# Major economies outside eurozone to ‘modestly’ decelerate – ECB

By Central Banking Newsdesk | News | 21 March 2019

Slow growth rates since “great recession” may point to fall in potential growth, say researchers

Major economies outside the eurozone are most likely to undergo a “modest” deceleration, rather than a drastic halt, according to research published in the European Central Bank’s latest economic bulletin.

The research draws a guardedly optimistic conclusion, arguing that “signals of a severe slowdown or recession appear contained” in major economies outside the eurozone.

But it warns that “downside risks abound, and have increased lately”. The researchers point to “an exacerbation of trade tensions, for example, or a ‘no-deal’ Brexit scenario” as having the potential to “negatively affect prospects for advanced economies”.

Some advanced economies are still benefiting from a positive output gap, the research says. The recovery began when most economies were experiencing very large output gaps. Growth is outstripping its long-term potential rate in these countries, the authors say, citing the US, Japan, Canada, Switzerland and Denmark.

The authors also point to a number of countries where economic recoveries have continued since the “great recession” caused by the financial crisis. The researchers say the UK, Norway and Australia all fall into this category.

But they say that Sweden “might have already transitioned into a phase in which activity is increasing at a pace below potential”.

The recovery of advanced economies since the great recession has been “relatively unusual in terms of both length and pace”, the authors argue: “The global expansion has now entered its tenth year, and is on track to become the longest on record.”

But they note that it is also “comparatively shallow” in a historical context. Accumulated GDP growth in non-eurozone advanced economies has been less than 20% since 2009, note the authors. This has beenwell below the levels seen in previous expansions”.

“The sluggishness of the recovery might be consistent with the view that potential growth has fallen in the past decade,” they warn.

# Swiss National Bank sharply lowers inflation expectations

By Central Banking Newsdesk | News | 21 March 2019

Central bank may have reached limits of monetary policy, observer argues

The Swiss National Bank (SNB) has cut its inflation expectations due to weaker growth globally, it says in its monetary policy assessment released today (March 21).

The central bank has left interest rates unchanged. Interest on sight deposits at the SNB stays at –0.75%, and the target range for the three-month Libor at between –1.25% and –0.25%.

The SNB has also revised down its December inflation forecasts. It now expects prices to increase by just 0.3% in 2019, down from the 0.5% in the previous assessment. Inflation is forecast now to rise to 0.6% in 2020, down from the 1% prediction in December.

These new forecasts “show that the SNB cannot act alone to avert periods of low inflation or outright deflation in Switzerland”, says Charlotte de Montpellier, economist at ING bank. “Its power to fight this risk is constrained because it has reached the limits of the instruments it can put in place.”

The central bank stated the inflation revision is “primarily attributable to weaker outlooks for growth and inflation abroad, and the resulting reduction in expectations regarding policy rates in the major currency areas going forward”.

### “Fiscal expansion needed”, analyst says

De Montpellier argues that if the global economic slowdown is more acute than expected, the SNB will lack policy options to increase prices. “As a result, a more expansionary fiscal policy will probably be needed in the future, alongside the SNB, to fight against deflationary pressures in Switzerland,” she says.

The SNB’s new forecast could mean the ultra-loose policy will remain in place in the foreseeable future. Rates in Switzerland have been unchanged since January 2015.

“We believe the SNB will not be able to raise rates for several years,” says de Montpellier. “It will have to wait for the next economic cycle to have the opportunity to increase them. In the meantime, negative rates are likely to remain the norm for Switzerland.”

Looser policy conditions in the US and Europe have special importance for the SNB’s inflation outlook. Global instability increases demand for the Swiss franc, which is considered a safe haven by international investors. Both trends contribute to reduce Switzerland’s import prices and, therefore, tend to contribute to lower inflation.

The SNB statement said the Swiss franc is “highly valued”. It announced the central bank “will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration”.

