MNI: Canada Work More Important Than Venezuela Deal- Hodgson

Natural Resources Minister Tim Hodgson on Wednesday downplayed recent U.S. threats to replace Canadian heavy crude oil imports with product from Venezuela, a situation he had declined to comment on earlier this month when visiting the oil hub of Alberta.  

“We can’t worry about what the Americans are doing. We’re just going to build for Canada,” Hodgson told MNI in brief comments as he left the House of Commons. President Donald Trump recently signed a deal to rebuild Venezuela's oil industry and move heavy crude to refineries around Texas in a bid to displace Canadian energy, part of the escalation of the trade war with Prime Minister Mark Carney. (See: MNI INTERVIEW:Paused Talks Help Canada In US Trade War-Verheul)

MNI INTERVIEW: Local Debt Biggest Challenge To China Since 90s

China should issue a total of up to CNY10-12 trillion in treasury bonds over three to four years to bail out local governments, one of the country’s most prominent economic advisors told MNI, calling for the same level of determination officials brought to dealing with non-performing bank loans in the 1990s.

Shanghai University of Finance and Economics Professor Yao Yang said the central government should issue up to CNY4 trillion in special treasuries annually during this effort. Bailing out local governments would permit them to settle outstanding payments which are the cause of chains of indebtedness between companies which he says is paralysing local economic activity.

While Yao does not expect his recommendations for local liabilities or the national property sector to be acted upon in the near term, he describes addressing local fiscal liabilities as the most significant economic issue facing China. He draws parallels between the present moment and the late 1990s banking crisis, when he said the economy came closest to collapse in modern times.

“The entire economy is grinding to a halt,” said Yao, who has participated in meetings with President Xi Jinping and former Premier Li Keqiang. The “triangular debt” between large-scale enterprises whose origins lie in local government liabilities totals about CNY30 trillion, he said.

A previous CNY12 trillion package in late 2024 aimed at regularising liabilities which local governments had hidden off-balance sheet in order to get around financing limits has had the effect of increasing the fiscal burden on local administrations, said Yao, who believes that much of the debt should instead have been written off.

The package included raising local governments’ debt ceiling by CNY6 trillion to swap out the hidden debt, as well as allocating an annual CNY800 billion in local special bonds for five years. The local government funding vehicles would have been technically registered as corporate defaults if they had been allowed to fail, noted Yao, but instead they have been linked to local government books.

In the event 12 provinces received most of the official support and were able to roll over and extend debt maturities to 20-30 years, with remaining regions having to raise their own funds for repayments, he added.

“Every country has to clean up its debt roughly every 20 years with the backdrop of a credit-based economy,” said Yao, who argues that the need to alleviate debt which impedes central government objectives overrides concerns over moral hazard.

At least 80% of local governments’ total debts are backed by tangible assets, many of which are currently idle, noted Yao.  (See MNI: China's Investment Likely To Decline In 2026 - Advisors)

“If the central government could allow asset management companies to step in and sell off these high-quality assets, there is plenty of capital in the market to absorb them,” he said.

The best way to curb disorderly borrowing by local governments is to compel administrations at all levels to publish their balance sheets for public scrutiny, according to Yao. Such a reform was mentioned during the Third Plenary Session of the 20th CPC Central Committee but has proven virtually impossible to advance, he added.

REAL ESTATE

Yao also has suggestions for dealing with China’s struggling property market.

A national-level entity could acquire properties to provide public rental housing, especially those subject to judicial auctions, and could be funded by issuance of CNY2-3 trillion of corporate bonds, he suggested.

"If the central government puts the money on the table, housing prices would stabilise or even see a slight rise, with the entity possibly turning a profit at the end,” he said.

Over 700,000 foreclosed properties were listed last year, many of which were selling at half of market price, constantly eroding market confidence at the margins, said Yao. These properties should be purchased as soon as possible to reduce disruption to the market, he said. 

Yao rejected suggestions that the housing market is in the early stages of a recovery, adding that the current increase in second-hand housing transactions with falling prices has characteristics of a fire sale.

INVITE: LIVESTREAM MNI CONNECT With ECB's Cipollone On Oct 6

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/0900-10.30 ET/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 SNB WATCH: On Hold, But SNB On Inflation Watch

The Swiss National Bank looks set to keep monetary policy unchanged on Thursday, holding the policy rate at 0%, but following on from hikes at leading G7 central banks in recent weeks, the likely upward revision of inflation forecasts could signal monetary policy tightening is approaching in Switzerland too.

Futures markets currently see a probability of around 50% of a 25 basis-point rate hike at the December meeting, and such a move is fully priced in by the end of March 2027.

Recent comments from SNB President Martin Schlegel have been seen as a shift in a hawkish direction and policymakers in Zurich have not pushed back on the move in market pricing.

Swiss inflation rose to 0.8% year-on-year in August, above the SNB’s estimate for the average rate in Q3 2026, with a continued rise in fuel prices pointing to further increases in the coming months, perhaps pushing the consumer gauge above 1% y/y for the first time since the summer of 2024. These factors should be reflected in the forecasts.

