wednesday for the fifth straight time. The Fed was slightly more upbeat about the U.S. economy in a statement released after its two-day meeting, taking a step toward an increase later this year without signaling how soon a move might come.
Chair Janet Yellen and her colleagues have been watching for evidence of how headwinds from abroad, including fallout over Britain’s decision to leave the European Union, will affect U.S. hiring and progress in lifting inflation toward their goal of 2 percent.
Click here for a quick overview of the Fed’s liftoff and rate path.
Data released earlier on Friday by the U.S. Commerce Department showed the economy expanded less than forecast in the second quarter, while the Fed’s preferred gauge of price pressures excluding food and energy prices rose 1.7 percent annualized.
“The GDP number for the second quarter was low,” said Williams, who isn’t a voting member of the policy-setting Federal Open Market Committee this year. “Final sales actually looked pretty good,” though, and “a lot of the second-quarter weakness, part of it was really inventory swings.” He also said that the inflation data “was more or less what I had been expecting,” while the effects on the U.S. economy from the Brexit vote appeared to be “very modest.”
The U.S. central bank has been on hold since it raised its target for the federal funds rates by a quarter-point in December to 0.25 percent to 0.5 percent, ending seven years of near-zero rates. Its most recent forecasts, released in June, showed that the median estimate of policy makers was for two more quarter-point rate increases this year, though six of the 17 officials submitting projections saw only one move.
“It makes sense to continue on the process of the gradual removal of accommodation — my personal view is it makes sense, assuming the data will support that, to raise rates again this year, but it is data-dependent,” said Williams. “We’ll get a couple more employment reports, more data on inflation before our next meeting.”
The FOMC next meets Sept. 20-21. Yellen will also have an opportunity to discuss her sense of the economy’s progress when she speaks on Aug. 26 at the Kansas City Fed’s annual policy symposium in Jackson Hole, Wyoming.
The U.S. economy likely expanded at a 1.8 percent annualized rate in the second quarter following a report on June’s advance goods trade balance, the Atlanta Federal Reserve’s GDP Now forecast model showed.
The latest gross domestic product estimate was slower than the 2.3 percent figure calculated on Wednesday, the regional Fed said on its website.
The advance goods trade balance is an early reading of the trade balance of goods plus inventories. It excludes services.
The Atlanta Fed’s outlook on second-quarter GDP had held above 2 percent since its initial reading of 1.8 percent on April 28. It peaked at 2.9 percent and had been in a tight 2.3 to 2.4 percent range.
The government said earlier Thursday its advance figure showed imported goods exceeded goods exported by $63.3 billion last month, compared with a goods trade deficit of $60.59 billion in May.
The Atlanta Fed model showed trade would be a 0.10 percentage point drag on second-quarter GDP compared with an earlier estimate of a 0.17-point contribution.
Inventory investments likely subtracted 0.79 point from second-quarter GDP, more severe than the model’s prior forecast of a 0.63-point drag, the Atlanta Fed said.
The government will release its first reading on second-quarter GDP growth at 8:30 a.m. (1230 GMT) on Friday. Analysts polled by Reuters forecast the U.S. economy likely grew at an annualized 2.6 percent growth rate in the second quarter, faster than the 1.1 percent seen in the first quarter.
Source: Reuters (Reporting by Richard Leong Editing by W Simon and James Dalgleish)
The New Development Bank (NDB) set up by the BRICS countries — Brazil, Russia, India, China and South Africa — will help break the stranglehold of the U.S. dollar on global trade, a Brazilian expert has said.
“The establishment of the NDB is part of a desire to help crisis-hit countries without having to go to the World Bank or the IMF (International Monetary Fund),” Bruno Martarello de Conti, an economics professor and BRICS expert at the State University of Campinas in Sao Paulo, said in a recent interview with Xinhua.
On July 21, 2015, the NDB officially opened in Shanghai with its main focus on projects in infrastructure and sustainable development.
“The multilateral institutions set up after World War II were all centered around the U.S. dollar. The IMF lends loans in the U.S. dollar and they have to be paid back in the same currency. About 80 percent to 90 percent of international trade is denominated in the U.S. dollar,” the expert said.
