Category Archives: Economics

Riksbank: Brighter outlook, but the risks to financial stability are still elevated

With the help of extensive support measures, the Swedish financial system has coped relatively well during the pandemic and a financial crisis has been avoided. Credit supply has been maintained and important funding markets are now working satisfactorily. However, the risks to financial stability are still elevated. It is important for economic policy to continue to support the economic recovery, while also taking longer-term vulnerabilities into account.

Extensive support measures have prevented a financial crisis

The coronavirus pandemic is continuing to restrict economic developments. However, extensive support measures have helped to mitigate the economic consequences, and enabled the financial system to cope relatively well through the pandemic.

Over the winter and spring, further major fiscal policy stimulus packages have been launched and central banks have continued with large-scale asset purchases and extensive lending programmes. At the same time, vaccinations are under way and the outlook is brighter than when the Riksbank’s previous Financial Stability Report was published in November 2020.

Uncertain future and the risk of setbacks

The risks to financial stability are still elevated. Although the global economy has shown itself to be more resilient lately, we still do not know how the pandemic will develop and what effects it may have. Companies and households have been affected with varying severity during the pandemic. With time, the negative effects have become significantly more concentrated to parts of the service sector. Bankruptcies risk increasing in the period ahead, both in Sweden and abroad, particularly if the support measures are phased out quickly. Banks would then also risk major loan losses.

Sharply rising asset prices in several countries during the pandemic, together with increasing indebtedness, are also part of the risk outlook. In Sweden, for example, housing prices have risen sharply, which has probably to do with the unusual economic effects of the pandemic. The ability and willingness of many households to spend money on housing has increased during the pandemic. In addition, the increase in unemployment can be seen primarily among temporary workers, who normally have a weak position on the housing market.

There are vulnerabilities in the financial system that were already there prior to the pandemic. In the euro area, these are mainly a matter of weak banks and public finances, while in Sweden they mainly concern high household indebtedness and high levels of exposure among the major banks to residential and commercial properties. A crisis in the property market could threaten the stability of the Swedish financial system.

Economic policy needs to cooperate to support the recovery and counteract financial imbalances

The economic recovery requires monetary policy and fiscal policy to remain expansionary. At the same time, economic policy also needs to take longer-term vulnerabilities into account. The most appropriate way of combating these is via targeted structural measures, well-designed financial regulation and macroprudential policy. The Riksbank’s measures are having a broad impact on the economy and are therefore not particularly appropriate for counteracting financial imbalances within individual sectors in the prevailing economic situation.

The risks of high household indebtedness and the rapid upturn in prices in the housing market make it important for Finansinspektionen (FI) to allow the temporary exemption from the amortisation requirements to expire in August as planned. If the economic recovery continues as expected, it is also desirable that FI announces that the value of the countercyclical capital buffer will be increased, not least as increases are implemented with a time-lag of twelve months.

It is also important to work on a broad front to rectify identified weaknesses and further strengthen the resilience of the financial system. This is a question of, among other things, managing global challenges such as cyber risks and climate change. It is also a question of achieving a better-functioning Swedish market for corporate bonds and limiting the risks inherent in funds with corporate bond holdings.

RBNZ: Monetary Support Continued

The Monetary Policy Committee agreed to maintain the current stimulatory level of monetary settings in order to meet its consumer price inflation and employment objectives. The Committee will keep the Official Cash Rate (OCR) at 0.25 percent, and the Large Scale Asset Purchase and Funding for Lending programmes unchanged.

The global economic outlook has continued to improve, with ongoing fiscal and monetary stimulus underpinning the recovery. New Zealand’s commodity export prices have benefited from this rise in global demand. However, divergences in economic activity, both within and between countries, remain significant. The sustainability of the global economic recovery remains dependent on the containment of COVID-19.

The near-term economic data will continue to be highly variable. While economic growth in New Zealand slowed over the summer months following an earlier strong rebound, construction activity remains robust. The aggregate level of employment has also proved resilient, while fiscal spending continues to support domestic economic activity.

However, tourism-related business activity continues to be affected by the absence of international visitors, with the recent opening of Trans-Tasman travel expected to only partially offset revenue losses. The extent of the dampening effect of the Government’s new housing policies on house price growth and hence economic activity will also take time to be observed.

Overall, our medium-term outlook for growth remains similar to the scenario presented in the February Statement. Confidence in the outlook is rising as the more extreme negative health scenarios wane given the vaccination progress globally. We remain cautious however, given ongoing virus-related restrictions in activity, the sectoral unevenness of economic recovery, and the weak level of business investment.

A range of international and domestic factors are currently resulting in rising costs for businesses and consumers. These factors include disruptions to global raw material supplies, higher oil prices, and pressure on shipping arrangements. These price pressures are likely to be temporary and are expected to abate over the course of the year.

The Committee noted that medium-term inflation and employment would likely remain below its Remit targets in the absence of prolonged monetary stimulus. The Committee also noted that while the low interest rate environment has supported house prices, other factors such as recent tax changes, the growing supply of housing, and lending restrictions, are providing offsetting pressures.

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience.

