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Commentary

Wed 13 Feb 2019 / North America

Questions over Fed dovishness

The Federal Open Market Committee's decision at the end of January to pause rate increases was long telegraphed and widely expected. But the highly dovish messaging in the Federal Reserve statement and press conference by Chair Jerome Powell surprised markets. The reasoning for the sharp shift in Fed rhetoric between December and January remains elusive. To reconcile an unchanged baseline economic outlook with its dovish messages, the Fed pointed to increased external downside risks.

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Tue 5 Feb 2019 / Asia Pacific

Election muddies India's outlook

Conditions are becoming murky in the lead up to India's general election in May. Prime Minister Narendra Modi's popularity is falling, and the losses of his Bharatiya Janata Party in state assembly and other by-elections dim his prospects for a clear win. The government's drive to boost growth has shifted economic policies into an expansionary mode. Last October the RBI moved its policy stance to 'calibrated tightening', citing sustained inflation risks. The events since, especially after the resignation of Governor Urjit Patel, shift the bias towards easing.

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Tue 29 Jan 2019 / Global

Banxico independence faces scrutiny

Central banks, traditionally considered harmless technocratic institutions, have come under intense scrutiny since the 2008 financial crisis. A distinct set of tensions is unfolding between Mexican President Andrés Manuel López Obrador and the country's central bank. These follow the president's decision to cut his salary as part of a governmental austerity drive. This indirectly affects other top civil servants, including Banco de México officials, as Mexico's constitution stipulates no public official can earn more than the president.

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Tue 22 Jan 2019 / Global

Proper perspective on emerging risks

You can hear the bearishness in everyone's voices. They fear a market swoon in a world of unstable politics. Risks are mounting, as indicated by recent data signalling slight economic contractions in Germany and Japan. There is plenty of room for unpleasant surprises, especially from higher debt servicing costs and continuing pressures on some emerging markets. But it is important to keep these risks in proper perspective against a global economy that is slowing, but still very strong, and political tensions that are distracting, but unlikely to trigger recession.

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Wed 16 Jan 2019 / Global

Central banks heading for exit

In among all the concern about economic growth rolling over, it is important to recognise that central banks are still heading to the exit. Just before Christmas the Sveriges Riksbank raised rates for the first time in this cycle, a move that went largely unnoticed. In its monetary report, the Swedish central bank acknowledged that countries were entering 'a phase of more subdued GDP growth' globally. The central bank referenced the uncertainties surrounding Brexit and 'the ongoing trade conflict between the US and several other countries'.

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Tue 15 Jan 2019 / Europe

Fiscal money solution for Rome

Fiscal money is a transferable and negotiable government-issued security that bearers may use for obtaining tax rebates two years from issuance. In the case of Italy, FM could fund public investments and social spending programmes, supplement employees' income and reduce businesses' tax-wedge on labour. These allocations would increase and sustain a higher level of domestic demand and improve business competitiveness. As a result, Italy's output gap would close without affecting the country's external balance.

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Mon 10 Dec 2018 / Europe

AKK's rise: France, euro repercussions

Annegret Kramp-Karrenbauer, the new leader of Germany's principal governing party, faces a complex struggle to impose her will on her fractious Christian Democratic Union. She will pursue a more conservative path in key areas compared with still-Chancellor Angela Merkel. This has consequences for policies to stabilise the euro. 'AKK' is a long-time Merkel ally and, more recently, her designated successor. How well she masters her shorter-term tasks will have a crucial bearing on whether, when and how she takes over the chancellorship.

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Mon 26 Nov 2018 / Europe

ECB must address QE misallocation risk

By the end of this year, the European Central Bank is expected to end its monthly net asset purchases. This raises several questions about the ECB's reinvestment strategy and the implications for individual countries. The central bank's quantitative easing programme was not as successful as believed. The real issue for the ECB governing council to address when discussing fiscal implications of reinvestment is the risk arising from the misallocation of liquidity and corresponding claims and liabilities.

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Tue 20 Nov 2018 / Asia Pacific,North America

Opening for US-China renminbi action

Since early April, the renminbi has fallen 10% against the dollar, largely reflecting dollar strength. The causes lie in the cyclical and monetary policy divergence between the US and China. However, there is an alignment of interests. Both want to pursue their domestic economic agendas without the complications of a falling renminbi. This could create an opening for unexpected co-operative action by the US Treasury and the People's Bank of China – a joint foreign exchange intervention operation to strengthen the renminbi.

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Tue 13 Nov 2018 / North America

Doves waiting in Fed wings

The rotation of voting members of the Federal Open Market Committee after its December meeting will bring to the fore outspoken doves, James Bullard of the St. Louis Fed and Charles Evans of the Chicago Fed, to balance out incoming hawks. Bullard made headlines in mid-October by calling for the Fed to stop raising rates and has proposed changed in how the Fed views the sustainability of current low unemployment and its effect on inflation. So far, the Fed has been able to raise rates because the economy has outperformed.

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