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Japan ending 2023 with rates still negative – Industry roundup: 20 December

Japan’s central bank keeps benchmark rate at -0.1%

Japan’s central bank maintained its ultra-loose policy settings at its latest two-day meeting, opting to await more evidence on whether wages and prices would rise enough to justify a shift away from a massive monetary stimulus.

The Bank of Japan (BOJ) also made no change to its dovish policy guidance, dashing hopes among some traders it would tweak the language to signal a near-term end to negative interest rates.

BOJ Governor Kazuo Ueda said prices and wages appeared to be moving in the right direction with labour unions and big firms signalling the chance of sustained wage gains next year, but warned that conditions are still uncertain.

“The chance of trend inflation accelerating towards our price target is gradually heightening,” Ueda told journalists. “But we still need to scrutinise whether a positive wage-inflation cycle will fall in place.”

At this week’s meeting the BOJ kept its short-term rate target at -0.1% and that for the 10-year government bond yield around 0%. It also left unchanged a pledge to ramp up stimulus “without hesitation” if needed. The yen fell and Japanese stocks gained after the BOJ's decision to hold off on phasing out stimulus.

Japan has seen inflation hold above 2% for over a year and some firms have signalled their readiness to keep raising wages, increasing the chance the BOJ will finally abandon its status as a dovish outlier among global central banks.

In a Reuters poll last month more than 80% of participating economists said that they expect the BOJ to end its negative rate policy in 2024. Half of them predicted April as the most likely timing, although some see a policy shift occurring as soon as next month.

Ueda gave no clear signal on how soon the BOJ could exit negative rates but said there “won't be much data coming in” between now and the next policy meeting on 22-23 January.

He also said the BOJ won’t be rushed into raising rates just because the US Federal Reserve could start cutting them soon.

“Obviously, I am always thinking about various scenarios about how we could change policy when certain conditions fall into place,” Ueda said.

“But uncertainty over the outlook is extremely high and we have yet to foresee inflation sustainably and stably achieving our target. As such, it's hard to show now with a high degree of certainty how we can exit.”

Since his appointment last April, Ueda has moved towards dismantling the radical stimulus of his predecessor by relaxing the bank's grip on long-term rates in July and October. Markets see the next step to be a hike in short-term rates to around zero from the current -0.1%.

But sharp shifts in global monetary policy may complicate the BOJ's decision with US and European central banks signalling that their next interest rate move will be a reduction.

Raising rates at a time other central banks are cutting them could trigger a spike in the yen that hurts big manufacturers' profits and discourages them from hiking wages, analysts say.


UK inflation falls to 3.9%

Inflation in the UK slowed more than expected last month.

The annual inflation rate, measured by the consumer prices index (CPI), fell to 3.9% from 4.6% in October, the lowest since September 2021, the Office for National Statistics said. Analysts had expected a reading of 4.3-4.4%.

The latest fall follows a sharp drop from 6.7% in September to 4.6% in October, enabling Prime Minister Rishi Sunak to declare an early victory on his goal to halve inflation by the year end. Annual CPI inflation has now fallen to 3.9% from a peak of 11.1% in October 2022.

However, a senior Bank of England (BOE) official has warned UK interest rates will have to stay higher for longer, dashing expectations of monetary easing next year.

Sarah Breeden, in her first speech as the Bank’s newly appointed deputy governor for financial stability, said the risks of inflation remaining stubbornly high were greater than the chances of a significant fall.

“The economy is moving in the right direction to return inflation to the 2 per cent target, but our job isn’t done,” Breeden said. “The question I am focused on is whether there is evidence of more persistent inflationary pressure, which means we may need to tighten further.

“Regardless, monetary policy still needs to be restrictive for an extended period of time to keep pushing down on inflation and to return it sustainably to target.”

Her comments come a week after the Bank’s rate setting monetary policy committee (MPC), which includes Breeden, kept the base interest rate unchanged at 5.25% for a third consecutive meeting. The MPC warned there were still “upside risks to the outlook for wage growth”, which could warrant another increase to the base rate if this were to translate to higher inflation.