“Therefore, the BRICS and the NDB can try and make operations in their own currencies, such as the renminbi or the real. It will foster the use of other currencies, which is important for the international monetary system,” he added.
Another interesting aspect is that the BRICS nations are ready to share some of their international reserves to help each other out at difficult moments, said Martarello de Conti, referring to the Contingent Reserve Arrangement, a reserve pool worth 100 billion dollars to be set aside for liquidity measures and crisis protection.
“When one of them is in crisis, they will have access to these reserves instead of seeking credit from the IMF, which imposes many constraints. We can set our own criteria for sharing these reserves, without depending on the IMF,” he said.
The NDB’s potential, the expert said, is not limited to the five BRICS countries. “The idea is to invite other countries in Latin America, Africa and even Greece to join the NDB. All the periphery countries can see the NDB as an important source of funds, in parallel of the World Bank.”
Besides, closer BRICS collaboration can bring its member countries closer together, Martarello de Conti said, citing the example of the China-Brazil cooperation.
“Chinese investment is very important for Brazil as it can be a source of demand for our economy to rebound,” he said, urging the two countries to work together on infrastructure.
“For example, China imports many soybeans from Brazil, but crops are mostly in the central-western states of Goias or Mato Grosso, states that are far from the shore. For the soybeans to get to the ports, they travel a long way by truck, making them even more expensive for the Chinese,” he said.
“Constructing a railway would be good for both Brazil and China, as imports would be at a lower cost,” he added.
Martarello de Conti said that the NDB can be a source of important funding for infrastructure in Brazil, saying that “we have the Brazilian Development Bank, which is important but has its limits. The NDB can be important for our development.”
The Bank of Japan expanded stimulus on Friday by doubling purchases of exchange-traded funds (ETF), yielding to pressure from the government and financial markets for bolder action, but disappointing investors who had set their hearts on more audacious measures.
The central bank, however, said it will conduct a thorough assessment of the effects of negative interest rates and its massive asset-buying program in September, suggesting that a major overhaul of its stimulus program may be forthcoming.
BOJ Governor Haruhiko Kuroda said the bank was conducting the review not because its policy tools have been exhausted but to come up with better ways to achieve its 2 percent target – keeping alive expectations of further monetary easing.
“I don’t think we’ve reached the limits both in terms of the possibility of more rate cuts and increased asset purchases,” Kuroda told reporters after the policy meeting.
“We will of course consider what to do in terms of monetary policy steps, based on the outcome of the assessment.”
At the two-day rate review that ended on Friday, the BOJ decided to increase ETF purchases so its total holdings increase at an annual pace of 6 trillion yen ($58 billion), up from the current 3.3 trillion yen. The decision was made by a 7-2 vote.
But the BOJ maintained its base money target at 80 trillion yen, as well as keeping to the existing pace of purchasing other assets including Japanese government bonds.
It left unchanged the 0.1 percent interest it charges on a portion of excess reserves that financial institutions park with the central bank.
The dollar fell more than a full yen on Friday at one point to as low as 102.825 and the Nikkei average tumbled nearly 2 percent, after the BOJ’s decision fell short of expectations.
The benchmark 10-year JGB yield rose briefly to minus 0.170 percent, its highest since June 24, as the BOJ held off on expanding bond purchases.
“The BOJ did not live up to expectations,” said Norio Miyagawa, senior economist at Mizuho Securities. “Increasing ETF purchases makes no contribution to achieving 2 percent inflation. The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”
By coordinating its action with the government’s promised $272 billion economic stimulus spending package, the BOJ likely aimed to maximize the effect of its measures on an economy that is struggling to escape decades of stagnation.
“Japan is conducting a powerful mix of flexible fiscal policy and quantitative easing,” Kuroda said. “The government’s stimulus package helps reinforce this drive and is timely in achieving sustainable growth with price stability.”
MORE STIMULUS COMING?
The BOJ maintained its rosy inflation forecasts for fiscal 2017 and 2018 in a quarterly review of its projections. It also left intact its timeframe for hitting its 2 percent price growth target, but warned that heightening uncertainties could cause delays.