Summary Record of Meeting

The Monetary Policy Committee discussed economic developments since the February Statement, and their implications on the outlook for inflation and employment. The Committee noted the ongoing improvement in global economic activity and the associated rise in long-term wholesale interest rates. Fiscal and monetary stimulus are continuing to underpin the global recovery. However, the varied pace of national vaccination programmes, and the re-introduction of COVID-19 containment measures in some countries, means that the growth outlook remains uncertain, and uneven within and across countries.

Economic activity in New Zealand has returned to close to its pre-COVID-19 level. The increase in economic activity has been supported by ongoing favourable domestic health outcomes. This has led to a catch up in consumer spending, supported by substantial monetary and fiscal stimulus.  Improving global demand and higher prices for New Zealand’s goods exports are also contributing to economic activity.

The Committee discussed the key factors underpinning the economic recovery and agreed that the outlook was unfolding broadly as outlined in the February Statement. The improvement in global and domestic economic indicators, such as New Zealand’s terms of trade, have provided members more confidence in this outlook. However, the Committee agreed on the need for caution as domestic activity remains uneven across sectors of the economy.

The Committee noted areas of the economy where business activity levels remained low. The sectors most exposed to international tourism remain weak, despite the recent re-opening of travel with Australia. Business investment also remains below its pre-COVID-19 level, although recent indicators of investment intentions suggest signs of recovery.

The Committee noted that the level of employment has remained resilient. Reports of specific skill and seasonal worker shortages have the potential to put upward pressure on some wage costs. The economy is experiencing pockets of both labour shortages and employment slack, consistent with the economic disruption caused by COVID-19.

The Committee agreed that, in aggregate, the current level of employment remains below their estimates of the maximum sustainable level but expect it to converge to that level over time. They also expect to see wage growth lift as firms compete for labour, in particular given the current low levels of immigration.

The Committee noted that underlying CPI inflation currently remains slightly below their target midpoint of 2 percent per annum. A range of domestic and international factors are expected to lift headline inflation above 2 percent for a period. Members noted these factors are expected to be temporary and include higher international transport costs, disruptions to global raw material supplies and resulting higher prices for many commodities, and administrative charges.

The Committee discussed the risk that these one-off upward price pressures may promote a rise in more general inflation and inflation expectations. However, the Committee agreed that these risks to medium-term inflation were mitigated by ongoing global spare capacity and well-anchored inflation expectations.

The Committee assessed the effect of its monetary policy decisions on the Government’s objective to support more sustainable house prices, as required by its Remit. It was noted that the current level of house prices result from a range of factors including low global and domestic interest rates, housing supply shortages, land use regulations, and strong investor demand.

However, the Committee acknowledged that some of the factors supporting house price growth have eased. In particular they noted the current high rate of housing construction, historically low population growth, increased loan-to-value ratio restrictions, and the Government’s recent changes to housing tax and supply policies. These factors place downward pressure on the longer-run level of sustainable house prices and are consistent with a period of significantly lower house price growth.

The Committee noted risks remain to economic growth both on the upside and downside. However, they expressed greater confidence in their outlook for the economy given the reduced risk of extreme downside shocks to the economy from COVID-19.

The Committee noted that on current projections the OCR eventually increases over the medium term, but agreed that this is conditional on the economic outlook evolving broadly as anticipated. In line with their least regrets framework, members reinforced their preference to maintain the current level of monetary stimulus until they were confident that the inflation and employment objectives would be met. They agreed this would require considerable time and patience.

The Committee discussed the effectiveness of monetary policy settings since the February Statement. The Committee noted staff advice that the LSAP programme has provided substantial monetary policy stimulus to date.

Staff noted that reduced government bond issuance was placing less upward pressure on New Zealand government bond yields. This also provided less scope for LSAP purchases with the limits outlined in the letter of indemnity, specified as a percentage of government bonds outstanding. Based on current Treasury projections for the issuance of New Zealand government bonds, the Committee acknowledged that the LSAP programme could not reach the $100bn limit by June 2022.  Members affirmed that this dollar figure was a limit, not a target.

Members endorsed staff continuing to adjust weekly bond purchases as appropriate, in particular taking into account market functioning. The Committee agreed that weekly changes in the LSAP purchases do not represent a change in monetary policy stance, and that any desired change in stance would be made via the usual Monetary Policy Committee communication channel.

The Committee agreed that the OCR is the preferred tool to respond to future economic developments in either direction.

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. The Committee agreed it will take time before these conditions are met.

On Wednesday 26 May, the Committee reached a consensus to:

  • hold the OCR at 0.25 percent;
  • maintain the existing LSAP programme; and
  • maintain the existing Funding for Lending Programme (FLP) conditions.

Attendees:
Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha
External: Bob Buckle, Peter Harris, Caroline Saunders
Observer: Bryan Chapple
Secretary: Sandeep Parekh

Governor Christopher J. Waller: The Economic Outlook and Monetary Policy

At The Global Interdependence Center’s 39th Annual Monetary and Trade Conference, The LeBow College of Business, Drexel University, Philadelphia, Pennsylvania (via webcast)

Thank you, Kathleen, and thank you, George and the Global Interdependence Center, for the invitation to speak to you this afternoon. I am with you to talk about my outlook for the U.S. economy and the implications for monetary policy.1 In the last week we have received employment and inflation reports that have garnered a lot of attention. Incorporating this information into my outlook, I have two messages today. The first is that, despite an unexpectedly weak jobs report, the U.S. economy is hitting the gas and continuing to make a very strong recovery from the severe COVID-19 recession. Let’s remember, and this applies to latest inflation data too, that a month does not make a trend—the trend for the economy is excellent. My second message is that, despite the unexpectedly high CPI inflation report yesterday, the factors putting upward pressure on inflation are temporary, and an accommodative monetary policy continues to have an important role to play in supporting the recovery.

