“A Week Of Reversing Course for Central Banks…”

A Week Of Reversing Course For Central Banks…

Central banks around the globe are moving towards policy easing amid the escalating US-China trade war that adds pressure on the world’s slowing economy:

The European Central Bank

In one of the biggest policy reversals in his eight-year tenure, Mario Draghi the President of the European Central Bank, flagged more policy easing if inflation failed to pick up.  After four years of stimulus policy to revive the European economy and slowly bearing fruit, the ECB had been preparing markets for policy tightening.  However, the global trade war is derailing its plans.  With rates at record low and with the ECB’s balance sheet already swelled at 4.7 trillion euros, its remaining ammunition remains limited.  This raises doubts about the effectiveness of any further measures.  Draghi at the ECB Annual Conference in Sintra Portugal said that, “in the absence of improvement such that the sustained return to inflation to our aim is threatened, additional stimulus will be required.”   Draghi said that the ECB has consistently undershot its inflation target of just under 2 percent since 2013, could still cut rates, adjust its interest rate guidance and had ‘considerable headroom’.  Draghi said on Tuesday, “we will use all the flexibility within our mandate to fulfil our mandate and we will do so again to answer any challenges to price stability in the future.” He further added that “Monetary policy remained committed to its objective and does not resign itself to too-low inflation.” Draghi also said that the ECB could offer “mitigating measures” to offset the unwanted side effects of negative rates, a comment indicating that a multi-tier deposit rate was also on the table.  Whilst adding an argument for urgency of action, he noted that risks to growth in the 19 countries that use the euro are tilted to the downside and that indicators for the coming quarters point to lingering softness.  He said that the ECB will use the “coming weeks” to study its options, suggesting that action may come sooner rather than later.  The next ECB policymakers meeting is on 25th July.


The Fed joined its global peers such as the European Central Bank and the Australian Central Bank this week indicating that more policy stimulus is needed to boost growth, as it took stock of the rising trade tensions and growing concerns about weak inflation.  The Fed’s interest rate signal came before the meeting of other central banks in Asia and Europe that were expected to pursue similar moves.   The FED removed its ‘patience approach’ to cutting rates, signalling on Wednesday that it will reduce the rates as early as July, stating it is ready to battle growing global and domestic economic risks amid the trade tensions and growing concerns about weak inflation.  Although the US central bank left its benchmark interest rate unchanged for now, the shift in the Fed’s view since its last policy meeting, weighed on the dollar and the US treasury yields.  New economic projections released by the FED show that nearly half of the 17 policymakers are now showing a willingness to lower borrowing costs over the next six months, and seven see rates likely to warrant being lowered by a full half a percentage point.  According to Fed Chair Jerome Powell, although the baseline economic outlook remains “favourable”, Powell said risks continue to rise including the drag that rising trade tensions may have on US business investment and signs that economic growth is slowing overseas.

Bank Of Japan

Bank of Japan kept its monetary policy steady on Thursday but stressed that global risks were increasing, as trade tensions and uncertainty over the US economic policies jolt financial markets, signalling that it too is leaning towards ramping up monetary support.  It also kept intact a loose pledge to keep buying government bonds so the balance of its holdings increases by roughly 80 trillion yen per year.  As was widely expected, the BOJ maintained its short-term rate target at -0.1 percent and a pledge to guide 10-year government bond yields around zero percent.  Japan’s economy expanded by an annualised 2.1 percent in January to March but many analysts are predicting that growth will slow in the coming quarters as the US-China trade row hurts global trade.  A scheduled sales tax hike in October may also curb consumption.  The annual core consumer inflation hit 0.9 percent in April, away from the 2 percent target of the BOJ, despite years of massive and radical stimulus.

News From The Bank of England

The central bank policyholders, as expected, voted unanimously to keep interest rates on hold at 0.75 percent.  Policyholders stuck to their message that rates would ned to rise in a limited and gradual fashion, as long as Britain avoids a damaging no-deal exit from the European Union.  The message from the BOE was less dovish than the US Federal Reserve and European Central Bank, which this week opened the door to rate cuts and more stimulus, to counter effect the rising trade tensions and the economic slow-down. Policymakers have however noted a darkening global outlook and said Britain’s economy was now on track to stagnate in the second quarter, rather than grow 0.2 quarter on quarter as it had forecast last month.

Australian Central Bank

Reserve Bank of Australia (RBA) Governor Philip Lowe said it was “unrealistic” to think that the single quarter-point rate cut in rates to 1.25 percent would work on its on and called for the government for more action on fiscal stimulus.  Annual growth in the economy slowed to a decade low of 1.8 percent in the March quarter while the jobless rate has ticked up to 5.2 percent from a low of 4.9 percent in February.  Inflation and wages growth have also been more subdued than the bank has previously expected.  Lowe further added that Australia could and should push unemployment down to 4.5 percent and easing policy would help deliver that goal.