The committee will be monitoring the inflation data and subsequent figures on wage growth before taking its next policy decision in February. This wee  Ben Broadbent, another of the Bank’s deputy governors, warned that he needed to see further evidence of a weakening labour market before declaring victory over inflation. Wage growth would “probably require a more protracted and clearer decline before the MPC can safely conclude that things are on a firmly downward trend”, he said.


Norway advances CBDC pilot to next phase

Norway’s central bank has advanced its central bank digital currency (CBDC) pilot in a fifth phase, exploring introduction and design models amid evolving global payment trends.

In a press release on researchers at Norges Bank revealed that the central bank’s pilot on a CBDC is entering a new phase, marking the culmination of a two-year effort by a working group.

According to the statement, the fifth phase aims to establish the foundation for deciding whether Norway should proceed with the introduction of a CBDC or not.

While exact dates were not specified, the final verdict is expectedto be revealed by the end of 2025. Ida Wolden Bache, the governor of Norges Bank, emphasized that while Norway‘s current payment system functions effectively, considerations such as declining cash usage and global developments in CBDCs warrant a thoughtful approach.

“Norges Bank wants to be prepared to be able to introduce a CBDC if the payment system evolves in a direction where important societal considerations are challenged,” she said.

The project’s fifth phase will focus on analysing possibilities and impacts, testing candidate solutions, and researching new settlement forms in state-controlled digital money in a bid to foster financial system innovation. The project will maintain engagement with stakeholders in the Norwegian payment system as well as other central banks.

Norway first announced plans to start CBDC experiments in April 2021, saying the motivation for research into CBDCs “has been strengthened.” Eventually, the central bank wants to find a preferred solution if it becomes relevant to introduce a CBDC in the country.


EIB Group and BNP Paribas sign new securitisation transaction

The EIB Group – made up of the European Investment Bank (EIB) and European Investment Fund (EIF) – has signed a synthetic securitisation transaction with BNP Paribas for a total amount of €106 million.

The EIB Group’s support will enable BNP Paribas to partially release its regulatory capital, so facilitating an additional commitment of about €425 million (US$466 million) in new financing for French small businesses and mid-caps. At least €85 million of these funds will be allocated to projects promoting the transition to climate neutrality.

The EIB Group has now signed its fourth synthetic securitisation transaction with BNP Paribas since 2017. Similar to the three previous transactions, its investment will support small and medium-sized companies (SMEs) while contributing to the transition to climate neutrality.

The EIF is providing protection on a mezzanine tranche of €106 million (which is in turn counter-guaranteed by the EIB) in the form of an unfunded guarantee. The structure, which features synthetic excess spread, a two-year revolving period and pro-rata amortisation of the senior tranche and the mezzanine tranche (subject to performance triggers), comprises a portfolio of small business, micro and corporate loans originated by BNP Paribas with a total outstanding balance of about €1.4 billion. As part of the transaction, BNP Paribas is transferring credit risk on a mezzanine tranche through the EIF guarantee. The securitised loans portfolio remains on the bank’s balance sheet.

The securitisation transaction has been structured to achieve optimal risk-weighted asset relief over the next five years and, consequently, free up lending capacity to further support real economy financing.

Under the arrangement, BNP Paribas pledges to supply new lending of €425 million to French SMEs and mid-caps over a two-year period. At least 20% of this financing will be allocated to projects aligned with climate action and environmental sustainability, highlighting the commitment of BNP Paribas and the EIB Group to supporting the transition to a low-carbon economy.


BSP offers incentives for sustainable financing in Philippines

The Bangko Sentral ng Pilipinas (BSP), central bank of the Philippines, has approved additional temporary measures to incentivise banks to extend loans or finance investments for green or sustainable projects or activities, including transition financing for decarbonisation.

BSP Governor Eli Remolona Jr. said the central bank approved the measures in the form of extra lending capability and reduced reserve requirement rate on sustainable bonds issued by banks to scale up sustainable financing in the islands.