Kuroda justified Friday’s slight easing as aimed at preventing external headwinds, such as weak emerging market demand and Britain’s vote to leave the European Union, from hurting business and household confidence.
But analysts say pressure from the government and markets was largely behind the move. Japan’s economy minister lobbied for more BOJ action in the wake of Prime Minister Shinzo Abe’s announcement of a bigger-than-expected 28 trillion yen stimulus package on Wednesday.
“The BOJ seems to have had no choice but to ease policy this time as markets had factored in fresh stimulus measures significantly. In addition to that, there seems to have been political pressure,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.
Worried about their dwindling policy options, some BOJ policymakers have expressed doubts over the feasibility of expanding an already massive stimulus program that has failed to boost inflation.
Such concerns may be addressed when the BOJ conducts an assessment of the effect of its current policies at its next rate review on Sept. 20-21, though Kuroda ruled out the chance of modifying the price target or the timeframe for hitting it.
He stressed that there was still more room to deepen negative rates or expand bond purchases. Some analysts say the review may lead to more radical steps being proposed.
“What’s noteworthy is that the BOJ has promised to review the effects of its policy at its next meeting, keeping alive expectations of further easing,” said Shunsuke Yamada, chief Japan currency strategist at Bank of America Merrill Lynch.
“This makes the next meeting very important. The yen is likely to be volatile until then.”
Source: Reuters (Additional reporting by Stanley White, Tetsushi Kajimoto, Minami Funakoshi, Lisa Twaronite and Shinichi Saoshiro; Editing by Chang-Ran Kim, Edmund Klamann and Eric Meijer)
Political pressure on the Bank of Japan to expand stimulus on Friday is intensifying with the economy minister calling on the bank to work with the government to boost economic growth.
Prime Minister Shinzo Abe sent a “powerful message” by announcing a 28 trillion yen ($267 billion) stimulus package on Wednesday, Economy Minister Nobuteru Ishihara was quoted as saying by Japanese media hours after the announcement.
The figure was larger than markets had expected.
“I think people at the BOJ will take that into account and make an appropriate decision. I think (BOJ Governor Haruhiko) Kuroda understands that the world is watching,” he said in a television appearance on Wednesday evening, the Kyodo news agency reported.
The remarks suggest the earlier-than-expected announcement of Abe’s economic package was an attempt by the government to pressure the BOJ into expanding stimulus at a two-day rate review ending on Friday.
“Abe’s announcement is a squeeze play on the BOJ. The BOJ has to move now. It is unavoidable,” said Hiroaki Muto, an economist at Tokai Tokyo Research Center.
“There is a growing sense that the BOJ cannot move the market on its own, which is part of the reason why the government wants to combine fiscal and monetary policy.”
Abe’s announcement of the package boosted Japanese stocks on Wednesday and reinforced market expectations that the BOJ will match fiscal stimulus with another dose of monetary expansion.
But the package is inflated by 15 trillion yen of loans from quasi-government financial institutions, loan guarantees and subsidies to private firms, sources briefed on the matter told Reuters.
Direct fiscal spending would be only around 7 trillion yen, just a quarter of the total package, the sources said, which could disappoint some market players expecting bigger outlays.
Another 6 trillion yen will be for a fiscal loan and investment program aimed at spurring private-sector spending such as for construction of a “maglev” train line.
Japan’s Nikkei average declined more than 1 percent on Thursday as the initial hype over Abe’s package fizzled. The market’s attention is now squarely focused on the BOJ.
There is near-consensus in markets the BOJ will sharply cut its inflation forecasts and further ease policy by expanding its already massive asset-buying program and possibly cutting interest rates deeper into negative territory.
But the central bank appears in little mood to deploy radical steps to overwhelm hyped-up market expectations, even if it were to ease.
Many BOJ policymakers prefer to hold off on easing on Friday, worried about the growing risks of further asset purchases, which are drying up bond market liquidity.
But Ishihara’s remarks suggest that political considerations may nudge the BOJ into action, even as it struggles to revive the economy with dwindling ammunition.
Sources familiar with the deliberations say finance ministry officials have been pressuring the BOJ behind the scenes to ease on Friday to drive borrowing costs even lower.
