INVITE: Livestreamed MNI Connect VC with ECB's Piero Cipollone

You are invited to listen to a Livestreamed MNI Connect Video Conference with ECB Executive Board Member, Piero Cipollone.

Details below:

• Speaker: ECB Executive Board Member,Piero Cipollone.
• Topic of discussion: ‘Money in the Digital Age: Digital Euro, Tokenisation and the Role of Central Banks’
• Date: Tuesday 6 October from 1400-15.30 London/15:00-16:30 CET
• This event will be run as a Zoom Webinar and is a public, on-the-record event.

To register please go to: MNI Webcast Registration

MNI: Yuan Seen Appreciating Gradually Over Next Five Years

China is likely to become more tolerant of yuan strength as it pursues policies to boost the domestic economy and high-tech industry and amid dollar weakness, analysts and policy advisors told MNI, adding that the currency could strengthen beyond CNY6.0 to the U.S. dollar over the next five years.

In the shorter term, the yuan looks moderately strong, assuming the dollar index drifts lower from around 99 to perhaps 96 or 97 by the end of this year, according to Sun Bin, chief analyst at China Foreign Exchange Investment Research Institute, noting a possible cut to central bank interest rates or reserve requirement ratios could boost sentiment and flows into the stock market, potentially strengthening the yuan and taking it lower than 6.70 against the dollar.

He added that the Chinese currency could also depreciate as far as 6.90 from its current 6.71 over the same period should external uncertainties increase. (See MNI INTERVIEW: Further Yuan H2 Appreciation Uncertain – Guan)

Over the medium to long term, the trend for the yuan is clearly to strengthen within the People’s Bank of China managed framework, with the mid-point of the yuan-dollar pair likely to appreciate by CNY0.2 to CNY0.25 per year on average, according to Sun, who thinks it could break through the 6.0 level over the next four to five years.

While officials have emphasised the need to enhance the flexibility of the yuan exchange rate, Sun predicted that volatility is likely to diminish. Year-to-date, the fluctuation of the yuan against the dollar has been only about 2,800 pips, compared to 3,600 pips in 2025 and the volatility of 5,000 to 10,000 pips in some years during the 14th Five-Year Plan period, he noted.

High U.S debt levels will tend to feed a long-term trend for dollar weakness, favouring a stronger yuan, said Tan Xiaofen, a professor at the School of Economics and Management of Beihang University. Short term, he sees the currency ranging from 6.60–6.90, appreciating moderately to 6.50–6.70 in the medium term, with two-way fluctuations falling within a gradual upward trend over the longer term. (See MNI INTERVIEW: Yuan In Steady Upward Trend - Sheng Songcheng)

Since last November, the PBOC has shifted its focus from preventing depreciation by applying the so-called counter‑cyclical factor in its daily fixing prices, to curbing excessive appreciation, Tan said. In March it lowered the forward sale risk reserve requirement ratio to zero, making it easier for Chinese companies to lock in future exchange rates.

MNI calculations show that since the beginning of this year, the PBOC's CNY central parity price has been weaker than market expectations on most trading days, and the deviation has widened since August, as the authorities lean against over-rapid appreciation by the currency.

GRADUAL APPRECIATION

Another driver for a stronger yuan has been the continued increase in foreign exchange settlement by exporters, said Sun, noting that FX settlement has consistently outpaced purchases since April 2025.

China needs a steadily appreciating currency to achieve its goal of boosting domestic circulation during the 15th Five‑Year Plan, Sun said. Technological innovation, a primary focus for this plan period, requires long-term, stable equity capital, particularly foreign investment, so preventing sharp fluctuations in both the foreign exchange market and stock markets is crucial, while the prospects for profit from AI‑driven technology remain uncertain, he said. High-tech imports are also facilitated by a relatively strong currency, according to Sun.

The yuan is likely to break free from the dollar further as the proportion of dollar-denominated assets in the country’s forex reserves declines, and as Chinese monetary policy is increasingly set according to the needs of the domestic economy, Sun said. The impact of fluctuations in the dollar index has shifted from a trend-setting factor for the yuan to a source of short-term volatility, he added.