“As a sustainable finance champion, the BSP will continue to play an active, enabling role in fostering the transition toward a sustainable economy,” Remolona said. “We will identify and create appropriate incentives that are within our mandates, empowering the banking system to steer capital flows toward growing green or sustainable investments and accelerate the development of solutions addressing just transition and adaptation-related challenges.”

The BSP chief issued Circular 1185 granting additional single borrower's limit (SBL) for financing eligible projects and zero reserve requirement rate against sustainable bonds on 13 December. The measures were approved by the BSP Monetary Board through Resolution 1562 at the end of November.

The introduction of the set of measures forms part of the suite of initiatives under the BSP's 11-point Sustainable Central Banking Strategy to mainstream sustainable finance, as well as support the achievement of the country's climate commitments and sustainable development goals.

Under the approved measures, banks are allowed to extend loans for eligible green or sustainable projects or activities with a top-up 15% SBL.


Ireland’s central bank cuts economic growth, inflation forecasts

Ireland’s central bank has revised downwards its economic growth forecasts out to 2025 for the second successive quarter, saying that the economy had shifted to a slower growth path but that inflation would also fall faster than previously forecast.

The Central Bank of Ireland reduced its forecast for modified domestic demand (MDD) - it and the government's preferred measure of economic activity - to 1.5% in 2023 from 2.9% previously, while making more minor downward revisions to the 2.5% and 1.9% growth seen in 2024 and 2025.

MDD soared by 9.5% last year but the most recent reading showed it flatlining in the third quarter.

The central bank said the slowdown reflected the exceptional level of physical investment by multinationals in 2022, but also the impact of higher interest rates and capacity constraints.

“The economy has shifted onto a slower growth path following a strong post pandemic recovery,” the bank said in a quarterly update of its forecasts, noting that the economy was now set to grow in line with its medium term potential from 2024 to 2026.

Large foreign multinationals based in Ireland often distort gross domestic product (GDP), notably through the inclusion of exports produced abroad but counted in the Irish statistics. The measure is still used to calculate Ireland's share of activity across the euro zone.

The central bank reiterated that GDP does not provide a good indicator of economic conditions in Ireland when slashing its forecast for 2023 to a decline of 1.3% from the 2.9% expansion it expected three months ago.

The bank said headline inflation continues to decelerate, with tentative signs of a return to normal seasonal patterns. It cut its 2023 Harmonised Index of Consumer Prices (HICP) forecast to +5.2% from +5.4% and to +2.2% in 2024 from +3.2%.

It expects inflation to fall to 1.4% in 2026, below the European Central Bank (ECB) target of 2%. Core inflation, which excludes unprocessed food and energy prices, is expected to be stickier next year but fall below 2% in 2025.


Asset managers face tougher rules on investor cash calls

Global regulators have published more stringent rules for managers of open-ended investment funds to ensure they can meet investor cash calls in a crisis without resorting to emergency liquidity from central banks.

Regulators have been studying the ability of open ended funds, a sector worth over US$40 trillion globally, after central banks were forced to intervene in March 2020 to stop money market and other types of funds freezing in the face of a “dash for cash” as economies went into anti- Covid-19 lockdowns.

Funds could not raise cash fast enough, though the industry has argued that many parts of the market came under severe stress at that time.

The reforms from the G20's Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO) aim to end so-called first mover advantage or investors leaving a fund being less worse off than those who remain.

The rules, which had been put out to public consultation, with some tweaks in the final recommendations, say that redemption terms must reflect how long it would take to sell assets in a fund to avoid a liquidity "mismatch".

Property funds, for example, were offering daily redemptions and some had to suspend them given the difficulty of selling property quickly.

The FSB sets out “buckets” to categorise whether funds can offer daily redemptions. “In response to the public consultation, the FSB sought to clarify the categorisation approach and provide more flexibility to authorities in implementing the framework in their respective jurisdictions,” the FSB said in a statement.

