Crude at $45 may cut deficit

perspective
business
OMANDAILYOBSERVER
17
TUESDAY l DECEMBER 13 l 2016
*
INTEREST RATE
Fed turns to Trump with rate hike nearly in the bag
THE Federal Reserve
inaugurates the Trump
era this week with a
near-certain interest
rate increase and new
economic forecasts
providing a first glimpse into whether
the US election has reshaped the central
bank’s growth and inflation outlook.
Fed fund futures show a 97 per cent
probability that the Fed will lift rates
by a quarter of a percentage point at
the end of its two-day policy meeting
on Wednesday, according to the CME
Group.
All 120 economists in a Reuters poll
expect a rate hike in the wake of a string
of solid US economic reports.
More telling will be whether the
stock market rally and jump in bond
yields triggered by Trump’s November 8
victory will push the Fed to an inflection
point of its own and a higher projected
pace of rate increases for 2017 and
beyond.
The Republican businessman is
inheriting a good economy, one that
grew by 3.2 per cent in the third quarter,
the fastest pace in two years. There
are, however, concerns that his plan to
reduce taxes, cut regulation and increase
infrastructure spending could not just
boost the economy but also fuel higher
inflation.
Since first published in 2012, the
Fed’s quarterly “dot plot” of projected
interest rates has generally moved in
one direction — down — and any postelection
change will show whether
policymakers expect Trump’s policies to
shake things up.
As of September, Fed officials’ median
projection was for two rate increases
A view shows the Federal Reserve building in Washington. — Reuters
next year and a long run “neutral” level
of 2.6 per cent. A rate increase this week
would be the first since last December
and only the second since the 2007-2009
financial crisis.
“Their path is going to move up faster
and a little sooner,” said Steve Rick, chief
economist for CUNA Mutual Group.
He said the economy was running at its
potential, and that was the Fed’s cue to
“exit stage right” and steadily move rates
to normal.
Fed officials have long hoped that
other government policies would take
the place of monetary engineering,
which some believe may have lost its
effectiveness in lifting economic growth.
They have warned in recent weeks
that any new government spending
should specifically be designed to boost
productivity in an economy that is
already near full employment and facing
a high public debt burden.
The Fed’s new forecasts will indicate
if policymakers feel that the monetaryto-fiscal
handover is on the horizon,
or need more time for the Trump
administration’s plans to become more
detailed and move through Congress.
Fed Chair Janet Yellen is scheduled to
hold a press conference at 2:30 pm (1930
GMT) on Wednesday to elaborate on the
economic outlook and policy statement.
She’ll have a broad set of issues to
cover since her last press conference in
September — from the Federal Open
Market Committee meeting itself, to the
likelihood she will be replaced in early
2018 and the risks she foresees from the
Trump agenda.
Trump repeatedly attacked Yellen
during the election campaign, accusing
her of holding down rates to help his
Democratic rival. Since the election,
he has expressed his disapproval of
corporate America, criticising Boeing,
and took credit for a deal to keep
hundreds of jobs at an Indiana plant
from being moved to Mexico.
The president-elect also will be under
scrutiny after this week’s Fed meeting for
clues about how he plans to handle his
relationship with the central bank.
“There is a real risk that he could be
openly critical of the decision to raise
rates next week,” Paul Ashworth, an
economist with Capital Economics, said
in a note last week.
That could upset markets and raise
serious issues about whether Trump
intends to leave the Fed alone or try to
influence its decisions. Top US elected
officials, in particular the president,
typically avoid criticising the Fed’s shortterm
rate decisions, emphasising instead
the need for monetary policy to be set
independently.
“If he remains silent after the
announcement to raise interest rates
next Wednesday, then we can begin to
assume that it will be business as usual
for the Fed,” Ashworth wrote.
WATCHING THE MARKETS:
Trump’s plan to cut taxes and regulation
and funnel fresh billions into capital
projects must pass Congress, and
it may be well after that before any
new programmes meaningfully effect
economic forecasts.
But policymakers also watch the
markets closely. It may be hard for the
Fed to stick with its ultra-slow pace of
rate hikes if a major tax overhaul and
fiscal spending plan are unleashed.
TD Securities analysts said that fiscal
policy at this point in the economic
recovery could prompt “an inflationary
demand shock” that adds nearly a per-
Fed fund futures show a 97
per cent probability that
the Fed will lift rates by a
quarter of a percentage
point at the end of its
two-day policy meeting on
Wednesday.
centage point to economic growth, but
spurs the Fed to raise rates much quicker
than expected — by nearly an extra percentage
point per year.
That scenario of a central bank caught
behind the curve and forced to act faster
is one that Yellen and other policymakers
have said they hope to avoid out of fear it
could prompt a recession.
Fed officials in recent days have
acknowledged the Trump agenda may
cause them to switch gears, though it is
not clear how soon.
“At this juncture, it is premature to
reach firm conclusions,” New York Fed
President William Dudley said last week.
But, since Trump won the election,
Dudley added, “the stock market has
firmed, bond yields have risen and
the dollar has appreciated... Market
participants now anticipate that fiscal
policy will turn more expansionary and
that the (FOMC) will likely respond by
tightening monetary policy a bit more
quickly than previously anticipated.”
— Reuters
*
HARD BREXIT
Banks want to be subject to EU laws for five years
Large banks in Britain
want the UK government
to allow their industry
to remain subject to EU
laws for up to five years
after Brexit, a move likely
to enrage euro sceptics who want to
break away from the bloc’s legal system
as soon as possible.
The banks are also pressing the
government to allow the European
Court of Justice to rule on decisions
related to their businesses during
that period, according to a document
reviewed by media.