In the short term, the yuan will continue to fluctuate according to the U.S.-China yield spread, trade frictions, and market expectations, but in the long term, its trajectory will depend on China's economic growth, capital returns, and the attractiveness of RMB-denominated assets, said Wang Dong, professor at the School of International Studies at Peking University.

Moves by the U.S. to suppress returns on dollar assets could also propel the yuan, Wang said.

MNI POLICY: BOJ Eyes Dec Tankan, Wages For Further Hike Signal

Evolving financial conditions, including firms’ financial positions and banks’ lending attitudes, in the September Tankan survey due out on Oct, 1 and the FY2027 wage outlook are likely to pave the way for the Bank of Japan to consider another rate hike as early as December, following the widely expected increase to 1.25% later this month, MNI understands.

The September Tankan will capture the impact of the June rate hike to 1%, as the June Tankan released July did not sufficiently reflect the effects of the increase.

Bank officials are focused on stronger-than-expected consumer prices and their adverse impact on consumer spending as they assess the strength of upside price risks and scrutinise the timing of the next rate hike following the widely anticipated move at the Sept. 17-18 meeting, which markets have priced in at a 97% chance. Traders currently assign a 67% chance of a December move, with a 1.5% rate fully priced in by the Jan. 21-22 meeting.

Board members will also have access to the Tankan results, due Dec. 14, at the December meeting, as well as a firmer view on the outlook for wage hikes in fiscal 2027.

MNI reported this week that the Bank is set to take a more flexible approach to policy rate hikes, abandoning its gradual every-six-month stance. (See MNI POLICY: BOJ Sees Scope For Flexible Rate Hikes)

INFLATION, WAGES

The BOJ expects the year-on-year increase in core CPI to accelerate to a level clearly above 2% from the second half of fiscal 2026, with core CPI rising to around 3%. This would reduce real incomes and exert downward pressure on typically resilient consumer spending, although bank officials are perplexed by the government’s considerably weak spending data.

Inflation-adjusted real wages, a barometer of households’ purchasing power, rose 2.4% y/y in July for the seventh straight month, accelerating from 2.2% in June, data showed.

Bank officials are mindful of the risk that real wages could return to negative territory as the pace of corporate price pass-through increases and the number of items for which firms plan to raise prices has risen compared with previous releases in July. Persistently high crude oil prices will add further pressure on firms to raise prices, increasing upward pressure on inflation and potentially pushing it above the BOJ’s forecast.

Stronger CPI will push up inflation expectations and underlying inflation, increasing pressure on the BOJ to raise its policy interest rate to prevent underlying inflation from rising above its target and anchor it at around 2%.

YEN PERFORMANCE

While the stronger yen, which has appreciated about 3% against the U.S. dollar over the past week to about JPY153.5, is somewhat mitigating upside price risks, its appreciation is unlikely to prompt businesses to lower retail prices, as firms have yet to pass higher costs through to consumers fully, according to the BOJ’s view.

The yen’s strength is also insufficient to offset upward price pressure from strong AI-related demand and high crude oil prices.

Bank officials are also concerned that the stronger yen will reduce exporters’ corporate profits, undermining the foundation for wage hikes in fiscal 2027.

MNI INTERVIEW: Trump CAD Talk Won't Trim Deficit-Manufacturers

The U.S. trade deficit will be little changed by President Donald Trump's seeking to revalue the Canadian dollar while the American economy will be strained more directly by the administration's own 50% tariffs, Canadian Manufacturers & Exporters President Dennis Darby told MNI Tuesday as Prime Minister Mark Carney's counter-tariffs take effect. 

Trump over the weekend said the "imbalance" between the Canadian and U.S. dollars is unacceptable and he will no longer tolerate it. While in past decades some exporters relied on a weak currency, that opportunity has faded as global customers write contracts in U.S. dollars. 