The FSB said the liquidity management tools (LMTs) that asset managers must have would be increasingly used by funds mainly invested in less liquid assets that typically take more time to sell. IOSCO said it has provided more flexibility in using LMTs, and has specified that the aim is to impose “fair and reasonable transaction costs” that are deducted from redemptions.


Xero teams with Flinks on banking data access for North American SMEs

Xero, a small business platform, has partnered with the open banking firm Flinks to give small businesses in Canada and the United States secure access to more than 20 direct bank connections and high-quality transaction data.

A release stated: “With the largest network of financial institution partners with live direct bank API connections in North America, Flinks will provide new and secure high quality bank feeds for customers in the US and Canada. For customers this will include, but not be limited to, direct bank feeds with the National Bank of Canada and EQ Bank, as well as US based banks.”

“Bank reconciliation is essential for every small business, bookkeeper and accountant, but manually entering transaction data takes precious time away from running the business and introduces room for error,” said Faye Pang, Country Manager, Canada at Xero. “Our partnership with a Canadian grown success story, Flinks, is just one more way we are expanding our bank feeds coverage to help provide Canadian small businesses with better visibility of their money coming in and going out.”

The increased access for Xero customers to North American financial institutions can help small businesses and advisors to recoup time previously spent on manual data entry and reconciliation.


Petrofac boosted by securing performance guarantees

Shares in UK company Petrofac have jumped sharply after the oilfield services provider announced that it received a performance guarantee for its first contract with Dutch electricity firm TenneT and agreed terms for its ADNOC Gas deal in Abu Dhabi.

The latter contract, which Petrofac won in October, is valued at more than US$600 million and involves the delivery of carbon capture units, associated pipeline infrastructure and a network of wells for carbon dioxide (CO2) recovery and injection.

The company has grappled with payment delays and cost overruns at its largest unit - engineering and construction, and warned earlier this month that it would no longer be able to meet its annual forecast of “broadly neutral free cash flow”.

Active discussions were ongoing to secure guarantees required for other contracts, Petrofac said. Performance guarantees refer to a commitment to honour the terms of the deal.

Petrofac forecast a smaller annual loss of US$180 million for the group, compared with a loss of US$205 million last year. It expects to report US$2.5 billion in total revenue for the year, compared with the $2.67 billion that analysts expect, according to a company-compiled consensus.

However, it also estimates net debt will be higher at the year-end compared to the US$584 million as at June 30, due to delays in securing advance payments on contracts and a subsequent increase of over US$100 million in collateral for the guarantees.

“While we are encouraged that management has been able to secure some advance payments for contracts won in the year, this has required a meaningful level of collateral, and ultimately the group needs to find a solution to strengthen its balance sheet such that banks are able to provide performance bonds without the need for collateral,” JPMorgan analysts said in a note.


Ethiopian Airlines gets US$450 million loan from Citigroup to expand fleet

Africa’s largest carrier, Ethiopian Airlines Group, has secured a US$450 million loan from Citigroup to finance five new Boeing aircraft as part of a planned expansion of  its fleet in the coming decade.

Ethiopia s flagship carrier announced that it will use the funds to purchase three 737 Max aircraft and two 777 freighters from Boeing. The planes will be delivered this month and will expand the airline’s fleet to 150 aircraft.

Ethiopian placed orders with both Airbus and Boeing for around 40 planes in November as part of its ambitious plans to nearly double its fleet over the next 12 years to more than 270 aircraft and fly to over 200 international airports.

“Fleet expansion being one of our strategic growth pillars, we will continue expanding and modernising our fleet size so as to grow our business and reach new markets,” said Ethiopian Chief Executive Officer Mesfin Tasew Bekele.

For Citigroup, the loan is part of the bank’s efforts to expand its business across the continent of Africa. Although it does not have a physical office in Ethiopia, the company remains the only US bank providing correspondent banking in the country, according to the statement.

“A lot of work has gone into getting this deal off the ground,” said Akin Dawodu, Citigroup’s head of sub-Saharan Africa, “Citi has been serving Ethiopian Airlines for many decades, and we are pleased to support its growth with financing.”

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