The pandemic and resulting public health response led to the sharpest drop in employment and output the United States has likely ever experienced—22 million jobs lost in eight weeks and an annualized decline of 30 percent in real gross domestic output for the second quarter of 2020. These numbers are simply staggering, and they left us in a deep, deep hole. Not so long ago, it seemed like the economic damage from COVID-19 might be with us for a long time, and that a full recovery could take many years. But thanks to the rapid development of vaccines and aggressive fiscal and monetary policy, the economy is recovering much faster than anyone expected six months ago.

I said a few weeks ago that the economy was ready to rip, and in many respects, that is exactly what it is doing. The initial estimate of first quarter real gross domestic product (GDP) growth came in at a 6.4 percent annual rate, surpassing the level of output in the first quarter of 2020, before the full force of COVID-19 hit the economy. Second-quarter growth is likely to be as much as 8 percent, and the prospects are good that GDP will be close to trend output by the end of 2021. New home sales continue to be strong. We are seeing robust household spending on durable goods despite supply bottlenecks that I will discuss in a moment. Surveys of purchasing managers point to continued solid growth in both manufacturing and business services.

So, what about that jobs report? That thud you heard last Friday was the jaw of every forecaster hitting the floor. It was a big surprise for me and most people, but it probably should not have been, because it fits with what we have been hearing from businesses about labor supply shortages. GDP is back to its pre-pandemic level, but we have recovered only 14 million of the 22 million jobs lost last spring.

To fully understand how the labor market is performing, I like to refer to the Federal Reserve Bank of Atlanta’s labor market distribution spider chart.2 The chart plots data for 15 different labor market indicators in an easy-to-read manner. Using this chart, you can compare all these indicators for February 2020, April 2020, and March 2021. Looking at these months allows one to compare the very healthy labor market of February 2020 with the depths of the pandemic decline in April 2020 and see both how well we have rebounded since then and how much farther we still have to go.

The takeaway from that chart is that the labor market has recovered on many dimensions, such as hiring plans, job openings, quits rates, and firms unable to fill job openings. But on other dimensions, the labor market is far from recovering to its pre-pandemic level. Employment, as I said, is still below where it was in February 2020, by 8 million jobs. The unemployment rate is still 2.5 percentage points higher than it was in February 2020, and we know that it is even worse for some groups—nearly 10 percent for Black workers and nearly 8 percent for Hispanics. The employment-to-population ratio continues to be depressed from February 2020. The upshot is that several measures of labor market conditions have fully recovered, but other measures indicate that the overall labor market has a long way to go to get back to full strength. In short, some of the labor market’s cylinders are firing away, and some are still sputtering, so monetary accommodation continues to be warranted.

This chart, like the disappointing jobs report for April, shines a light on a current puzzle characterizing the U.S. labor market—a lot of job openings, but high unemployment rates and a low labor force participation rate. We hear repeatedly from our business contacts about firms boosting wages yet still being unable to attract workers.3 While clearly this is a real problem for some firms at the moment, I believe this mismatch is temporary.

I think of the current problem as follows. When the pandemic hit, both labor demand and labor supply fell dramatically. The combination of widespread vaccines and fiscal and monetary stimulus caused consumer demand to recover sharply. This situation, in turn, caused labor demand to rebound quickly, particularly in goods-producing industries. However, due to factors like continued fears of the virus, the enhanced unemployment insurance, child-care issues, and early retirements, labor supply has not rebounded in the same fashion, which led to a situation with excess demand for labor and upward pressure on wages.4 And that is exactly what we saw in the April jobs report. Average hourly earnings rose 20 cents in April for private-sector nonsupervisory workers, to $25.45.

But it is likely the labor supply shortage will be temporary. As vaccinations continue to climb, fears of reentering the labor force should decline. By September, most schools and daycare facilities are expected to fully reopen, resolving recent child-care issues for many families. Finally, the enhanced unemployment benefits passed in response to the pandemic expire in September, and research has shown repeatedly that the job-finding rate spikes as unemployment benefits run out.5 Thus, while labor demand is currently outrunning labor supply, supply should catch up soon.

Now let me turn to the other leg of the Fed’s dual mandate, price stability. That second thud you heard yesterday was forecasters’ bodies following their jaws to the floor after the CPI report was released. It was a surprise, but a look at its causes doesn’t alter my fundamental outlook, which is that the main pressures on inflation are temporary.

First, let me address concerns that strong growth threatens to unleash an undesired escalation in inflation. In August 2020, the Federal Open Market Committee (FOMC) adopted a new policy framework that includes flexible average inflation targeting and a policy stance based on economic outcomes as opposed to economic forecasts.