“If you want to buy a chiller or a heat exchanger, the price is the price, and it tends to always be denominated in U.S. dollars," Darby said. “It sounds like there's some magic, that Canada is suddenly producing lower cost stuff, it's just not true.” The currency trades at about CAD1.38 today and over the last decade has been more stable, a break from past bouts of weakness that allowed for arbitrage.

The advantage of producing with cheaper Canadian workers has also faded because of changes in the industry over time, he said. “The cost of labor isn't as big a deal in manufacturing as say it would have been 25 or 30 years ago, because you know there has been a lot more automation.”

DOUBLE WHAMMY

Trump has said the U.S. trade deficit with Canada amounts to a USD200 billion annual subsidy, but most economists note America has a surplus excluding commodities largely priced in global markets. “Our biggest export to the U.S. is oil and gas. And it sells at a discount relative to world markets,” Darby said, referring to Alberta's heavy crude oil.

Manufacturers now face a "double whammy" where goods created by shuttling parts across the Canada-U.S. border are likely to face double taxation, Darby said in an interview. U.S. producer prices for targeted products like autos, aluminum and steel have already been climbing since the tariff dispute emerged early last year, he said. (See: MNI INTERVIEW: US Will Bend On Aluminum Tariffs- Charest)

Firms on both sides of the border are also curtailing investment as they await a resolution, hurting North America's competitiveness against overseas rivals, he said. Canadian firms polled within Darby's 2,500-member group report investment plans are down 30% and there are signs U.S. spending outside of data centers is down by a quarter. 

“This is not sustainable,” said Darby, whose previous roles included six years living Cincinnati and working for Procter & Gamble. “This is not sustainable for the U.S. either.”

Even with that pressure for a deal Darby said the two countries aren't returning to the zero or low tariff world of USMCA. "What we've seen with this Administration around the world is that, I’ll use their words, there is a price to enter the U.S. market,” Darby said. “The question is, what is that level of tariff on goods that that doesn't end up being hurtful to Canada or inflationary to the U.S.?”

TALKS SEEM FAR AWAY 

Canada needed to break off talks as Prime Minister Mark Carney recently did according to Darby, because the reported terms would have been destructive than the pain of seeking a better deal. “You'll continue to see some layoffs in some areas where companies are trying their best to not close a plant, but just sort of throttle them down a bit, so we can get through this period.”

To protect domestic firms against new U.S. tariffs, Canada imposed tariffs at midnight matching USD20 billion of U.S. levies. Over the weekend Trump posted a set of memes showing for example the President playing hockey and bodychecking Carney -- who played goal at Harvard -- to the ice. 

“For now, it doesn't seem like the parties are ready to renegotiate that deal, even though (USTR) Jamieson Greer has said more than once, and in meetings I’ve been in, said they ultimately do want to renegotiate it," Darby said. "It seems like a long way away right now.” 

MNI INTERVIEW: BOE Very Near Stable Reserve Level - Fisher

The Bank of England is very close to the equilibrium level of reserves, and there is no reason for it not to hold the remaining gilts on its balance sheet to maturity, its former executive director markets Paul Fisher told MNI.

While a BOE survey indicated that banks’ preferred minimum range of reserves is from GBP365-515 billion, below the actual level which is now around GBP640 billion and is no longer obviously declining, Fisher noted that banks cannot accurately predict  future demand, as this is impacted by the economy and desired lending.

The BOE's strategy is demand-led, satisfying banks' desired level of reserves and remunerating them in full. 

"I would say we're probably at, or very close to, the plausible upper end of the current range," Fisher, now an academic with fellowships at Cambridge, Warwick and King's Business School, said in an interview. "The range can move over time as people get used to it, and conditions change, so it's a moving feast.”  (See MNI INTERVIEW: BOE MPC Shouldn't Lead QT - ex-MPC's Saunders)

QT A SIDESHOW

While analysts have focussed on the upcoming update by the Monetary Policy Committee on the pace of its reduction of the stock of gilts held in the Asset Purchase Facility over the next 12 months as it continues with quantitative tightening and running down crisis-era bank funding schemes, Fisher said this would have little impact on the economy.

