UK faces two-sided risks to economic recovery, but those risks are declining as time goes by
Toolkit decisions should not be interpreted about signal of future policy path
Negative rates contingency planning implies nothing about our intentions in that direction
Contingency planning for negative rates does not imply it is our chosen policy tool
QE is set to run its course at the end of the year
Covid has been both a demand and supply shock to the economy, and the recovery, therefore, has to be in both elements. Absent a dual recovery, dealing with the issues that arise will be more difficult.
Longer-term scarring damage to the economy will be more limited than in some past recessions, but there will most likely be structural change
Important to boost supply capacity to raise the sustainable rate of growth.”
Important to emphasize the role of the forward guidance that the MPC has adopted, and the announcements made a month ago on so-called toolbox issues.
Far from clear whether or to what degree changes to the economy during covid will persist post-covid and therefore what will be the longer-term impact on the economy.
My best guess is we will see some persistence of structural changes of the economy under covid, not full persistence but not a full reversion to pre-covid either.
German economy robust enough to deal with a longer weaker phase
German inflation to be slightly stronger than expected this year
Extended lockdowns into Q2 would only delay the recovery process
ECB can flexibly adjust pace of PEPP purchases if needed
We see spillovers from rising US borrowing costs
Must very carefully analyse rise in bond yields
Financing conditions are still favourable
Assumptions of underlying forecasts are still correct
Forecasts were based on lockdown measures until end of Q1
Some of the uncertainty has been cleared, such as Brexit, US election, vaccine
Start of the year is more positive than some would argue
We are monitoring exchange rate movements very carefully, but we do not target it
ECB will be 'extremely attentive' to exchange rate impact on prices
Impact of latest virus restrictions appears less than that in spring last year
Our best guess is GDP over Q4 was flat to slightly down
Mobility indicators are down more than in autumn, but less than in spring
Expects Q1 output to be weaker than November forecasts
Negative rates are a controversial issue
There are a lot of issues with negative rates
No country has used negative rates in 'retail' end of the financial market
Transmission of negative rates depends on banking system
BOE is doing a lot of work on whether negative rates are practical
There are good reasons to think we're in a world of low interest rates for a long period of time
Outlook for interest rates hinges on productivity growth
The coronavirus pandemic is continuing to have a strong adverse effect on the economy.
Against this difficult backdrop, the SNB is maintaining its expansionary monetary policy with a view to stabilising economic activity and price developments.
In light of the highly valued Swiss franc, the SNB remains willing to intervene more strongly in the foreign exchange market.
Furthermore, it is supplying generous amounts of liquidity to the banking system via the SNB COVID-19 refinancing facility.
The SNB’s expansionary monetary policy provides favourable financing conditions, counters upward pressure on the Swiss franc, and contributes to an appropriate supply of credit and liquidity to the economy.
In the current situation, the inflation outlook remains subject to high uncertainty.
The new conditional inflation forecast through to the end of 2021 is slightly lower than in September. This is primarily due to the renewed deterioration in the economic situation as a result of the second wave of the pandemic.
The forecast for 2020 is negative (−0.7%). The inflation rate is likely to be higher again next year (0.0%) and slightly positive in 2022 (0.2%). The conditional inflation forecast is based on the assumption that the SNB policy rate remains at −0.75% over the entire forecast horizon.
Momentum is likely to be weak in Q4 2020 and Q1 2021.
The SNB expects that GDP will shrink by around 3% this year.
SNB expects GDP growth of 2.5% to 3% for 2021.
Reuters reports that ECB policymaker Francois Villeroy de Galhau said that the amount of monetary stimulus is not the only question facing the European Central Bank and it also needs to look at how it is transmitted to the economy.
"In the face of prolonged uncertainty, out first objective must be keeping very favourable financing conditions as long as necessary," Villeroy said.
"To this end, the recalibration of instruments must focus in particular not only on the level of monetary support, but also on the duration, flexibility and efficient targeting, in short, the quality of monetary policy transmission," he added.
Reuters reports that ECB President Christine Lagarde said that the European Central Bank could "neither go bankrupt nor run out of money" even if it were to suffer losses on the multi-trillion-euro pile of bonds it has bought under its stimulus programmes.
"As the sole issuer of euro-denominated central bank money, the Eurosystem will always be able to generate additional liquidity as needed," Lagarde said.
"So, by the definition, it will neither go bankrupt nor run out of money. In addition to that, any financial losses, should they occur, would not impair our ability to seek and maintain price stability.
Reuters reports that European Central Bank policymaker Pablo Hernandez de Cos said that it will take time before any COVID-19 vaccine has a positive impact on the economy.
New restrictions imposed in euro zone countries to curb the second wave of the pandemic mean that the ECB's upcoming macroeconomic projections in December would be most likely revised downwards, de Cos added.
"The vaccine is very positive news, regarding investor confidence, consumers confidence and economic activity. But I would like to be cautious. In the short term, restrictions will continue across Europe," de Cos said.
The good news on the vaccine "will take time to translate into economic activity," he added.
Vaccine news starts to reduce the weight of uncertainty
Today's GDP data was in line with where we thought it would be
We've had a strong recovery, but there is still a huge gap
The recovery has been very uneven
Don't have a date in mind for negative rates review outcome
We have talked about yield curve control, but it's something I don't see a great need for at the moment
Great deal of work to be done with banks in deciding if negative rates are doable
We will have more information on Brexit in December meeting
Not yet at a point where we can reach a conclusion on negative rates
There is a risk that negative rates end up being counterproductive
Outlook for monetary policy is skewed towards adding further stimulus
QE is probably less potent now than in March
Risks are skewed towards even larger job losses
Difficult to see a scenario where all furlough workers are reintegrated seamlessly
The speed of the recovery is likely to be slower while the virus remains a concern
UK recovery in Q3 is a little bit ahead of expectations
The economy can be viewed as glass half-full or half-empty
Labour demand is weak, unemployment is higher than reported number
Investment is also very weak, but housing market is strong
We will do everything we can to support the UK economy
We have looked very hard at scope to cut rates further
That includes negative interest rates
Concluded that negative rates should be in the toolbox
We do not intend to take any action to tighten policy until there is very clear evidence of significant progress to achieve 2% inflation target sustainably
Like the Fed, BOE is flexible in returning inflation back to its target
The economy’s faster-than-expected rebound in the last few months has reflected a benign window in which large fiscal support has coincided with the relaxation of lockdown measures and low infection rates. This window may now be closing.
Unemployment is likely to rise significantly in coming quarters as the furlough scheme winds down and workforce participation recovers.
The strength in money growth is an indication of the exceptional level of fiscal and monetary policy support in recent months. It is unlikely to translate into excess spending given the economic impact from Covid-19.
Looking forward, I suspect that risks lie on the side of a slower recovery over the next year or two and a longer period of excess supply than the forecast in the August MPR.
If these risks develop, then some further monetary loosening may be needed in order to support the economy and prevent a persistent undershoot of the 2% inflation target.
Yields in the gilt market are extraordinarily low
Trends over many years have pushed down rates
We are not actively planning for negative rates
We are using tried and test policies such as QE
Important to stress that negative rates are now in the toolbox
Financial structure is a key conditionality for negative rates
BOE can support the transition by keeping rates low
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