Flexible average inflation targeting means we aim to have inflation overshoot our 2 percent longer-run goal if inflation had been running persistently below target. Given that we missed our inflation target on the low side consistently for the past eight years or so, the FOMC has said that it will aim to moderately overshoot its inflation target for some period but then have it return to target. Our willingness to aim for above-target inflation also means we will not overreact to temporary overshoots of inflation—we need to see inflation overshoot our target for some time before we will react.

An outcomes-based policy stance means that we must see inflation before we adjust policy—we will not adjust based on forecasts of unacceptably high inflation as we did in the past. Call this the “Doubting Thomas” approach to monetary policy—we will believe it when we see it.

We asked to see it, and lo and behold, we are now starting to see inflation exceeding our inflation target. But the critical question is: for how long? Although inflation is starting to exceed our 2 percent target, in my view, this development is largely due to a set of transitory factors that are occurring all at once. I can think of at least six.

First, there is what we economists call “base effects,” which is the simple arithmetic of what happens when the very low inflation readings of the first half of 2020 fall out of our 12-month measure of inflation. That adjustment will be over in a few months. A second temporary factor is higher energy prices, which have rebounded this year as the economy strengthens but are expected to level off later this year. Retail gasoline prices have jumped in some areas due to the disruption of the Colonial Pipeline, but the effect on inflation should be temporary also.

A third factor is the significant fiscal stimulus to date. Stimulus checks put money in people’s pockets, and when they spend it, there will be upward pressure on prices. But when the checks are gone, the upward pressure on prices will ease.

A fourth factor is a reversal of the very high savings that households have built up over the past year. As households draw down these savings, demand for goods and services will increase, which again will put upward pressure on prices. But, just like stimulus checks, once the excess savings is gone, it is gone, and any price pressures from this factor will ease.

A fifth factor is supply bottlenecks that manufacturers and importers are currently experiencing; supply chain constraints are boosting prices, particularly for goods—less so for services. One strength of a capitalist system is that markets adjust. If demand and prices rise for a product, supply will follow, and bottlenecks will dissipate. So once again, price pressures induced by bottlenecks should reverse as supply chains catch up and orders get filled.

Finally, the excess demand for labor I described earlier is likely to continue to push wages up in the next couple of months. How much of this increase gets passed through to prices is unknown, but some of it will. However, as I argued earlier, once labor supply catches up, this wage pressure should ease.

I expect that all of these factors will cause inflation to overshoot our 2 percent longer-run goal in 2021. But they will not lead to sustained, high rates of inflation. Financial markets seem to think the same—5-year breakeven inflation expectations are around 2.5 percent, and 5-year, 5-year-forward measures are around 2 percent, when adjusted for the difference between CPI (consumer price index) and PCE (personal consumption expenditures) inflation rates.6 Hence, markets do not believe the current factors pushing up inflation will last for long.

While I fully expect the price pressure associated with these factors to ease and for some of the large increases in prices to reverse, it may take a while to do so. Shortages give producers pricing power that they will be reluctant to let go of right away. Wage increases for new workers may cause firms to raise wages for existing workers in order to keep them. Consequently, there may be knock-on effects from the current wage increases. The pandemic has also caused firms to restructure their supply chains, and, as a result, bottlenecks may last longer than currently anticipated as these supply chains are rebuilt. There are also asymmetric price effects from cost shocks—prices go up very quickly but often tend to come down more slowly, as consumers slowly learn that the bottlenecks have gone away.

For these reasons, I expect that inflation will exceed 2 percent this year and next year. After that, it should return to target. And in my view, this fluctuation is okay—our new framework is designed to tolerate a moderate overshoot of inflation for some time as long as longer-term inflation expectations remain well-anchored at 2 percent.

Before I turn to the implications of all this for monetary policy, a word about the housing market. As I said earlier, housing is a bright spot in the economy that is encouraging investment and lifting household wealth, which is all good, but with memories of recent history in mind, the fast growth in housing prices in most areas of the United States does bear close watching. Housing is becoming less affordable, and that price increase has the biggest effect on low-income individuals and families who have struggled the most since last spring and who are always the most vulnerable to rising rents and home prices. Prices for lumber and other inputs for housing are skyrocketing, and while that occurrence is not having a significant effect on inflation, it is limiting the supply of new homes and helping feed the house price boom. Fortunately, the banking system is strong and resilient—going through multiple Fed stress tests and a tough, real-life stress test this past year. Nevertheless, I am watching this sector closely for signs of stress and will continue to do so.

So, in summary, the economy is ripping, it is going gangbusters—pick your favorite metaphor. But we need to remember that it is coming out of a deep hole, and we are just getting back to where we were pre-pandemic. Labor market indicators are more mixed with 8 million workers still without jobs. But many of the problems holding back labor supply will dissipate over time, and we should return to the robust labor market we had in February 2020. Inflation is currently being driven above our 2 percent inflation target but is expected to return to target in subsequent years as transitory inflation shocks fade.

Highly accommodative monetary policy, in conjunction with unprecedented fiscal support, has supported a rapid recovery from a uniquely sharp, pandemic-caused recession. The improving economy is helping repair the significant economic damage suffered by individuals, families, and businesses, but there is still a way to go before we fully recover.