The Race To Lead Britain

Boris Johnson, who is a former foreign secretary and who served as London mayor for eight years,  and helped lead the 2016 Brexit referendum campaign, is the front runner to win a final pair of ballots on Thursday, that will lead to the replacement of Prime Minister Theresa May to two candidates.  Despite a series of scandals in the past and criticism about his attention to detail, Johnson has dominated the race since Theresa May announced her resignation a month ago after she failed to get her Brexit deal ratified by parliament.  Johnson has pledged that the UK will leave the EU on 31st October with or without a deal.  The EU has said it will not renegotiate the divorce deal that Theresa May agreed last year whilst the British parliament has indicated it will block a no-deal exit.

UK Retail Sales

The cold weather that hit the UK in May resulted in the biggest drop in British retail sales this year as shoppers delayed buying their summer clothes, adding to signs that the economy is struggling ahead of Brexit.  This sets the way for a weak second quarter this year.  According to the Office for National Statistics (ONS), monthly retail sales volumes contracted 0.5 percent.   The ONS further said that unseasonably cold weather hit demand for clothing and footwear sales, which fell 4.5 percent on the month which is the biggest drop since July 2015.   The pound and the British government bonds showed little reaction to the retail sales data.  Stable inflation and stronger growth in wages has helped investors to take Brexit in their stride also helping the world’s economy at a time when companies are cutting back on investment amid uncertainty over Brexit.

China And US Back To Trade Talks

China and the United States are rekindling trade talks ahead of a meeting next week between Presidents Donald Trump and Xi Jinping. On Tuesday Trump said that the teams from the two sides would begin preparations for the leaders to sit down at the G20 summit in Osaka. With the news, stocks extended gains as investors bet new talks cold ease trade tensions between the world’s two biggest economies.   China which previously had declined to say whether the two leaders would meet, confirmed the get together.   White House officials declined to go into detail about the preparations or expected outcomes of talks in Japan.  Meanwhile, US officials called for structural changes in the Chinese economy and how Beijing treats US businesses, while China called for dialogue instead of expensive tariffs.

Labour Market In The United States And Manufacturing

The number of Americans filing applications for employment benefits fell more than expected last week, pointing to strengthening of the labour market despite a sharp slowdown in job growth in May.  Meanwhile, the outlook for the economy continues to look gloomy, as other data on Thursday showed that factory activity in the mid-Atlantic region stalled in June.  This reflects a recent persistence of the trade war between China and the US.  According to the Labour Department, initial claims for state unemployment benefits dropped 6,000 to a seasonally adjusted 216,000 for the week ended 15th June.  The drop in claims followed three straight weekly increases.  Claims are being closely watched for any signs of layoffs emanating from the trade war.  The Fed Chairman, Jerome Powell, acknowledged the meagre job gains in May and said, “in light of recent developments this bears watching” but also noted that “many labour market indicators remain strong.”

Markets Wrap

Trump’s tweet about the trade talks next week with China fuelled a rally on Wall Street as investors bet renewed talks could diffuse the trade war.  The S&P 500 gained nearly 1 percent while the NASDAQ and the Dow Jones both gained around 1.4 percent,  all closing at their highest levels since May, when Trump ratcheted up tariff rates on $200 billion of imported Chinese goods, knocking global stock markets.  Meanwhile Mario Draghi’s comments on central bank’s stimulus fired up stocks, bonds and commodities although currency moves were smaller.  On Wednesday world stocks held near two-week highs as investors awaited a wave of central bank stimulus.   Overnight the drop in global yields has boosted rate cut bets across global markets with money markets pricing in three rate cuts from the FED before the end of the year and as many as five cuts until mid-2020.  Soon after the markets opened on Thursday the S&P 500 hit a record intraday high as investors took comfort from the signs that the FED could cut interest rates as soon as next month to counter effect the growing risks to global and domestic growth.  The Dow Jones rose 0.61 percent (161.38 points) at the open to 26,665.38, the S&P 500 opened higher by 0.79 percent (23.14 points) whilst the NASDAQ Composite gained 1.25 percent (100.12 points).  Meanwhile, the British FTSE 100 extended its gains to hit a day’s high and was last up 0.5 percent on news from the Bank of England.  The exporter-heavy stock index tends to rise when the sterling falls.  British government bond prices rallied with the benchmark 10-year gilt yields falling to a day’s low of 0.809 percent down more than 5 basis points on the day.