In order to prevent the franc from appreciating against the euro and the dollar, in the aftermath of the financial crisis the SNB started to buy sovereign debt and other assets denominated in both currencies. This increased total currency reserves to Sfr776 billion ($781 billion) at the end of 2018, according to central bank figures. # BoE on hold as Brexit weighs on outlook By Central Banking Newsdesk | Official Record | 21 March 2019 Policy-makers point to weak investment and continued uncertainty Policy-makers at the Bank of England voted to keep the headline interest rate on hold today (March 21), as uncertainty around Brexit continues to complicate decision-making. The main rate remains at 0.75%, with inflation close to the 2% target at 1.9%. Growth is forecast to be subdued but a little higher than previously thought, at 0.3% in the first quarter. At the monetary policy committee meeting, policy-makers noted wages were rising at around 3.5%, though there was little sign of a recovery in productivity. Wage growth could be a sign of inflationary pressures, but some MPC members said there was limited evidence of a strong link between wages and prices, minutes of the meeting show. Brexit is one of the main uncertainties facing the economy, and seems to have contributed to abnormally weak business investment, policy-makers said. Investment has now fallen in each of the past four quarters. The minutes state several times that the outlook is highly dependent on the final Brexit arrangement, which remains unclear just eight days before the March 29 deadline. Policy-makers continue to view gradual rate hikes as the most likely scenario, but say rates could move up or down in response to Brexit. # Norwegian central bank hikes rates as inflation rises By Victor Mendez-Barreira | News | 21 March 2019 Central bank increases the policy rate by 25 basis points to 1%, despite global uncertainty Norges Bank’s executive board decided unanimously to increase interest rates after its policy meeting today (March 21), in an effort to curb rising inflation. The central bank increased the key policy rate by 25 basis points to 1%. The decision follows its rate hike in September 2018, when Norges Bank started the tightening cycle. Norges Bank said it was tightening rates because “the upturn in the Norwegian economy appears to be stronger than anticipated earlier”. Norwegian inflation is rising. In February, Norway’s consumer price index, adjusted for tax changes and excluding energy, rose year-on-year by 2.6%, up from 2.1% in January, according to official data. This is well above Norges Bank’s target of “annual consumer price inflation of close to 2% over time”. Against this backdrop, the central bank’s executive board said it still viewed monetary policy as expansionary, and more rate increases will be necessary in 2019. The executive board’s current assessment is that the policy rate will be likely increased again in the course of the next half-year. “A policy rate that is too low over time may increase pressures in the economy, triggering acceleration in price and wage inflation,” says the monetary policy report released alongside the policy decision. The report forecasts the key policy rate will be increased to 1.75% at the end of 2022. The decision to raise rates runs against the trend recently followed by most major central banks. On March 20, the US Fed left interest rates unchanged, citing weaker inflation pressures and lower growth forecasts. The Federal Open Market Committee released documents showing most members do not expect a rate increase in 2019. On March 7, the European Central Bank said it will maintain rates at record-low levels through the end of 2019 as it revised down growth expectations. In this global economic environment, “the fact the Norges Bank is in tightening mode stands out”, says David Oxley, senior Europe economist at consultancy Capital Economics in London. Norges Bank said its decision does take into account the worsening economic outlook. “The uncertainty surrounding global developments and the effects of monetary policy suggests a cautious approach to interest rate setting,” says the policy statement. ### Strong local economy The monetary policy statement from Norges Bank’s executive board stressed Norway’s growth has been solid since autumn 2016. GDP in mainland Norway expanded by 2.2% in 2018, according to official data, and the central bank forecasts it will grow by 2.7% in 2019. The unemployment rate reached 3.7% in February, according to official statistics. Higher oil prices, boosting the value of Norway’s major export, and low interest rates have contributed to pushing up growth, the statement added. “The primary reasons for pulling the rate path up in the short end were higher-than-expected domestic demand and a weaker krone,” said Halfdan Grangård, senior economist at Scandinavian bank Handelsbanken. “The short-term outlook for domestic activity is still solid with the main boost coming