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Lagarde urges patience at ECB despite ‘painful’ inflation surge

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Christine Lagarde has said the European Central Bank should remain “patient” and avoid tightening policy prematurely, despite soaring eurozone inflation that is “unwelcome and painful”, particularly for poorer people.

“At a time when purchasing power is already being squeezed by higher energy and fuel bills, an undue tightening would represent an unwarranted headwind for the recovery,” the ECB president said in a speech to a Frankfurt banking conference.

“We must not rush into a premature tightening when faced with passing or supply-driven inflation shocks,” Lagarde said, signalling that the ECB is likely to maintain a sizeable stimulus at its meeting next month even as other central banks withdraw support.

Lagarde’s remarks knocked the euro, which was already being hit by investor concerns about record Covid infections in parts of Europe, pushing it down 0.7 per cent against the dollar to trade at $1.284, close to a 16-month low. The euro also lost ground against other major currencies including sterling and the yen. Against the Swiss franc it hit a six-year low of SFr1.048.

The common currency had already been losing ground over the past week over expectations of a growing interest rate gap between the eurozone and other major economies, as central banks such as the US Federal Reserve and Bank of England respond to the recent surge in inflation with tighter policy.

Eurozone government bonds rallied on the prospect of ECB policy staying accommodative for longer, and were given a further boost by news of fresh German and Austrian restrictions being implemented to contain the spread of Covid-19. The yields on German 10-year government bonds, a benchmark for assets across the euro area, fell 0.04 of a percentage point to minus 0.32 per cent, the lowest level in two months.

“The market is understandably fearful of further Covid-related disruptions and the impact that could have on growth,” said Lee Hardman, a currency analyst at MUFG. “That certainly helps Lagarde’s efforts to push back on expectations for early ECB rate hikes.” 

Last month, inflation in the euro area hit a 13-year high of 4.1 per cent, well above the ECB’s 2 per cent target, prompting some investors to bet that the ECB would raise rates next year. But Lagarde said many of the drivers of higher inflation, such as soaring energy prices and supply chain bottlenecks, were “likely to fade over the medium term”.

“This inflation is unwelcome and painful — and there are naturally concerns about how long it will last,” she added. “We take those concerns very seriously and monitor developments carefully.”

The eurozone economy faced a “mixture of shocks, which is partly related to catch-up demand but has a strong supply-driven element too”, Lagarde said. “Tightening policy prematurely would only make this squeeze on household incomes worse.

“At the same time, it would not address the root causes of inflation, because energy prices are set globally and supply bottlenecks cannot be remedied by the ECB’s monetary policy,” she added.

Most investors expect the ECB to say next month that its flagship €1.85tn bond-buying programme, which it launched last year in response to the pandemic, will come to an end in March 2022. However, the central bank is widely expected to step up its longer-standing asset purchase programme at the same time to limit any sell-off in bond markets.

Having committed not to raise rates before it stops primary bond purchases, next month’s decision will provide a vital signal on the potential timing of the first rate rise.

Lagarde indicated the ECB was likely to keep buying bonds for much of next year, saying: “Even after the expected end of the pandemic emergency, it will still be important for monetary policy — including the appropriate calibration of asset purchases — to support the recovery and the sustainable return of inflation to our target of 2 per cent.

“We do not see the conditions — either at the economy-wide level or at the sectoral level — for inflation rates above our target to become self-sustained,” she said, before concluding: “Monetary policy today must therefore remain patient and persistent, while being alert to any possible destabilising dynamics emerging.”

However, there are growing divisions among ECB rate-setters over the likely course of inflation. Jens Weidmann, the outgoing head of Germany’s central bank and a member of the ECB governing council, told the Frankfurt event: “The elevated inflation rates will probably take longer than previously projected to recede again.”

“Given the considerable uncertainty about the inflation outlook, monetary policy should not commit to its current very expansionary stance for too long,” Weidmann said. “To keep inflation expectations well anchored, we need to reiterate over and over again: if required to safeguard price stability, monetary policy as a whole will have to be normalised.”



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Saudi Arabia’s Most admired Companies in 2022

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Insights Success is an archway that caters to Entrepreneurs’ quench of technology and business updates which are currently ruling the business world.
We are ceaselessly proving the best platform for leading companies, which aids indefinite progress while creating meaningful learning experiences for the visitors and invaluable brand awareness for the clients.



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Bank of England raises base interest rate to 1.75%

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The Bank of England has raised the base interest rate by half a percentage point to 1.75 per cent, the biggest rise since 1995, in an attempt to combat runaway inflation.

The nine-strong monetary policy committee voted eight to one in favour of a 50 basis point rise, defying some market expectations for an increase by 25 basis points.

It is the Bank’s sixth consecutive tightening in monetary policy and follows in the footsteps of the US Federal Reserve and European Central Bank, which have begun aggressively raising rates by larger increments.

Interest rates are now the highest since 2009 as the Bank attempts to bring down inflation, which is running at a 40-year high of 9.4 per cent and is on course to exceed 11 per cent later this year.

These would be the worst inflation rates in the G7, caused in large part by rising global energy prices driving household bills higher this year. The UK economy is also heading for a slowdown this year as consumer incomes are squeezed more tightly than since the 1950s.

Andrew Bailey, the Bank’s governor, has hinted that it will also announce how it intends to begin unwinding the £850 billion of government debt pumped into the economy since the financial crisis, offloading bonds worth between £50 billion and £100 billion from as early as next month.