Kuroda, a former finance ministry bureaucrat, has ruled out the chance of adopting “helicopter money,” or direct underwriting of public debt. But he has also stated there was “nothing wrong” in coordinating fiscal and monetary action to boost the effect on growth.
Source: Reuters (Additional reporting by Takaya Yamaguchi, Stanley White, Tetsushi Kajimoto and Minami Funakoshi; Editing by Eric Meijer and Kim Coghill)
Britain’s housing market may see some near-term weakness after the Brexit vote last month, though it will take a while to fully assess the underlying trends, according to Nationwide Building Society.
The lender reported on Thursday that monthly house-price growth picked up to 0.5 percent in July from 0.2 percent in June, taking the annual gain to 5.2 percent. However, because it uses mortgage offer data, any impact from the U.K. vote to leave the European Union may not be fully captured in July’s figures.
Consumer confidence has plunged in the wake of the vote to leave the European Union, as has sentiment in the housing market. That could undermine demand, which has been supported in recent years by employment growth and low borrowing costs. Still, the impact on home prices isn’t clear as potential sellers could hold off putting their properties on the market at a time of heightened uncertainty.
“In the near term, increased economic uncertainty may lead to weaker demand for homes,” said Nationwide Chief Economist Robert Gardner. “The outlook for the housing market remains unusually uncertain and it may take several months for the underlying trends in the market to become evident.”
Homebuilder Taylor Wimpey Plc said this week that while it’s too early to assess what the longer term fallout from the referendum result may be, it’s not seen a meaningful impact so far.
U.K. housing has also softened since the start of the year, when demand was boosted by buyers trying to beat a tax change and save money on purchases. Gardner said that determining how much of any fall-back in activity is the result of the tax changes and how much is due to the referendum will be difficult.
Long-term inflation expectations among the British public fell to a record low this month, even though they anticipate higher inflation over the next year, according to a monthly survey published on Thursday.
Inflation expectations over the next five to 10 years fell to 2.4 percent, the lowest since the Citi/YouGov survey began in November 2005.
For the next 12 months, inflation expectations jumped to 1.8 percent compared with 1.5 percent in June, the highest level since November 2014.
“We expect the Bank of England to look through the likely short-term inflation spike and focus on declining long-term inflation expectations,” Citi economists said in a note.
“While still above the Bank’s 2 percent target, the decline by a full percentage point over the last three years, along with short-term worries about growth, warrants decisive Bank of England action.”
Source: Reuters (Reporting by Andy Bruce, editing by David Milliken)
The euro zone economy has remained surprising resilient to the shock of Britain’s vote to leave the European Union, fresh data showed on Thursday, a big contrast to the UK where signs of widespread economic pain are already apparent.
Euro zone economic sentiment improved this month, defying expectations for a decline, and German unemployment fell more than anticipated, supporting views that the bloc has so far shrugged off the impact of Brexit.
Still, Europe is unlikely to escape unscathed, economists argue. Export, investment and sentiment are likely to take at least a moderate hit in coming months as firms come to grip with the reality that Brexit in one form or another is irreversible.
“The stability/resilience in the euro area was broad-based across sectors in July and there is also nothing in the detail to suggest increased concern about the future,” JPMorgan economist Greg Fuzesi said. “It is too early to draw strong implications for our growth forecast, but the initial news is certainly better than expected.”
Euro zone sentiment improved in industry, services, retail and the construction sector while the business climate index, pointing to the phase of the business cycle, also increased sharply.
Forward-looking indicators were also solid, particularly for employment and services, even as manufacturing expectations dipped, reversing some of the previous month’s big gain.
Rebounding after a second weak quarter, Germany is again expected to be the engine of euro zone growth, preserving momentum at least for now.
“Employment growth is robust and is set to stay high according to the latest sentiment indicators,” HSBC economist Rainer Sartoris said.
“This view is supported by the number of unfilled positions, which keep on rising. The high demand for labour should continue to support wage growth, which will continue to support private consumption,” he added.
Such an upbeat outlook is in contrast with data out of Britain, where sentiment plunged this month, with consumer confidence taking the biggest hit and losses recorded across all sectors.
The figures come on top of already grim reading in recent days, which suggest Britain may struggle to stave off a recession.