from private investment.” # UK and EU agree template for no-deal Brexit supervision By Central Banking Newsdesk | News | 21 March 2019 Template sets out basis for supervision rules under no-deal Brexit UK and European Union supervisors have agreed a template for supervisory co-operation in the event of a no-deal Brexit, with the deadline for the UK’s departure from the EU little more than a week away. The Prudential Regulation Authority and Financial Conduct Authority signed the agreement with their EU counterpart, the European Banking Authority. The template will form the basis for memoranda of understanding with national supervisors in individual EU countries. The UK authorities plan to move “swiftly” to sign such bilateral agreements with supervisors across the EU, they said in a statement on March 20. “These agreements will ensure our continued co-operation in carrying out our supervisory responsibilities,” said PRA chief Sam Woods. “We have enjoyed a strong working relationship with our European partners for many years and I am confident that this will continue.” FCA chief Andrew Bailey added the action was a “clear signal” that authorities were determined to work together. “The MoUs build on years of continued working, and will ensure these can carry on if the UK leaves the EU without an agreement,” he said. “We are encouraged by the approach of the EBA on this vitally important matter.” Though the parties did not publish the text of the template, the EBA said it was similar to MoUs already signed between the EU and supervisory authorities outside the bloc. “The template covers both general concepts of information exchange and supervisory co-operation and specific aspects of co-operation in performing the most common supervisory tasks,” the EBA said in a statement. “Its aim is to ensure that there are no breakdowns in the supervision of cross-border financial institutions in the no-deal scenario.” ### No-deal risks The MoUs will only come into effect if the UK leaves the EU with no deal on March 29, a situation that implies a sudden rupture with no transition period. The Bank of England has warned several times of the likely negative impact on the economy, and says uncertainty around the outcome has been weighing heavily on the economy. With just eight days until the deadline and no political agreement yet struck, the risk of a no-deal Brexit appears to be significantly rising. While the UK government has written to the EU seeking an extension, EU officials say they will only grant such a thing if the UK parliament agrees a deal. Lawmakers have already twice rejected the withdrawal agreement proposed by Prime Minister Theresa May. The government is likely to put its deal to parliament for a third time next week. If the deal is voted down again, and if the EU refuses to revise the withdrawal agreement, the UK could exit with no deal. # FOMC cuts rate projections as Powell warns of slowing growth By Central Banking Newsdesk | News | 21 March 2019 Federal Reserve’s rate-setting body projects slower inflation, higher unemployment The Federal Open Market Committee turned even more dovish on March 20, as the majority of members revealed they do not expect a rate hike this year. At its meeting on March 20, the FOMC voted to hold the target band for the federal funds rate constant at its current 2.25–2.5%. At the press conference following the meeting, Federal Reserve chair Jerome Powell said growth is slowing “somewhat more than expected”. Data released by the FOMC shows its individual members are not expecting to raise policy rates again this year. The dot-plot chart shows the future path of the policy rate that individual FOMC members deem most likely to achieve the central bank’s dual mandate. The chart released after the meeting shows only five out of 17 FOMC members expect rates to be above the current target band for the federal funds rate this year. On average, members’ projections for the rate this year moved down to 2.5%, from 2.9% projected in December 2018, the statement shows. The FOMC members’ average projection for US GDP growth in 2019 is now 2.1%, down from 2.3% in December and 2.5% in September 2018. The committee’s estimates of unemployment also shifted upwards from earlier projections. On average, FOMC members estimate unemployment will reach 3.7% at the end 2019, up from projections of 3.5% in September and December. The unemployment rate is currently 3.8%. “Average monthly job growth appears to have stepped down from last year’s strong pace, but job gains remain well above the pace necessary to provide jobs for new labour force entrants,” Powell said. ###### It may be some time before the outlook for jobs and inflation call clearly for a change in policy Jerome Powell, Federal Reserve Powell said inflation remains “muted”, as members revised down their December projection by 0.1 percentage points to 1.8%. In December, year-on-year inflation stood at 1.7%. “It may be some time before the outlook for