The Bank will also deliver its quarterly outlook, with Bailey expected to forecast that inflation will rise beyond 11 per cent and remain in double digits into next year. The Bank’s target is 2 per cent.

Commenting on today’s Bank of England interest rate rise, David Bharier, Head of Research at the British Chambers of Commerce (BCC), said: “This rise is the clearest signal yet of the Bank of England’s intention to get inflation under control. Spiralling prices are cited by businesses as by far and away the top concern right now.

“However, given the extremely precarious state of the economy, this decision is not without risk for businesses and consumers that are exposed to banking or overdraft facilities.

“There are many causes of the current inflation crisis – global supply chain problems, trade barriers, soaring energy costs, increased taxes, and labour market shortages. Interest rate rises alone will do little to address these.

“Worryingly, our research indicates strongly that most small businesses are not investing for growth, and that longer-term confidence is beginning to wane.





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Opinion: OSC appointment fuss is a tempest in a teapot

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Jeffrey MacIntosh: The government has the legislated right to have a say in the agency’s course

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Ed Waitzer’s recent op-ed (“The issue at the OSC is integrity, not debate,” July 14, 2022) expresses surprise and disappointment in my recent op-ed (“Conflict at the OSC: Why the regulator needs to make room for dissent,” July 7, 2022). In that op-ed, I argued that lawyer Heather Zordel’s appointment as non-executive chair of the OSC in March of this year should be met with open arms, as it introduces new points of view into what seems to be a rather intellectually closed shop. I don’t suppose it will come as a shock to Ed Waitzer or anyone else that I am surprised and disappointed at his rebuttal.

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To begin with, it contains a number of inaccuracies. It states that Ms. Zordel was denied reappointment to her earlier position (2019-2021) as part-time commissioner. In fact, given her busy legal practice, she took herself out of the running. This puts a rather different complexion on the matter.

And I never stated or implied that Ms. Zordel was not reappointed as part-time commissioner because of two dissenting opinions that she wrote as commissioner. My point was that for Ms. Zordel’s critics the dissents were a factor in opposing her appointment as chair of the board.

The nub of my argument was that the OSC could benefit from greater variety of viewpoints among its brass as to what investor protection and other aspects of the OSC’s mission entail. By contrast, Mr. Waitzer argues: “the importance of debate and dissent is not the point here.” I beg to differ. As I indicated, some prominent accounts of Ms. Zordel’s appointment have put a pejorative cast on her disagreements with her fellow commissioners. That puts the issue of debate and dissent front and centre.

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I certainly agree with Mr. Waitzer that the independence of administrative agencies is a cornerstone of our democracy. But does that mean that every administrative agency should be entirely divorced from any government oversight whatsoever — a little fiefdom unto itself and in no sense answerable to its political masters? Not a whit. It is the government that creates the agency, defines its mandate, gives it the powers that it needs to carry out that mandate and defines its organizational structure. And it is entirely within the purview of the government to enlist its legislative power to re-define that mandate, powers, and organizational structure if it chooses.

We don’t have to look into the distant past to find an example. On the advice of a non-partisan blue ribbon panel — the Capital Markets Modernization Taskforce (“CMMT”) — the Conservative government has recently substantially reorganized the OSC via the Securities Commission Act, 2021 (declared in force in April). That legislation splits the adjudicative function (the “Capital Markets Tribunal”) from the regulatory function. Moreover, where before the reorganization the OSC Chair and CEO were the same person, the two offices are now split. As expressed by the CMMT, “The Board of Directors, led by the Chair, (will) focus on the strategic oversight and corporate governance of the regulator,” while “The CEO (will) be responsible for the overall management of the organization and execution of the OSC’s mandate.” The directors, including the chair, are all government appointees.

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This new structure, recommended by a non-partisan committee, gives the government of the day the power to influence, at the highest level, the strategic direction of the OSC. But why should it not? If the government is dissatisfied with the strategic vision or regulatory philosophy of the regulator or the manner in which it is being implemented, it would be profoundly anti-democratic — and at odds with the rule of law — to forbid the government from seeking to alter the agency’s course.

Indeed, the Ontario Securities Act states “The Commission is an agent of the Crown in right of Ontario.” The key word here is “agent.” It is not “hegemony,” “fiefdom” or “satrapy.” At the end of the day, the OSC is a government creation performing regulatory functions ceded to it by the government.

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Do Ms. Zordel’s conservative connections compromise the independence of the institution of which she is now head? Absolutely not. In the making of such appointments, the twin issues of competence and integrity will take up a lot of shelf space. But why should the government not also consider, if it chooses, whether potential nominees share the government’s regulatory philosophy

The true worry about political interference is that the government might attempt to dictate or influence the result of particular cases. But the new legislation builds in the important protection of ceding no operational powers to the board of directors. Thus, aside from the government’s power to approve or decline proposed rule changes (a longstanding feature of securities regulation), its sole discretionary avenue of influence lies in its power to appoint directors and hence influence high-level strategic direction.

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What is left of the argument that there has been inappropriate political interference over the OSC? Only the assertion that Ms. Zordel and three other part-time commissioners were appointed without the government having consulted the OSC, as has customarily been done. Yes, it would have been better if the government had consulted the OSC. In all likelihood, however, the outcome would have been the same. The OSC might not like not having been consulted but at best this is a foible not a fiasco.

In the end, this tempest easily fits within a standard-issue teapot.

Financial Post

Jeffrey MacIntosh is a professor of law at the Faculty of Law, University of Toronto, and a director of the Canadian Securities Exchange.

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