British retailers suffered their sharpest fall in sales in four years after last month’s EU referendum while the purchasing managers index, the broadest survey of business confidence, fell by the most in its 20-year history.
The weak figures, which negate the impact of a sanguine second quarter GDP reading, all but assure that the Bank of England will cut rates next week for the first time since 2009.
But any brush with recession is bound to spread at least in part to the continent, weighing on growth and holding back the euro zone’s slow but steady recovery.
Indeed, a broad survey by the European Central Bank last week indicated that Brexit would reduce euro zone growth by 0.26 percentage point next year, a significant chunk for a bloc that is growing at only around 1.5 percent.
“Combined with the significant fall in UK confidence indicators, we continue to believe the eurozone growth will not be immune to the UK decision to leave the EU,” Clemente De Lucia, an economist at BNP Paribas said.
“The analysis of sub-components suggests the impact is likely to take more time to be reflected in the data. We estimate the total impact of Brexit on the bloc at about 0.5 percent of GDP over the next year and a half.”
Source: Reuters (By Balazs Koranyi, Additional reporting by Jan Strupczewski in Brussels; editing by Mark Heinrich)
U.K. businesses and consumers became much less upbeat about their prospects in the weeks following the June vote to leave the European Union, in contrast with their counterparts in the rest of the bloc, who were untroubled by the decision.
If sustained, the decline in confidence recorded by the European Commission’s monthly survey could weaken U.K. economic growth over coming months, since less optimistic businesses and households may be less inclined to raise their spending.
But the resilience of confidence in the eurozone should be positive news for the U.K., since it indicates that demand for the country’s exports should hold up, and may even be boosted by a weaker pound.
The commission on Thursday said its economic sentiment indicator for the eurozone–which aggregates measures of consumer and business confidence–rose to 104.6 in July from 104.4 in June. That was a surprise, since economists surveyed by The Wall Street Journal last week had expected to see a drop to 103.5 in response to the Brexit vote. It remained well above its average going back to 1990 of 100.0, indicating relative optimism among businesses and consumers.
However, the ESI for the U.K. fell sharply to 102.6 from 107.0 in June, reaching its lowest level since June 2013. However, it remained above the 100.0 level, which indicates businesses and consumers remain relatively optimistic about their prospects, and even further above the lows reached in the wake of the global financial crisis, when it troughed at 64.3 in March 2009.
The surveys were conducted in the early weeks of July, during a period in which political uncertainty was heightened in the U.K. as a new prime minister was being chosen by the ruling Conservative party, and she, in turn, was choosing members of a new government, including those who will conduct negotiations on a new relationship with the EU.
As that uncertainty abates, confidence may be boosted over coming months.
The commission confirmed the sharp fall in consumer confidence in the wake of the Brexit vote first noted by market researchers GfK U.K. Ltd, which conducts U.K. research on the Commission’s behalf. Sentiment also soured among manufacturing companies, service providers, retailers and construction companies.
The confidence survey is in line with other measures of Brexit’s immediate impact on the U.K. and eurozone economies. A measure of activity based on questioning of purchasing managers at manufacturers and services companies found the U.K. economy likely contracted in July as businesses responded to the uncertainty created by the Brexit vote by cutting output and payrolls, while the eurozone economy continued to grow as businesses added to their payrolls at the fastest pace in more than five years.
In a further sign that the eurozone economy has been little affected by the Brexit vote, Germany’s labor agency on Thursday said the number of people without jobs fell by 7,000 in July, a larger drop than economists had expected.
“The labor market has developed well in July,” said Frank-Jürgen Weise, the head of the labor agency.
Figures released on Wednesday showed U. K. growth accelerated in the second quarter, a sign the economy remained resilient in the run-up to the June referendum. Comparable figures for the eurozone will be released Friday, and economists expect that they will record a slowdown during the second quarter, albeit from a relatively strong first three months of the year.
ECB President Mario Draghi last week signaled that policy makers are open to providing additional stimulus should the U.K. vote appear likely to throw its efforts to boost inflation off course, but said it was too early to judge whether that would be the case.
The resilience of business confidence in the wake of the vote reduces the likelihood that policy makers will conclude more stimulus is needed when they next meet in September.