jobs and inflation call clearly for a change in policy,” Powell said. “Data are not currently sending a signal that we need to move in one direction or another.” ### Balance sheet plans The Fed also announced on March 20 that it will slow the pace of its balance sheet reduction programme, also known as quantitative tightening. The Fed said it aims to end the process entirely at the end of September 2019. Powell said the balance sheet will be roughly 17% of US GDP in September, down from its peak of 25% in mid-2014. He estimates its eventual size will be “a bit above”$3.5 trillion. The balance sheet is currently around $3.97 trillion. Once quantitative tightening ends, the FOMC expects to hold the overall size of the balance sheet constant for some time, as the level of reserves in September is likely to be “somewhat above” the level needed for the effective implementation of monetary policy, Powell said. “During such a period, persistent gradual increases in currency and other non-reserve liabilities would be accompanied by corresponding gradual declines in reserve balances to a level consistent with efficient and effective implementation of monetary policy,” the balance sheet statement says. FOMC discussions about the long-run maturity and asset composition of the balance sheet are continuing, Powell said. # People: Malpass emerges as sole candidate for World Bank president By Central Banking Newsdesk | News | 21 March 2019 Bank of England extends Martin Taylor’s time on financial policy committee International: David Malpass is set to become the World Bank’s next president, after the organisation announced that there had been no other nominees for the role. Malpass, the undersecretary for international affairs at the US Treasury, was nominated by the administration of US president Donald Trump in February. His final hurdle will be an interview with the World Bank’s external directors that will take place in the “coming days”, the organisation said in a statement issued on March 14. The World Bank has said it will conclude the selection process before the spring meeting later this year. Kim left the role in February, stepping down three years early from his second five-year term. UK: Martin Taylor will get an extra year on the Bank of England’s financial policy committee, as a result of changes around the appointment of Jayne-Anne Gadhia. Gadhia was appointed as an external member of the FPC in January to replace Taylor. However, her commitments to working for private sector firm CYBG means she will now join the committee in April 2020. The delay will ensure she is “free from conflicts”, the BoE said in a statement. In October 2018, Virgin Money was acquired by CYBG to create the UK’s sixth-largest bank. Gahdia, who was chief executive of Virgin Money at the time, stepped down from her position but agreed to stay on as an adviser to CYBG chief executive David Duffy for 18 months. “The delay to her start date will ensure she does not have to recuse herself from significant parts of the FPC’s work,” the BoE said in a statement. US: Alan Krueger, a prominent economist and public servant, passed away on March 16 according to a statement from Princeton University where he was a professor. “Alan was recognised as a true leader in his field, known and admired for both his research and teaching,” the university said. He was 58 years old. Krueger had an extensive career, serving as assistant secretary of the Treasury for economic policy under President Barack Obama. He went on to serve as chair of Obama’s council of economic advisers. His early work concerned the effect of the labour market, studying the effect education had on earnings and the impact the minimum wage had on employment. Krueger’s later work was less traditional. In one of his books, he looked at the economic background of terrorists and concluded they often come from middle-class, college-educated backgrounds. Chile: Raimundo García Vergara has been appointed to the role of operations division manager by the Central Bank of Chile. The role is new and follows the creation of the operations division in August 2018 as part of the bank’s overhaul of its internal structure. He will take up the role in April. Vergara is an engineer by trade and will leave his role at the Universidad Diego Portales where he has been responsible for the university’s logistical needs. # Denmark set to continue growing despite risks – central bank By Central Banking Newsdesk | Official Record | 21 March 2019 The Scandinavian economy is prepared to withstand external shocks, says analysis Denmark is expected to continue its long expansion over the next few years as the economy has become resilient to external shocks, according to analysis published on March 20 by the National Bank of Denmark. “The upswing in the Danish economy continues for the sixth consecutive year,” says the central bank. However, the expansion will likely run at a slightly slower pace – GDP is forecast to grow by 