In light of that fact, I expect the FOMC to maintain an accommodative policy for some time. We have said our policy actions are outcome based, which means we need to see more data confirming the economy has made substantial further progress before we adjust our policy stance, because sometimes the data does not conform to expectations, as we saw last Friday. The May and June jobs report may reveal that April was an outlier, but we need to see that first before we start thinking about adjusting our policy stance. We also need to see if the unusually high price pressures we saw in the April CPI report will persist in the months ahead. The takeaway is that we need to see several more months of data before we get a clear picture of whether we have made substantial progress towards our dual mandate goals. Now is the time we need to be patient, steely-eyed central bankers, and not be head-faked by temporary data surprises.

Thank you for the opportunity to speak to you, and I would be happy to respond to your questions.

RBNZ: Monetary Stimulus Continued

The Monetary Policy Committee agreed to maintain the current stimulatory level of monetary settings in order to meet its consumer price inflation and employment objectives. The Committee will keep the Official Cash Rate (OCR) at 0.25 percent, and the Large Scale Asset Purchase and Funding for Lending programmes unchanged.

The global economic outlook has continued to improve since the February Monetary Policy Statement. Ongoing fiscal and monetary stimulus are continuing to underpin the global recovery in economic activity. However, economic uncertainty remains elevated and divergences in economic growth both within and between countries are significant. New Zealand’s commodity export prices continue to benefit from robust global demand.

Economic activity in New Zealand slowed over the summer months following the earlier rebound in domestic spending. Short-term data continues to be highly variable as a result of the economic impacts of COVID-19.

The planned trans-Tasman travel arrangements should support incomes and employment in the tourism sector both in New Zealand and Australia. However, the net impact on overall domestic spending will be determined by the two-way nature of this travel. The extent of the dampening effect of the Government’s new housing policies on house price growth, and hence consumer price inflation and employment, will also take time to be observed.

Overall, our medium-term outlook for growth remains similar to the scenario presented in the February Statement. This outlook remains highly uncertain, determined in large part by both health-related restrictions, and business and consumer confidence.

Some temporary factors are leading to specific near-term price pressures. These factors include disruptions to global supply chains and higher oil prices. However, the Committee agreed that medium-term inflation and employment would likely remain below its remit targets in the absence of prolonged monetary stimulus.

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at or above its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience. The Committee agreed that it was prepared to lower the OCR if required.

IMF praises Switzerland’s handling of the pandemic

According to the International Monetary Fund (IMF), Switzerland has navigated the COVID-19 pandemic well up to now and has been able to limit the decline in economic output. Economic measures should now be geared towards a strong and sustainable recovery. The IMF expects Swiss growth to reach 3.5% in 2021. It sees pension reforms and climate change as long-term challenges.

In 2020, the Swiss economy contracted by 2.9%, less than other European advanced economies. According to the IMF, the impact was cushioned by the solid public and household finances, competitive export industries, the large and well-capitalised financial sector, low dependency on contact-intensive sectors, the well-resourced healthcare system and targeted containment measures. The swift emergency measures exceeding 10% of GDP to provide targeted support for households and businesses were also crucial in curbing the economic slowdown.

Given the ongoing uncertainty and fiscal policy leeway, the IMF recommends maintaining targeted support for demand until the recovery is secured. In view of the still subdued outlook for inflation, the IMF additionally advises keeping monetary policy accommodative. In the event of large capital inflows into Switzerland and strong appreciation pressure on the Swiss franc, this could also include forex market interventions.

The Swiss banking sector entered the COVID-19 crisis with strong buffers and has incurred only limited losses so far. The IMF recommends continuing to keep an eye on real estate price developments, monitoring financial market participants’ risk controls and buffers, and taking early action if needed.

In order to preserve jobs, the IMF believes that crisis-related support measures in the labour market should be maintained until a sustained recovery is under way. At the same time, it cautions that keeping support measures too long could impede necessary structural adjustments.

In the longer term, the IMF recommends supporting digital and sustainable growth with efficient and targeted measures. The required investments, including in the energy system, transport and building renovation, must take account of synergies with ongoing programmes and ensure high effectiveness and efficiency of expenditure.

Finally, the IMF considers more far-reaching reforms to secure pension benefits in the longer term to be important, especially in view of rising life expectancy. Among other things, the retirement age should be raised more significantly and linked to life expectancy.

The IMF delegation conducted this year’s Article IV Consultation from 17 March to 7 April 2021 via video conferences, following the cancellation of last year’s evaluation because of the pandemic. The regular evaluation of the economic and financial situation of its member states within the scope of the Article IV Consultation is a core element of the IMF’s economic policy monitoring activities.

Federal Reserve issues FOMC statement March 2021

FOMC statement: The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

Implementation Note issued March 17, 2021

Fitch Ratings: World GDP Forecasts Revised Up After US Fiscal Stimulus Package

Global growth prospects are improving as fiscal support is stepped up sharply, economies adapt to social distancing and vaccination rollout gathers momentum, says Fitch Ratings in its latest Global Economic Outlook (GEO) released today.