Euro-area economic confidence unexpectedly improved in July in a sign that the immediate impact on growth of Britain’s surprise vote to leave the European Union may be muted.
An index of business and consumer confidence rose to 104.6 in July from 104.4 the previous month, the European Commission in Brussels said on Thursday. Economists in a Bloomberg survey predicted a decline to 103.5.
“On the face of it, a lot of the business surveys look quite resilient up until now,” said Nick Kounis, head of macroeconomic research at ABN Amro NV in Amsterdam. “So far so good, but expectations indicators within a number of surveys have deteriorated more significantly. This could impact the activity measures over time.”
While the International Monetary Fund has warned that downside risks to global growth have increased significantly following the Brexit vote, policy makers from around the world haven’t succumbed to that kind of pessimism. European Central Bank President Mario Draghi has said that early estimates of the U.K. referendum’s economic impact need to be taken with a “grain of caution.” New growth and inflation forecasts are due in September.
Sentiment improved across most sectors in July, with a gauge of confidence in industry rising to the highest since December. Consumers were less optimistic than in June.
Unemployment fell in both Germany and Spain, separate data on Thursday showed. The jobless rate in Germany remained at a record low of 6.1 percent in July. In Spain, it fell to 20 percent in the second quarter, the lowest in almost six years.
Euro-area economic growth probably slowed to 0.3 percent in the three months through June from 0.6 percent in the previous quarter, according to a Bloomberg survey. Eurostat will release preliminary data on Friday, together with unemployment and inflation figures for the region.
The U.K. economy had a stronger-than-expected performance before Britons voted to opt out, with gross domestic product rising 0.6 percent in the April-June period after 0.4 percent. The pickup may mark the end of more than three years of uninterrupted growth — economists predict a mild recession in the second half of 2016.
Nine out of 10 Irish exporters see Britain’s vote to leave the European Union hurting businesses with more than half of those firms planning to diversify into different markets as a result, a survey showed on Thursday.
Ireland’s fast growing economy is considered more vulnerable than any other in the EU to Brexit with its exporters first to suffer after a significant weakening of the pound against the euro made their euro-priced goods more expensive.
In a survey conducted in the two weeks following the June 23 vote, the Irish Exporters Association (IEA) said 92 percent of members felt the decision by its neighbour and major trade partner to quit the EU would have a harmful effect on the sector.
The IEA is the main representative group for goods and service exporters in Ireland.
The weaker pound has already had an impact on two thirds of exporters, the survey found, while nearly three-quarters were concerned about currency volatility in the short term.
The curtailing of trade due to Brexit caused Ireland’s central bank to cut its forecast for economic growth for this year and next on Wednesday and warn of worse consequences ahead if Britain leaves on bad terms.
According to the survey, exporters are most concerned about the possible reintroduction of border controls between British-run Northern Ireland and the Republic of Ireland. This is closely followed by the impact on Irish economic growth and potential revival of customs procedures and tariffs.
However, some worries have eased since a similar survey was conducted in March ahead of the vote, with 79 percent of firms concerned over the impact to the Irish economy versus 83 percent previously while the effect on jobs was substantially lower at 44 percent from 60 percent four months ago.
“This may suggest that exporters are adapting to the idea of an EU without the UK. Ireland has traded with the UK for 1,000 years and we will continue to do so,” IEA Chief Executive Simon McKeever said.
“This current situation does highlight the need for Ireland to diversify its export markets. We need to focus more of our attention on high growth markets like China, India, Africa, South America and emerging opportunities in places like Iran.”
European Union rules limiting remuneration of bankers and financial firms’ staff may be too costly for smaller companies and could be reviewed, the European Commission said on Thursday, in a move that addresses concerns raised by banks.
The rules were adopted in the aftermath of the 2007-08 financial crisis in response to public outcry at bankers pocketing large bonuses after taxpayers had contributed to the bailout of several lenders in Europe.
Bankers and investment firms, especially in the City of London, complained that the rules would limit their ability to attract talent and would increase red tape.
The Commission, which has the power to propose and amend EU legislation, said on Thursday that the new provisions have been “effective in curbing excessive risk-taking behaviour and short-termism”, but added that “in certain cases, some of the rules may be too costly and burdensome to apply.”