The document was drawn up by
law firms on behalf of banks lobbying
the government for a departure in
stages from the EU. It has the support
of major banks, has been shared with
the Treasury and is the most detailed
request yet by Britain’s financial industry
for a transitional period to give it longer
to adapt to Brexit, bankers said.
Banks in Canary Wharf financial district are seen from the top of the ArcelorMittal Orbit in east London. — Reuters
“The report has been received as a
fairly serious piece of work. It focuses on
process.
“Transitional arrangements are likely
change and the sooner they wake up and
accept it the better.”
the legal underpinning of a transitional
essential,” the document says. “This is The document was drawn up by
arrangement,” according to one banker If no transition deal is important in order to avoid potential three of Britain’s biggest law firms —
at a large international firm. “It’s a
damage to the “real economy” that is Linklaters, Freshfields and Clifford
agreed, there is a risk that
heavyweight legal piece of work.”
reliant upon uninterrupted access to Chance — and says it is “intended to
The British government is currently some banks may not be financial services.”
provide technical support to those
divided on whether to support demands able to move parts of their The demands for special treatment developing a negotiating position for
for transitional arrangements — and if
for an industry scorned by Britons the UK.”
so, in what form — reflecting diverging
operations out of Britain
since the financial crisis may put it on All the law firms declined to
views about the best way to leave the or set up new British
a collision course with swaths of the comment. Financial services firms face
EU and concerns about a backlash from
subsidiaries in time.
public and politicians who voted for some of the biggest challenges of all
those who campaigned and voted for
Brexit because they wanted Britain to sectors responding to the vote to leave
Brexit.
While some Treasury officials are
backing the move, the Brexit Minister
withdrawal period that will begin when
the government invokes Article 50 of
regain control of its law.
OPPOSITION
Hardline supporters of Brexit are
the EU because large areas of their
businesses are governed by passporting
rules, which allow them to operate
David Davis and Prime Minister the EU’s Lisbon Treaty.
opposed to any transitional arrangement across Europe.
Theresa May are yet to commit publicly
to supporting any deal.
The Treasury said in a statement
Finance Minister Philip Hammond is
closely listening to the financial sector’s
views. The Department for Exiting the
European Union referred Reuters to the
Treasury for comment.
The document warns of the potential
shock to the British and European
economy from a loss of critical financial
services if banks do not secure a
If no transition deal is agreed, there is
a risk that some banks may not be able
to move parts of their operations out of
Britain or set up new British subsidiaries
in time, the document says, running the
risk that the banks may have to halt their
EU business activities abruptly.
It would normally take banks as long
as three years to relocate operations,
according to the document, but due to
the large number of firms seeking to do
this simultaneously regulators may be
worrying it could become permanent
as final trading terms can take years to
agree.
Richard Tice, Co-chairman of the
Leave Means Leave campaign, which
is pushing for a so-called “hard Brexit”,
where Britain leaves the EU’s single
market in order to impose controls
on immigration, said the banks are
exaggerating the potential disruption.
“This is a nonsense. It is just the
banks, frankly, not dealing with the
Finance accounts for about 10 per
cent of Britain’s economy, a larger
share than in other big economies,
highlighting its importance as the
government embarks on talks that may
determine if it remains a leading global
financial centre for years to come.
The document argues that Britain
must secure an agreement with Brussels
— around the time of triggering Article
50 — for a period of delay following the
two-year exit process for it to have any
transition phase beyond the two-year flooded with requests, slowing down the issue,” he said. “The country voted for impact.
— Reuters
*
NO BAILOUT
Italy’s BMPS to go with
private sector-led rescue
CÉLINE CORNU
Italy’s troubled Monte dei Paschi di Siena (BMPS) bank on Sunday
announced it would go ahead with plans to seek a private sectorled
rescue, narrowly avoiding the need for a government bailout.
The world’s oldest bank’s woes have raised concerns over the
euro zone’s third-largest economy, particularly in the aftermath
of prime minister Matteo Renzi’s resignation after a crushing
referendum defeat.
The bank’s prospects appeared somewhat less alarming on Sunday
however, after Italian
President Sergio Mattarella
asked Renzi’s ally Paolo
Gentiloni to form a new
government.
BMPS’s stock tumbled
on Friday over reports that
the European Central Bank
had denied it more time to
raise the cash it needed to The logo of Italian bank the Monte Dei
avoid being wound down, Paschi di Siena in Rome, is seen in this
image. — AFP
triggering speculation it
would be forced to seek a
government bailout.
The bank — seen as the weak link in Italy’s economy — had asked to be
given until January 20 to avoid collapse.
The request was reportedly refused, with the ECB’s board believed to
have ruled that two weeks of extra time would be of little use in turning
around the historic bank.
In a statement published on Sunday after a board meeting in Milan,
BMPS said it had “decided to go ahead” with plans to seek a market-led
rescue by December 31. The bank had initially announced its plan to seek
a private sector-led rescue in July.
The bank, whose stock has fallen more than 80 per cent this year, plans
the sale of 27.6 billion euros ($29 billion) in non-performing loans.
It also aims for a capital injection of up to five billion euros.
BMPS has already collected more than a billion euros by converting
bonds into shares — but it still has four billion more to go before it is in
the clear.
According to reports in the Italian press, up to two billion euros could
be raised by allowing private investors to convert bonds into shares.
Though it remains unclear whether the bank’s plan will actually work,
BMPS appeared on Sunday to have avoided the worst-case scenario.
Italian media reports say the Qatar Investment Authority — the Gulf
nation’s state-owned holding company — may be willing to contribute
another billion euros.
“Qatar is ready and willing to contribute the sum that was mentioned,”
a source close to the BMPS board reportedly said.
BMPS’s prospects appeared more favourable on Sunday, particularly
after Gentiloni was named prime minister. — AFP