We now expect global GDP to expand by 6.1% this year, revised up from 5.3% in our December 2020 GEO. GDP outturns were stronger than expected in 4Q20 – particularly in Europe and emerging markets (EM) – and world GDP declined by 3.4% in 2020 as a whole, compared to our previous forecast of a 3.7% decline. World GDP is now expected to be 2.5% higher in 2021 than in the pre-pandemic year of 2019.

“The pandemic is not over, but it is starting to look like we have entered the final phase of the economic crisis” said Brian Coulton, Chief Economist.

Fitch now forecasts US GDP growth at 6.2% in 2021 (revised up from 4.5%), China at 8.4% (from 8.0%) and the eurozone at 4.7% (unchanged). Growth in EM excluding China is forecast at 6.0% (up from 5.0%).

The main driver of our global forecast revision is the much larger-than-expected fiscal stimulus package recently passed in the US. The USD1.9 trillion price tag represents more than 2.5% of global GDP. Fiscal support had a powerful cushioning impact in 2020.

Further fiscal easing has also been announced in the UK, Italy, Japan, Germany and India, while the EU’s Next Generation EU recovery fund (NGEU) should provide a sizeable boost to eurozone growth in 2022. China is the only major economy that is starting to normalise macroeconomic policy settings, where the fiscal deficit is being scaled back and credit growth is slowing as the economic recovery matures.

Unemployment forecasts for the major economies have been cut but job market recoveries continue to lag. Leisure and transport (L&T) industries are labour-intensive and are still afflicted by social distancing. US employment is still 6.1% below pre-pandemic levels (compared to GDP which is 2.4% lower), while L&T accounts for more than one-third of furloughed workers in the EU.

Vaccine rollout has gained momentum, particularly in the UK and US. The eurozone has had a slower start but the programme should accelerate in 2Q21. It is still reasonable to assume that the health crisis will ease by mid-year, allowing social contact to start to recover. But immunisation delays or problems remain the key downside risk to the forecast.

Improving growth prospects, commodity price increases, and short-term supply constraints in some manufacturing sectors have renewed focus on inflation risks. US bond yields are up by 60bp this year.

The rate of headline US inflation could rise above 3% yoy in April but underlying inflation will increase much more gradually given labour market slack. The Fed is focused on unemployment, more tolerant of higher inflation and will remain patient. Core inflation will stay well below target in the eurozone and the ECB will continue to purchase assets through 2022.

The full report, ‘Global Economic Outlook March 2021: The Final Stretch’, is available at the above link or www.fitchratings.com

Philip Lowe: Opening remarks at the Melbourne Business Analytics Conference

Good morning and welcome to this year’s Business Analytics Conference.

I am very pleased to be able to join you, not least because of the theme of this year’s conference: Driving Recovery and Growth through Data Analytics. This theme brings together 2 issues that are very close to my heart – the recovery of the Australian economy from the pandemic and the critical role that investment in IT and data can play in sustaining that recovery. So I congratulate you on your choice of topic and I look forward to hearing your ideas.

The challenges facing us all are large. At the Reserve Bank, we are seeking to support the economic recovery and a stronger labour market that is consistent with achieving the inflation target. And most of you at this conference are seeking to find new ways of using data to help businesses and organisations innovate, compete and succeed.

These challenges are complementary. We will each be more successful if the other is successful. A stronger economy will provide businesses with the confidence and the resources to make the investments that are needed for our future. And conversely, our economy will be stronger because of your work, since the best decisions are those based on data, evidence and analysis. So our causes are linked.

I will come back to this idea, but first a few words about the economic recovery.

As a nation, we have responded very well to the pandemic. Australians have pulled together and been prepared to do what is necessary to contain the virus and support one another. Businesses have adapted quickly and innovated, with many making more progress on the digital front in a matter of months than they would have made in years. Governments also responded quickly and decisively, with extensive income support, increased spending on infrastructure and a large wage subsidy program. And monetary policy has also helped, reducing the cost of borrowing to historically low levels and supporting the supply of credit.

The result has been a quicker and stronger economic recovery than was expected. In the December quarter, GDP increased by 3.1 per cent and we are now within striking distance of the pre-pandemic level of GDP. The number of people in jobs has also almost returned to the level before the pandemic. Looking across the range of indicators, Australia is doing much better than most other advanced economies.

This, however, does not hide the fact that we still have a long way to go. The unemployment rate of 6.4 per cent is too high and the economy is operating well short of its capacity. Inflation and wages growth are also both lower than we would like. While we are expecting further progress to be made towards full employment and the inflation target, it is going to take some time before we reach our goals.

One piece of the recovery that is yet to click into gear is business investment. Understandably, last year many firms deferred their investment plans and sought to reduce risk on their balance sheets. Late in the year there was a welcome pick-up in investment in machinery and equipment, but there is still a long way to go to get back to the level of investment before the pandemic, which itself was low by historical standards. If we are to have a strong and durable recovery, it is important that the recovery in business investment continues and broadens.

Looking across the economy, there are investment needs and opportunities in many areas. The one I would like to focus on today is investment in IT, digitisation and data science. Investment in these areas is critical to lifting our nation’s productive capacity.