“Our evaluation shows that there may be room to make remuneration rules more proportionate and less burdensome from an administrative perspective, in particular for smaller and less complex credit institutions and investment firms,” the commissioner responsible for pay policies Vera Jourova said, confirming earlier announcements.
Before proposing any changes, Brussels will conduct a study to assess more thoroughly the impact of bonus rules. Proposals may come in November, when the Commission plans to review rules on banks’ capital requirements.
Brussels will look at a possible review of rules concerning staff with low levels of variable remunerations and requirements on deferral and pay-outs instruments in smaller investment firms.
The Commission did not address the wider issue of caps, a measure loathed by banks, which limit bonuses to no more than fixed pay or twice that amount with shareholder approval.
Brussels said that it is too early to assess the impact of this measure as it was introduced only in 2014.
In March the European Banking Authority, the bloc’s banking watchdog, said caps on banker bonuses did not undermine financial stability and did not limit lenders’ ability to control costs.
Source: Reuters (Reporting by Francesco Guarascio)
Japan’s prime minister unveiled a surprisingly large $265 billion (£202 billion) stimulus package on Wednesday to reflate the world’s third-largest economy, adding pressure on the central bank to match the measures with monetary stimulus later this week.
The earlier-than-expected announcement to boost the flagging economy sent Japanese and other Asian stock markets higher while it weighed on the safe-haven yen, but lacked crucial details on how much of the package would be direct government spending.
The size of the package, at more than 28 trillion yen ($265.30 billion / £202 billion), exceeds initial estimates of around 20 trillion yen and is nearly 6 percent the size of Japan’s economy. It will consist of 13 trillion yen in “fiscal measures,” which likely includes spending by national and local governments, as well as loan programmes.
“We need to take steps to support domestic demand and put the economy on a firmer recovery path,” Shinzo Abe said in a speech in southern Japan on Wednesday. “I want to use various measures to increase our escape velocity from deflation.”
The market expects the Bank of Japan to produce some fire power of its own at its rate review ending on Friday.
“The amount is so large that the stimulus package is bound to have a big economic impact. It is impossible to spend this much money in one extra budget, so this may take place over the next few years,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
“The BOJ is likely to ease policy, including increasing government debt purchases, so you could say the BOJ can absorb the new debt. It also makes it easier to show that the BOJ and the government are working together.”
Many BOJ policymakers prefer to hold off on easing as they expect the fiscal stimulus package to boost growth and brighten the prospects for hitting their 2 percent inflation target.
But yen moves and political considerations could be decisive factors for the BOJ policymakers agonizing over whether to expand stimulus or to save their dwindling policy resources for when the economy takes a turn for the worse.
Japan’s Nikkei stock average rose nearly 2 percent on the larger-than-expected stimulus package, while the yen slumped against the dollar.
NO LASTING IMPACT?
Abe ordered his government earlier this month to craft a stimulus plan to revive an economy dogged by weak consumption, despite three years of his “Abenomics” mix of hyper-easy monetary policy, big spending and structural reforms.
As part of the package, the government said it would raise the minimum wage by 3 percent this fiscal year to ramp up consumer spending.
Sources told Reuters the package would have a headline figure of at least 20 trillion yen. Only about 9 trillion yen was to come from a combination of direct spending from both national and local governments and loan programmes.
Such “fiscal spending” appeared to have increased to 13 trillion yen. But the rest is likely to come from state subsidies to private firms and lending from quasi-government entities, which does not involve direct government spending and thus may not give an immediate boost to growth, analysts say.
Abe’s administration has also offered few hints on how it will finance the package, casting doubts on Japan’s ability to fix its tattered finances.
Sources have signalled the package will be funded in state budgets spawning several years. The government is considering issuing construction bonds but remains cautious about resorting to large-scale debt issuance.
Japan’s finance ministry denied a media report it was considering issuing 50-year government bonds for the first time to capitalise on ultra-low interest rates.
While Abe may have succeeded in giving stocks a temporary boost, some analysts have doubts the impact will last.
