CURRENCY

CENTRAL BANKS TO KEEP STATUS QUO ON INTEREST RATES

The world’s central banks are in no mood to raise interest rates any time soon.

Jerome Powell, the US Federal Reserve chairman, said “a patiently accommodative monetary policy” is vital to bring the US unemployment rates down, which has reached 6.3% in January.

“In particular, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labour market conditions have reached levels consistent with maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time,” Powell said in February in a speech at the Economic Club of New York.

In addition, the Fed continued to increase its holdings of Treasury securities and agency mortgage-backed securities by USD 80 billion and USD 40 billion per month, respectively, until substantial further progress has been made toward its maximum-employment and price-stability goals.

The US economy grew 4% in the fourth quarter of 2020 according to the US Bureau of Economic Analysis (BEA), but annual GDP declined 3.5% during the year.

“The decrease in real GDP in 2020 reflected decreases in PCE (personal consumption expenditures), exports, private inventory investment, non-residential fixed investment, and state and local government that were partly offset by increases in federal government spending and residential fixed investment. Imports decreased,” the BEA said.

The US dollar has weakened as economic growth remains muted in the world’s largest economy.

The US Dollar Index, which tracks a basket of major currencies, has declined 8.76% to 90.39 over the past 10 months, although year-to-date it has clawed back some of the gains with a 0.50% increase.

Among major currencies, the euro has been one of the biggest beneficiaries of the weakening US dollar, rising nearly 12% over the past 12 months against the greenback to trade around the USD 1.2133 handle.

But the European Union is also looking to stimulate the economy with loose monetary policy.

As expected, the European Central Bank (ECB), at its first meeting of the year, made no changes to interest rates or its asset-buying programme after moving in December to bolster its efforts to support the Eurozone economy.

The ECB left its deposit rate at -0.5% and its main refinancing rate at 0%. In an accompanying press release, the central bank also affirmed it would maintain the "envelope" for its pandemic emergency purchase programme (PEPP) at EUR 1.85 trillion and would continue monthly purchases under the programme until at least the end of March 2022.

It added that if "favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation."

The ECB will also continue its asset purchase programme at a pace of EUR 20 billion a month.

Sterling, however, has been on a tear against the US dollar, rising 5.30% in the past three months alone.

At its first meeting for the year in February, the Bank of England’s (BOE) monetary policy committee (MPC) assessed that the existing stance of monetary policy remains appropriate.

“The MPC voted unanimously to maintain bank rate at 0.1%,” the bank said. “The committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at GBP 20 billion.”

Among emerging markets, the Chinese yuan has risen 7.45% against the greenback over the past 12 months, a clear beneficiary of the lacklustre dollar.

The People’s Bank of China has rolled out a number of measures since early 2020 to support the pandemic-hit economy, but has shifted to a steadier stance in recent months.

China will also avoid a sudden shift of monetary policy, the central bank said recently, adding that it will balance economic recovery with preventing risks, Reuters reported.

The Saudi government continues to take advantage of low interest rates. In January, the kingdom’s National Debt Management Center offered its eighth international issuance under the Global Medium-Term Note Programme.

The issuance was more than four times oversubscribed, with total orders amounting to more than USD 22 billion, according to the Ministry of Finance.

“The kingdom will issue a total of USD 5 billion (equivalent to SAR 18.75 billion), consisting of two tranches as follows: USD 2.75 billion (equivalent to SAR 10.3 billion) for 12-year notes maturing 2033, USD 2.25 billion (equivalent to SAR 8.4 billion) for 40-year notes maturing 2061,” the ministry said.