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BOV Market Watch - Week ending 24th September 2021
24 Sep 2021

U.S. Fed Hints Tapering of Asset Purchases. During this Wednesday’s meeting, the U.S.  Federal Reserve kept unchanged the target range for the federal funds rate at 0 to 0.25 percent. The Fed also reiterated that it expects it will be appropriate to maintain this target range until labour market conditions have reached levels consistent with maximum employment and inflation is on track to moderately exceed 2 percent for some time. Meanwhile, the latest dot plot projections from the Fed members showed that a majority of officials now expect interest rates to be raised next year compared to previous forecasts calling for the first rate hike in 2023.The Fed also hinted that tapering of the central bank's asset purchases could begin in the near future, citing progress towards it goals of maximum employment and price stability. The Fed stated that a "moderation in the pace of asset purchases may soon be warranted" if progress towards its dual goals continues broadly as expected. The Fed is currently implementing its bond purchases at a rate of at least USD 120 billion per month but is expected to begin scaling back later this year. However, Fed Chairman Jerome Powell indicated that  the central bank could begin tapering its asset purchases as soon as its next meeting in early November. The Fed also revised downwards its forecasts for U.S. GDP growth in 2021 to 5.9 percent from 7.0 percent, while forecasts for GDP growth in 2022 were upwardly revised to 3.8 percent from 3.3 percent. It revised upwards core CPI to reach 3.7 percent this year compared to the 3.0 percent forecasted in June. Inflation growth is expected to moderate to 2.3 percent in 2022, which is still above the current Fed's 2 percent target.

ADB Developing Asia Growth Outlook. The Asian Development Bank (ADB) raised its 2022 economic growth for developing Asia, but indicated divergence in the recovery paths among regional economies. In its latest outlook update, the ADB said developing Asia will expand 5.4 percent next year, instead of 5.3 percent estimated previously. Meanwhile, the outlook for 2021 was downgraded to 7.1 percent from 7.3 percent.  Regarding the region’s biggest economies, the ADB forecasts that growth in China will remain strong, despite a protracted recovery in household consumption, and its growth projection remained unchanged at 8.1 percent in 2021 and 5.5 percent in 2022. Its growth forecast for India for fiscal year ending September 2021 was revised down, as May's spike in COVID-19 dented the recovery. The economy is expected to rebound strongly in the next three quarters, and grow 10.0 percent in the full fiscal year before moderating to 7.5 percent in FY2022.Overall, ADB’s growth forecasts have been revised up for those economies that have managed to contain the pandemic.Covid-19 continues to besiege developing Asia, but vaccines are changing the nature of the pandemic, and uneven vaccination coverage is furthering regional divergence.

China Leaves Loan Prime Rates Unchanged. China kept its benchmark loan prime rates (LPR) unchanged  for the 17 consecutive months, again as widely expected. The one-year LPR was kept unchanged at 3.85 percent and the five-year LPR at 4.65 percent. The one-year and five-year loan prime rates were last lowered in April 2020.  The LPR is fixed monthly based on the submission of 18 banks, though Beijing has influence over the rate-setting. With the economy losing momentum and concerns around the property sector growing, policy rate cuts by the PBoC could come as soon as next month. Economists are forecasting cuts to the PBoC's policy rates, including the LPR starting next quarter.

Germany's Ifo cuts 2021 GDP growth forecast to 2.5%. Germany's Ifo economic institute has reduced its economic growth forecast for Germany for this year as supply chain disruptions and a scarcity of chips and other intermediate goods are slowing down the recovery from the pandemic. The Ifo now sees Germany's gross domestic product   expanding 2.5% this year, down 0.8 percentage points from its previous forecast, and 5.1% next year, up 0.8 points. Strong demand from abroad and robust local private consumption are nevertheless expected to drive the recovery this year and next. The worst-than-expected rebound in 2021 follows a plunge of overall economic output by 4.6% in 2020 caused by corona virus restrictions to contain the spread. The German government had forecasted growth of 3.5% for this year and 3.6% for next, and it will update its estimates in October. Germany's next coalition government is expected to inherit a still-fragile recovery from Chancellor Angela Merkel, who is stepping down after 16 years in power, following the forthcoming 26th September election.

UK Budget Deficit Rising. The UK Office for National Statistics reported that the UK budget deficit exceeded expectations and marked the second biggest shortfall on record for the month of August, driven by a surge in interest payments. Public sector net borrowing, excluding public sector banks, totalled GBP 20.5 billion in August 2021. This was the second-highest August borrowing since monthly records began in 1993 and far exceeded the economists' expectation of GBP 15.6 billion. However, this was GBP 5.5 billion less than in August 2020. In August, government receipts grew GBP 5.3 billion, while expenditure fell GBP 1 billion from last year. During the  April to August period, borrowing reached GBP 93.8 billion, the second highest financial year-to-August borrowing since monthly records began in 1993. The government expects the deficit to hit GBP 233.9 billion by the end of the financial year ending 2022. At the end of August, public sector net debt excluding public sector banks reached around 97.6 percent of GDP, the highest ratio since the 98.3 percent recorded in March 1963.

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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).