1.7% in 2019 and 2020, and by 1.65% in 2021. “This is only natural after several very good years,” the central bank adds. The analysis stresses Denmark is a small open economy dependent on global developments. It adds the global economic slowdown may be more severe than expected, and notes the trade conflict between the US and China has not been resolved and may worsen. Brexit may cause additional problems. In spite of all these factors, the central bank remains relatively sanguine. “The Danish economy is well prepared for addressing the current risks. Danish firms and households both have considerable savings and their wealth is substantial,” says the analysis. Thanks to this internal buffer, if external demand did contract, the central bank believes the local economy would have the resources to offset the decline. # Mortgage innovations fuelled pre-crisis housing boom – paper By Central Banking Newsdesk | Research | 21 March 2019 Researchers look at 60 million US mortgages to examine non-traditional mortgage products A rise in mortgage innovations – such as teaser rates, interest-only loans or negative amortisation periods – helped fuel the rise of house prices in the decade before the financial crisis, researchers find in a paper published by the Federal Reserve Bank of Chicago. Jane Dokko, Benjamin Keys, and Lindsay Relihan use data on more than 60 million loans and house price indexes for 1,163 US counties to examine the use of non-traditional mortgage products from 1993–2007. They find that in counties where the housing market boomed before 2000, the rise in house prices was likely driven by economic fundamentals. However, they find evidence that later housing market booms were preceded by an increase in non-traditional mortgage products. In the year before the start of later housing booms, the share of mortgages with non-traditional financing features increased by 5 percentage points, the authors say. This is primarily due to the use of variable rate and interest-only mortgage products, they say. Furthermore, in the year before the later housing booms, credit denial rates fell and there was a shift away from mortgages financed by the Federal Housing Administration towards subprime loans, they find. # Fed set to end quantitative tightening in September By William Towning | News | 20 March 2019 FOMC will also slow the pace of its balance sheet reduction programme from May The Federal Reserve is to slow the pace of its balance sheet reduction programme – known by some as “quantitative tightening” – with the goal of concluding it completely at the end of September, it announced in a monetary policy statement today (March 20). Starting from May, The Federal Open Market Committee said it will reduce the cap on monthly redemptions of Treasury securities to$15 billion a month, down from the current $30 billion. It also intends to allow its holdings of mortgage backed securities to decline, with the intention to hold primarily Treasury securities in the long-run. In October, the payments the Fed receives from its agency debt and mortgage-backed securities will be reinvested in Treasuries, up to a maximum of$20 billion a month. Anything above $20 billion will be reinvested in agency MBS. Once quantitative tightening ends, the committee expects to hold the overall size of the balance sheet constant for some time, as the level of reserves in September is likely to be “somewhat above” the level needed for the effective implementation of monetary policy. “During such a period, persistent gradual increases in currency and other non-reserve liabilities would be accompanied by corresponding gradual declines in reserve balances to a level consistent with efficient and effective implementation of monetary policy,” the statement says. The current maximum$50 billion a month pace of shrinkage will continue in March and April, before slowing to $15 billion in May. As the balance sheet is currently at around$3.97 trillion, that implies the smallest possible end-point is around $3.8 trillion. That is far above the 2008 level of around$900 billion. However, the economy has grown significantly since then and the value of banknotes in circulation is much higher, having risen on average by about \$90 billion each year. Other non-reserve liabilities have also grown.

In a speech on February 22, vice-chair Randal Quarles said, “this plan would substantially reduce the pace of the decline in reserves, allowing us to gradually approach our assessment of the appropriate amount of reserves for the efficient and effective implementation of monetary policy.”

The FOMC said today that some outright sales of mortgage-backed securities may be necessary in the future to reduce or eliminate its residential holding. However, the committee will communicate this “well in advance”, the statement says.

The committee also voted to hold the target band for the federal funds rate constant at 2.25–2.5%. The effective federal funds rate was 2.4% on March 19.