German economy rebounding, faces risk from virus resurgence

After shrinking 9.7 percent in the second quarter, the worst quarterly figure on record, the economy is rebounding from the severe shutdowns and restrictions on activity and movement of March, April and May. (File/AFP)
Updated 24 September 2020

German economy rebounding, faces risk from virus resurgence

  • The Ifo institute’s index released Thursday rose to 93.4 points in September from 92.5 points in August

FRANKFURT: A widely watched indicator of German business confidence has risen for a fifth month in a row as Europe’s largest economy rebounds from the coronavirus shutdowns — but the index remains below its long term average and uncertainty is high with virus cases rising.
The Ifo institute’s index released Thursday rose to 93.4 points in September from 92.5 points in August. The index is based on a survey of thousands of businesses about their view of current conditions and expectations for the future.
In this case the current assessment rose while the expectations part levelled off.
After shrinking 9.7 percent in the second quarter, the worst quarterly figure on record, the economy is rebounding from the severe shutdowns and restrictions on activity and movement of March, April and May.
Carsten Brzeski, chief eurozone economist at ING bank, said growth could rebound sharply with growth between 5 percent and 10 percent in the third quarter. But the recovery still faces hurdles and has a long way to go to regain its pre-pandemic footing.
“Given the recent softening of leading indicators, however, there is a risk of a double-dip in the fourth quarter,” Brzeski wrote in a research note, “unless social distancing rules are eased further; a very unlikely scenario given the latest increase in new COVID-19 cases.”


Turkey holds rates in surprise that sends lira to new low

Updated 22 October 2020

Turkey holds rates in surprise that sends lira to new low

ISTANBUL: Turkey’s central bank bucked expectations for a big interest rate hike on Thursday and sent the lira plunging to a record low by holding its policy rate at 10.25% and saying it had already made progress in containing inflation.
The bank, which also surprised last month when it hiked rates, said it would continue with liquidity measures to tighten money supply. It raised the uppermost rate in its corridor, the late liquidity window (LLW), to 14.75% from 13.25%. A Reuters poll of 17 economists had expected the bank to raise its key one-week repo rate by 175 basis points to address Turkey’s weak currency and double-digit inflation. Forecasts ranged from hikes of 100 to 300 bps.
The decision to leave the rate unchanged sent the lira down more than 2% to near 8 versus the dollar and prompted economists to question the central bank’s commitment to lowering inflation and its independence from the government.
“The (bank) is now back to a more unpredictable and opaque monetary policy framework. It appears as a severe miscalculation,” Per Hammarlund, chief emerging markets strategist at Swedish bank SEB.
The key policy rate remains below annual consumer price inflation, which stood at 11.75% in September, leaving real rates negative for lira depositors.
Turkey’s central bankers had surprised markets with a 200 basis point rate hike in September, the first monetary tightening in two years as it sought to rein in inflation.
Its so-called backdoor measures to rein in credit have raised the average cost of funding to 12.52% from a low of 7.34% in July. The LLW adjustment gives the bank more scope to raise funding costs.
“A significant tightening in financial conditions has been achieved, following the monetary policy and liquidity management steps taken to contain ... risks to the inflation outlook,” the bank’s monetary policy committee (MPC) said.
It said liquidity measures will carry on “until the inflation outlook displays a significant improvement.”
The lira touched a record low of 7.9845 against the dollar.
It is down 25% this year in a selloff prompted by concerns about high inflation and the central bank’s badly depleted FX reserves, and geopolitical worries including the prospect of trickier US ties under a possible Joe Biden White House.
Last month’s hike in the policy rate reversed a nearly year-long easing cycle in which it fell rapidly from 24%, where it was set in the face of a 2018 currency crisis.
“Last month the central bank took an important step to restore credibility and today’s decision seems like a step back. All this positive impact has been reversed significantly,” said Piotr Matys, senior EM FX Strategist at Rabobank.
Turkey’s economy contracted 10% in the second quarter because of the coronavirus pandemic and measures to combat it. Tensions in the Eastern Mediterranean and in the Nagorno-Karabakh conflict are also clouding the outlook.