“Markets are used to this size of stimulus, so their reaction is neutral,” said Kyohei Morita, chief Japan economist at Barclays Capital. “The effectiveness of the stimulus package itself is questionable.”
Source: Reuters (Additional reporting by Minami Funakoshi; Editing by Chris Gallagher, Eric Meijer and Jacqueline Wong)
Fines for Spain and Portugal for failing to bring their budget deficits below the EU’s ceiling will be cancelled and deadlines to meet the rules extended under a European Commission proposal that officials said is backed by Germany.
The proposal made on Wednesday underlines the EU executive’s reluctance to impose fiscal discipline while anti-EU sentiment is rising and economic growth remains slow. It took a similarly lenient view when France missed deficit targets last year.
“Taking into account past efforts of Spain and Portugal, the current challenging environment, and arguments laid out in the recent requests, the college (of Commissioners) agreed today to propose a cancellation of the fines,” Commission Vice-President Valdis Dombrovskis told a news conference.
The decision not to fine Madrid and Lisbon was made by European Commissioners using a provision for exceptional circumstances, after both countries pleaded for clemency in letters to the EU executive.
Under EU rules, governments cannot run budget deficits higher than 3 percent of gross domestic product, a legal safeguard to ensure that excessive government borrowing does not undermine the common euro currency.
If the shortfall is greater than 3 percent, the Commission and EU ministers set a deadline for its reduction. If steps aren’t taken to meet the deadline, the government can be fined.
EU finance ministers last week backed a Commission view that neither Spain nor Portugal had taken effective action to meet deficit reduction targets agreed with the EU and that therefore the next step was to fine them 0.2 percent of GDP.
Portugal was meant to cut its deficit to below 3 percent last year, but the gap turned out to be 4.4 percent.
Spain was meant to bring its deficit below 3 percent this year, but is likely to miss the target in 2016 and next year, according to Commission forecasts.
But fines are highly sensitive politically. Spain has been without a proper government since the inconclusive elections in December 2015 and could therefore argue it was and is unable to quickly implement spending cuts.
Moreover, there is rising anti-EU sentiment across Europe which heavy-handedness from Brussels on budget rules could fuel further, especially at a time when many economists are calling for more spending to stimulate economic growth.
On the other side of the argument is the need to uphold the budget rules laid out in the Stability and Growth Pact that underpins the euro currency, which were sharpened during the sovereign debt crisis to curb over-spending by governments.
The credibility of the rules has already been badly damaged by the Commission’s decision last year not to fine France for its repeated abuse of the Pact.
The Commission had been divided over what course of action to take, with some arguing the fines should be cancelled and others insisting they must be imposed, even in a token amount, to uphold the credibility of the rules.
EU officials said it was German Finance Minister Wolfgang Schaeuble, usually seen as a fiscal disciplinarian, who had tipped the balance in favour of no fines. They said he had called several Commissioners from the same political family — the centre-right European People’s Party — and asked them to help Spain’s centre-right acting Prime Minister Mariano Rajoy.
“Satisfied with the decision of the European Commission. Fiscal consolidation, growth and employment are priorities for Spain,” Rajoy tweeted after the decision.
Socialist-ruled Portugal was let off the hook because it would have been too difficult to fine one country and not the other, EU officials said.
Schaeuble said last week that suspending payment of EU structural funds — another step envisaged by the beefed-up Pact — could be a more effective way of influencing a government’s budget policy than levying fines.
Economic Commissioner Pierre Moscovici seemed to echo that view, tweeting on Wednesday: “Fines would not have corrected the past and would have been counterproductive at a time when people doubt in Europe.”
Structural funds are paid from the EU budget to less wealthy member countries for projects, ranging from infrastructure development to fighting youth unemployment — an important issue for Spain.
The Commission said it would start a discussion on a partial freeze of the structural funds that would normally go to Spain and Portugal in 2017 in September, after the European Parliament — which has to be consulted — returns from its summer break.
It is not clear yet how much of the funds could be suspended. But the money can be unfrozen quickly once, for example, the two countries adopt 2017 budgets that show they intend to meet their commitments under EU rules.
Source: Reuters (Reporting By Jan Strupczewski; Editing by Philip Blenkinsop and Catherine Evans)