In many ways data is the new oil of the 21st century. Investing in data and our digital capability are critical to our future prosperity. These investments allow better decision making and a faster response to the changes in our economy and society. These investments are also crucial to organisations delivering the more personalised goods and services that many people are seeking.

There are opportunities for digital innovation in every sector of our economy. Almost every organisation needs a strong digital capability to perform well, to innovate and lift their productivity. Technology and data analysis also hold the keys to solving many of the great challenges of our times, including controlling the pandemic, dealing with climate change and responding to increasing cyber threats. This all means that the discussions you are having at this conference are really important.

If, as a nation, we are to capitalise on your work and the growing opportunities, we need to keep investing in the skills and knowledge of our people. This conference is a good example of this investment. Developing a strong digital workforce with skills in areas like predictive analytics, machine learning and artificial intelligence is just as important as investing in the hardware and software needed to support the digital economy. As part of our journey we also need to think about how our organisations function and make decisions, so that our people can work in more agile and flexible ways as they grapple with complex problems. It is by investing in both physical and human capital that we can boost our productivity, create employment and drive Australia’s future prosperity.

The importance of investing in the digital economy has been recognised by our governments. The Australian Government has a strong focus on this and is making additional investments in skills and training, streamlining regulatory processes and strengthening the nation’s cyber security. The consumer data right, to give consumers greater access to and control over their data, will also help. This access has started with open banking, which will make it easier for Australians to switch between financial institutions and access financial products that better suit their needs. In time, Australians will benefit from this being extended to other areas.

At the RBA, we are also investing significantly in digital infrastructure and data. The importance of this to us is reflected in the decision to make ‘harnessing the power of data’ one of our internal strategic focus areas for the next few years.

We view data as a strategic asset, and are investing in the processes, technology and people to enhance the value we get from data. We have established an enterprise data office with responsibility for data management, for ensuring that our staff have the right skills and that we are using leading data technologies and methods in our analysis. This includes the use of machine learning and ‘big data’.

We are seeing the benefits from this focus on data in our analysis of the economy and financial system. For example, the Bank’s staff use loan-level large datasets from securitisations to better understand developments in the market for housing loans and use detailed settlement data to measure bond market liquidity. They also use machine learning techniques to extract measures of sentiment from news articles as an economic indicator.[1] And during the pandemic, we have been able to access and analyse a broader range of data to obtain real-time readings of economic conditions in a way that wasn’t possible in the past.

At the RBA, we also see the power of new technologies and data in our central banking operations. The RBA has played a significant role in building the New Payments Platform (NPP), a critical piece of national infrastructure, which enables us all to make fast payments on a 24/7 basis. As a provider of banking services to the Australian Government, the RBA has been working with its government banking clients as they modernise their payment systems using the NPP. As an example, Services Australia now routinely uses the NPP to make emergency welfare and disaster relief payments in real time to Australians in need. Payment messages through the NPP can also carry richer data, opening up opportunities for more efficient business processes and new digital services in the future. As an example of this, NPP will be able to support the adoption of e-invoicing, which will lower the cost of doing business.

Another example where technology and data are opening up new possibilities is in the area of digital currencies. The RBA is conducting research on the technologies and policy implications of a potential wholesale central bank digital currency. This could use distributed ledger technology to support the settlement of transactions in the interbank payment system. Some of this work is taking place in the RBA’s in-house Innovation Lab, where we are collaborating with external parties on a proof-of-concept. We look forward to sharing more details in due course.

The Bank and the Payments System Board are also strongly supportive of forms of digital identity that can be used in both the public and private sector. An effective system of digital identity is important in promoting competition, security and innovation in the digital economy. The Australian Government is also supporting digital identity services for conveniently and securely accessing government services online.

I would like to conclude by returning to the idea that the challenges facing the RBA and those of you attending this conference are complementary.

The RBA is doing what it can to support the recovery from the pandemic and will maintain that support until we have achieved our goals for full employment and inflation. A strong economy will make for a more conducive environment for investments in data and technology. Similarly, your investments in data, technology and human capital will help make the economy stronger and more dynamic. We need these investments to develop the industries of the future and to equip Australians with the skills needed for that future. Australia needs your ideas, your ingenuity and your energy so that organisations across our country can seize the opportunities that will help deliver our future prosperity.

I wish you the best for the conference and look forward to your insights on how we can best drive the recovery and growth through investment in data analytics.

Thank you.

The End of LIBOR

The FCA has announced the dates that panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available. This is an important step towards the end of LIBOR, and the Bank of England and FCA urge market participants to continue to take the necessary action to ensure they are ready.

The FCA has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:

  • immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
  • immediately after 30 June 2023, in the case of the remaining US dollar settings

Based on undertakings received from the panel banks, the FCA does not expect that any LIBOR settings will become unrepresentative before the relevant dates set out above. Representative LIBOR rates will not, however, be available beyond the dates set out above. Publication of most of the LIBOR settings will cease immediately after these dates. As ISDA has confirmed separately, the ‘spread adjustments’ to be used in its IBOR fallbacks will be fixed today as a result of the FCA’s announcement, providing clarity on the future terms of the many derivative contracts which now incorporate these fallbacks. 