As the level of reserves is pretty much steady "we know what the demand is now, given current interest rate levels. Any further run down of gilts or maturity of [Term Funding Scheme] loans will need to be replaced by lending operations, one-for-one," he said.

That leaves the BOE facing "a strategic decision to make about the future balance sheet. How much do they want to hold gilts, and how much do they want to repo?” Fisher said.

"Even if the MPC decide to run down the APF, the Bank could buy gilts for its own portfolios as long as that wasn't seen to interfere with monetary policy," Fisher noted.

"There's no reason why the Bank couldn't now just hold all their gilts to maturity," he said, though he added that the BOE could also look at other options, including, for example, swapping bonds for holdings in a national development bank.

"This is a political conundrum. It does open up the possibility that they could hold an investment portfolio for public policy purposes. But you'd have to be very careful about how you how they did that," he said.

Vicky Saporta, the current BOE Executive Director Markets, has said that she wants to the provide the majority of reserves via repo operations. But Fisher warns that there would be risks to this approach.

"I would think lending a lot more than GBP200 billion in repo creates growing operational risk for both the Bank and the markets," and could overload the Bank with lower quality collateral, he said.

"You might take so much illiquid stuff in normal times you can't really expand in a crisis," he said.

POLITICAL RISKS

As the BOE looks set to end up with sizeable amounts of reserves, it is likely to stay in the political spotlight - with two parties from opposite ends of the political spectrum, the Greens and Reform, advocating axing full reserve remuneration.

Fisher thinks that is a bad idea.

"If you cut the money you pay on the banks’ reserves you will put upwards pressure on bank charges and lending rates, banks won't want to lend to marginal customers … these are anti-growth outcomes," he said. "If you want to tax the banking system, then do it properly. Tax it on its profits ... Don't tax it on the liquidity it's holding.”

MNI: China's Inflation To Moderate, Broad-based Cuts Unlikely

China’s moderating inflation is unlikely to prompt broad monetary easing for the rest of the year, as policymakers focus on fiscal policy to expand domestic demand while global liquidity could tighten, advisors and analysts told MNI.

Inflation is expected to remain subdued at 0.5-1.0% y/y for the remainder of 2026, while producer price inflation could ease from a near-term peak of 4.1% in June to 3.8% in the third quarter and average 2.6% for the full year, said Zhang Lin, deputy director at the Far East Credit Rating Research Institute.

Su Jian, professor at Peking University’s School of Economics and director of the National Center for Economic Research, expects a wider CPI range of 0.4-1.2% over the coming months and sees PPI at 2.3-3.7%, largely reflecting base effects.

CPI rose by an average of 0.9% y/y during the first seven months of the year, while PPI increased by an average of 1.8%. The National Bureau of Statistics is due to release the latest inflation data on Wednesday.

Despite easing price pressures, both Su and Zhang saw little likelihood of broad cuts to reserve requirement ratios or interest rates this year. Zhang said policymakers are focused on implementing proactive fiscal policy, while monetary policy will play a supporting role by maintaining ample liquidity and using structural tools to support the real economy. (See MNI: China To Deepen Fiscal-Monetary Coordination, Eye Credit)

The People’s Bank of China is also unlikely to diverge from global trends should a rapid depreciation of the Japanese yen contribute to tighter global liquidity later this year, Su added.

CPI

Energy prices have exerted a neutral to slightly negative influence on CPI, with a sharp drop of 16 percentage points in gasoline prices helping to pull July inflation down to 0.5% from 1% in June, Zhang noted.

Pork prices could provide greater support after turning positive to rise 4.1% m/m in July following the implementation of tighter production controls, Zhang continued. If pork inflation recovers to around zero y/y from a 13.3% decline in July, it would remove about 0.25 pp of drag from headline CPI, while a further 10% increase could add around 0.2 pp, he estimated. 

“Pork prices should see moderate growth in Q4, supported by the lower comparison base and seasonal demand,” Zhang noted.