Currency Roundup

After Mario Draghi’s dovish tone on Tuesday that led the euro to fall to its two-week low of $1.1181, the euro was unchanged on Wednesday at $1.1195. The dollar measured against a basket of rival currencies was flat at 97.621 after it hit a two-week high on Tuesday.  The yen was up 0.2 percent at 108.28 yen per dollar suggesting investors remained cautious.  China’s yuan pulled back from a three-week high hit on Tuesday after the news that the Chinese President and the US President would return to the negotiating table.  Sterling was little moved by Boris Johnson’s confirmation as the frontrunner in the Conservative Party leadership contest.  It was last down 0.1 percent at $1.2547.  On Thursday the dollar sank and was on track for its biggest two-day drop this year after the US Federal Reserve signalled it was ready to cut interest rates as early as next month.  The dollar fell 0.3 percent against a basket of its rivals  .DXY  to 96.755 and fell 0.5 percent to a six-month low against the Japanese yen.  The greenback came under additional pressure after the benchmark 10-year Treasury yields fell to the lowest in more than two years.  Expectations of more rate cuts from the FED boosted the Norwegian crown with the currency rallying 0.8 percent versus the dollar and nearly 0.5 percent against the EUR with the markets widely expecting the central bank to raise interest rates at a policy decision.  China yuan increased to its strongest level in five weeks amid the dollar weakness and signs that China and the United States are returning to the negotiating table.  The pound on Thursday gave up some of its gains versus the dollar, dropped against the euro after the Bank of England slashed its second-quarter growth forecast and flagged the risks from global trade tensions and a no-deal Brexit.


Oil jumped more than 3 percent to $63 a barrel on Thursday after Iran shot down a US military drone.  This increases the fears of a military confrontation between Tehran and Washington. Meanwhile US President Donald Trump played down Iran’s downing of a US military surveillance drone on Thursday, and told reporters at the White House, “I think probably Iran made a mistake.  I would imagine it was a general or somebody that made a mistake in shooting that drone down.” Supporting the oil prices were also expectations that the US Federal Reserve could cut interest rates at its next meeting, stimulating growth in the world’s largest oil consuming industry.  Concerns about slowing economic growth and the US-China trade disputes has pulled oil lower in recent weeks.  Brent reached a high of $75 in April.  Also causing oil to move higher was a larger than expected decline in US crude inventories and the prospect of prolonged supply restrictions by OPEC and its allies.  After increasing to a near two-years highs, US crude stocks fell by 3.1 million barrels last week.  The Organisation of the Petroleum Exporting Countries and its allies including Russia agreed this week to meet on 1st to 2nd July ending a month of wrangling about the timing of the meeting.  The coalition which is knows as OPEC+ will be discussing whether to extend a deal which expires at the end of this month for the rest of 2019 on cutting 1.2 million barrels per day of production.


Gold prices soared to five-year peak on Thursday after the US Federal Reserve signalled a possible interest rate cut as early as next month.  Spot gold was up 1.6 percent at $1,380.96 per ounce after hitting its highest in March 2014 at $1,386.38.   Gold prices have so far gained $80 this month.  Lower interest rates decrease the opportunity cost of holding non-yielding bullion and weigh on the dollar, making gold cheaper for investors holding other currencies.  On Friday Gold jumped past $1,400, with more than 1.5 percent for the first time since September 2013, as hints of a rate cut from the US Federal Reserve took a toll on the greenback and the US Treasury yields.  Tensions in the Middle East also boosted gold’s rally, lifting the precious metal nearly 5 percent this week and almost 10 percent so far this year.

Malta:  Retail Price Index – May 2019

In May 2019 the annual rate of inflation as measured by the Retail Price Index was 1.87 percent down from 1.91 percent in April 2019.  The largest increase on annual inflation was recorded in the Food Index, while the largest downward impact was recorded in the Clothing and Footwear Index.  The Retail price Index measures price changes in the cost of purchasing a representative basket of consumer goods and services and is closely linked to the cost of living adjustment (COLA) and increases in periodic rent payment adjustments.

Malta:  Harmonised Index of Consumer Prices (HICP) – May 2019

In May 2019 the annual rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) remained at a constant rate of 1.7 percent.  The largest upward impact on annual inflation was measured in the Food and Non-alcoholic Beverages Index, while the largest downward impact was recorded in the Education Index.  The HICP measures monthly price changes in the cost of purchasing a representative basket of consumer goods and services.  The HICP is calculated according to the rules specified in a series of European Union Regulations that were developed by Eurostat in conjunction with the EU Member States.  The HICP is used to compare inflation rats across the European Union.

Antonella Mercieca

Client Relationship Manager


Reuters, Bloomberg, https://nso.gov.mt


June 21st, 2019

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