The Bank of England and the FCA have made it clear over a number of years that the lack of an active underlying market makes LIBOR unsustainable, and unsuitable for the widespread reliance that had been placed upon it. Accordingly, both have worked closely with market participants and regulatory authorities around the world to ensure that robust alternatives to LIBOR are available and that existing contracts can be transitioned onto these alternatives to safeguard financial stability and market integrity.

Market-led working groups and official sector bodies, including the Financial Stability Board, have set out clear timelines to help market participants plan a smooth transition in advance of LIBOR ceasing. Today’s announcements confirm the importance of those preparations for all users of LIBOR. Regulated firms should expect further engagement from their supervisors at both the Prudential Regulation Authority and the FCA to ensure these timelines are met.

Authorities have also recognised that there are some existing contracts which are particularly difficult to amend ahead of the LIBOR panels ceasing, often known as the ‘tough legacy’. The FCA is taking steps to help reduce disruption in these cases. The FCA will consult in Q2 on using proposed new powers that the government is legislating to grant to it under the Benchmarks Regulation (BMR) to require continued publication on a ‘synthetic’ basis for some sterling LIBOR settings and, for 1 additional year, some Japanese yen LIBOR settings. It will also continue to consider the case for using these powers for some US dollar LIBOR settings. Any ‘synthetic’ LIBOR will no longer be representative for the purposes of the BMR and is not for use in new contracts. It is intended for use in tough legacy contracts only. The FCA will also consult in Q2 on which legacy contracts will be permitted to use any ‘synthetic’ rate.

The FCA has also published today statements of policy in relation to some of these proposed new BMR powers. These statements of policy confirm its policy approach, explain its plans set out above and its intention to propose using, as a methodology for any ‘synthetic rate’, a forward-looking term rate version of the relevant risk-free rate plus a fixed spread aligned with the spreads in ISDA’s IBOR fallbacks.

FCA CEO Nikhil Rathi said:

‘Today’s announcements provide certainty on when the LIBOR panels will end. Publication of most of the LIBOR benchmarks will cease at the same time as the panels end. Market participants must now complete their transition plans.’

Bank of England Governor Andrew Bailey said:

‘Today’s announcements mark the final chapter in the process that began in 2017, to remove reliance on unsustainable LIBOR rates and build a more robust foundation for the financial system. With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021.’

Managing the risks of remote working in financial institutions

The Monetary Authority of Singapore (MAS) and The Association of Banks in Singapore (ABS) jointly issued today a paper on managing new risks that could emerge from extensive remote working arrangements adopted by financial institutions (FIs) amid the COVID-19 pandemic.

2      The paper “Risk Management and Operational Resilience in a Remote Working Environment” highlights that, in view of the protracted remote working arrangements and the likely adoption of hybrid working [1] arrangements in future, it is important that FIs remain vigilant towards remote working risks and take pre-emptive steps to mitigate them. The Paper seeks to –

• raise awareness of key remote working risks in the financial sector;
• share good practices adopted by FIs to mitigate key remote working risks; and
• encourage all FIs to adopt good practices on managing remote working risks.

3     The Paper looks at possible risks to FIs in the areas of operations, technology and information security, fraud and staff misconduct, and legal and regulatory risks. It also examines the impact on people and culture that may be brought about by remote working. Drawing from the experiences of ABS member banks, the Paper suggests key risk management actions needed to address these areas of concern. The risks and risk mitigation measures set out in the Paper are also applicable to non-bank FIs.

4     MAS encourages FIs to benchmark their remote working controls against the examples in the Paper. FIs should also continually review and enhance their risk management practices to address evolving risks. This Paper is part of the ongoing collaboration between MAS and ABS’ Return to Onsite Operations Taskforce (ROOT), to coordinate responses to the crisis and prepare for a post COVID-19 new normal.

5     Mr Ong Chong Tee, Deputy Managing Director (Financial Supervision), MAS, said, “Financial institutions in Singapore have swiftly adapted to remote working and split-team arrangements in response to COVID-19. The operational resilience of our financial institutions during this period reflects the soundness of their business continuity management plans. It also underscores the importance of regular tests through internal drills and industry-wide exercises jointly organised by the MAS and the financial industry. Investments in the digitalisation of work processes and services over the past five years have also enabled our financial institutions to continue to provide a high level of support to meet the needs of individuals and businesses, during the pandemic. MAS will continue to work closely with ABS and other industry associations to enhance operational resilience and maintain high service standards.”

6     Mr Samuel Tsien, Chairman of ABS, said, “Over the years, banks have invested consistently and significantly in risk management and technology. The investments have enabled the industry to quickly and effectively respond to the COVID-19 outbreak and ensure that banking services are not disrupted during the crisis. Where their roles permitted, banks have made arrangements to facilitate their employees to work from home in a safe and secured environment and allowed the continued provision of services that our customers needed. This outcome is not only due to individual banks’ efforts. It was also a collective one. ABS and ROOT, working together with MAS, coordinated the financial sector’s response to the crisis. The good practices are now captured in this Paper. It will serve as a valuable reference guide to all banks as remote and flexible work arrangements continue to be adopted as the pandemic evolves. The Paper is also a good guide to banks when dealing with other types of crises”.

  1. [1] A hybrid working arrangement is one where staff work in the office for part of the time, and remotely for other times.