Su expects less upside from pork, arguing that ample supply from large-scale farming should limit price volatility. A return to positive y/y pork inflation in the near term would lift CPI by no more than 0.3 pp, he said.

Wen Bin, chief economist at China Minsheng Bank, expects CPI inflation to rise to 0.8% y/y in August as extreme weather lifts food prices, hog-capacity controls support pork prices and oil prices rebound from late July into early August.

PPI PEAK

PPI has likely reached a near-term peak as base effects become less supportive and imported price pressures fade, Zhang said, although he flagged upside risks from oil remaining above USD90 per barrel and faster-than-expected increases in global AI hardware prices.

AI-related industries currently contribute about 0.69 pp to y/y PPI growth, rising to around 2.3 pp when indirect linkages are included, Zhang estimated. However, their relatively small weighting means their contribution to headline PPI is typically around 1 pp, allowing AI demand to cushion the decline rather than reverse the broader trend, he said.

Su added that AI-related demand could create a price cycle independent of traditional economic drivers, but its relatively small weighting in the PPI basket limits its influence on the headline index.

Wen expects PPI to rise 3.8% y/y in August from July’s 3.5% as industrial product prices reverse their previous decline and higher crude prices quickly feed through to downstream sectors.

MNI POLICY: BOJ Sees Scope For Flexible Rate Hikes

The Bank of Japan will move away from its previous approach of raising rates roughly every six months and instead adjust policy as needed based on economic and price developments, as previous increases to 1% have had limited effects on the economy and inflation, MNI understands.

The shift follows comments last Wednesday by BOJ board member Hajime Takata, a known hawk, that raised the prospect of an outsized or back-to-back rate increase and sent the yen 1.2% higher against the dollar. Governor Kazuo Ueda also said after the July meeting that sustained accommodative financial conditions and price pressures could warrant faster rate hikes, reinforcing the case for a more flexible approach to tightening. (See MNI BOJ WATCH: Ueda Points To Possible September Hike)

BOJ officials see greater scope to accelerate the pace of rate hikes than maintain the gradual approach. While there is a time lag before the effects of the 1% policy rate become fully apparent, past hikes have not caused a significant slowdown in either the economy or prices, giving the Bank more scope to act. Continued economic strength and a firm inflation outlook could also prompt the Bank to accelerate hikes to prevent a further rise in inflation and avoid having to tighten abruptly later. (See MNI POLICY: BOJ Sees Need For Move To Restrictive Policy) 

However, the Bank has no clear view on how quickly rates will rise or how high the policy rate will ultimately go, with inflation, economic activity and the effects of past hikes determining the appropriate level. The Bank sees little risk of a sharp deterioration in the economy and expects inflation to rise again from September or later, keeping upside risks to prices elevated. As a result, the factors supporting a faster pace of hikes are unlikely to change significantly in the near term.

With underlying CPI inflation approaching the 2% target, the BOJ is paying greater attention to upside price risks and sees scope for a pre-emptive hike.

Markets see a 95% chance of a 25-basis-point hike at the Sept 17-18 meeting, which would represent the Bank’s third increase this year. Markets have also priced in a 1.5% rate by the January 2027 meeting. 

LIMITED PRICE RISK

Despite recent policy-rate increases, interest rates on an outstanding-stock basis have risen much less than the policy rate, indicating that financial conditions remain considerably accommodative.

However, BOJ officials do not see a major upside risk to prices, as they judge the probability of a sharp acceleration in underlying CPI inflation driven by a wage-price spiral to be relatively low. The policy rate is also set to enter the neutral interest-rate range, estimated at 1.1% to 2.5%, meaning the BOJ will want to consider further increases more slowly and cautiously.

Bank officials are also mindful that the neutral interest-rate range may have risen above its estimated level, given that the range is based on the past 30 years, when the policy rate peaked at just 0.5%. Should the economy show signs of slowing, the Bank would need to take a cautious approach to avoid exerting unexpectedly strong downward pressure on activity.