Together with the impulse from energy prices, consumer prices could also face demand-side pressures after economic growth in the first half of 2026 exceeded expectations. A pick-up in new orders alongside resilient foreign demand point to GDP growth still at an above-potential rate in H2 2026.

CURRENCY MOVES
Recent franc weakness risks pushing imported inflation higher. Barring favourable energy price shocks or severe adverse shocks to growth, analysts at EFG says "it would not be surprising if the SNB adopted a less expansionary monetary policy before the end of 2026."

The SNB has two tools at its disposal to tighten financial conditions: the policy rate and foreign exchange market interventions. The SNB's primary tool is the policy rate, but the SNB has used the FX markets historically to influence the exchange rate and thereby adjust its monetary policy stance. Normally, FX activity was meant to counter franc appreciation but -- as in 2022-23 -- the SNB has also used intervention to tighten financial conditions.

"It is highly likely that the SNB will keep rates at 0% at its upcoming meeting on Sept 24. The SNB’s likely upward revision of inflation forecasts will signal that a monetary
policy tightening is approaching in Switzerland too," said GianLuigi Mandruzzato, senior economist at EFG Bank.

MNI RIKSBANK WATCH: Inflation Forecasts, Rates Path, To Rise

The Riksbank is generally expected to hold its policy rate at 1.75% on Thursday, though it is expected to raise its inflation forecasts given persistently high energy costs, and analysts anticipate an increase in its rate path to indicate a higher probability of a hike before year end than the 50% mentioned in June.

The Bank has held rates unchanged since its cut in September 2025. Inflationary pressures have been weaker than in many other advanced economies, with the target CPIF inflation measure consistently below 2%. Annual CPIF ex-energy inflation fell from 0.6% to 0.5% in August.

The Riksbank's estimate of the long-run neutral rate is between 1.5% and 3.0%, locating the current policy stance towards the bottom of the range, but the latest rate path trends slightly upward. The persistence of the Middle East conflict and associated increases in energy prices remain in focus, and in August, the Board assessed "that the probability of a rate increase later this year remains."

This guidance could be strengthened by adding a line stating that a rate hike this year was now seen as likely.

In June, Governor Erik Thedeen had said the chances of a hike were about 50/50. (See MNI INTERVIEW: 50/50 Hike Chances Due To Iran Doubts-Thedeen)

The Riksbank’s Executive Board, however, has been split, making agreement on guidance trickier. Deputy Governor Anna Seim, at the hawkish end, could dissent and vote for a hike this month while on the other side Deputy Governor Per Jansson said at the August meeting that the deterioration in the geopolitical outlook presented primarily a communication challenge and that the deterioration in the inflation outlook was slight.

MNI NORGES WATCH: Hike In Balance As Oil High But Output Cools

Analysts are split down the middle as to whether Norges Bank will raise its key policy rate from 4.25% at its Sept 24 meeting, as it balances a deteriorating geopolitical outlook and higher energy prices against softening domestic activity.

While Norges Bank said at its last meeting that a further rate increase "may still become necessary," it has not specified timing, and Norway's policymakers have steered away from meeting-specific guidance since catching analysts off guard with their May hike.

If the Bank's policy committee shares the market consensus that another hike remains likely, then there would seem to be little value in delay at a time when concerns over higher energy costs have helped prompt tightening at the Federal Reserve, the European Central Bank and the Bank of Japan.

The market curve has fully priced in a hike by end-2026, with the next likely opportunity coming at the December meeting. 

But inflation has surprised to the downside amid signs of the economy cooling. The central bank's own Regional Network business survey found that, after picking up through 2025, growth has slowed this year, with output expected to rise just 0.3% in Q3 and Q4. On the core CPI-ATE target measure, inflation dipped to 2.7% in June and July before rising to 3.0% in August, still below Norges Bank's 3.3% forecast.

The policy rate is already in restrictive territory, with Norges Bank's most recent estimate of the neutral rate lying in a range between 2.25% and 3.75%. (See MNI INTERVIEW: Norges Head Sees Rate Hike Despite Iran Deal)

Norges Bank's most recent quarterly rate path was consistent with a little more than one 25 basis point hike. The new monetary policy report on Tuesday will likely adjust the near-term rate path. 

If the Bank doesn't hike, the near-term path would likely be lowered for the fourth quarter from just over 4.5%, in a signal that a rate hike this year is not a done deal. If they do hike the rate path is still likely to tilt upwards, leaving the door open to a further increase in either Q4 or Q1 next year. (See MNI INTERVIEW: Macklem-BOC Faces Tough Calls Ahead On Rates)

RPT-MNI INTERVIEW2: Macklem Comfortable With Limited Guidance

(Repeats story published earlier.)

Bank of Canada Governor Tiff Macklem told MNI he is comfortable giving limited forward guidance to explain the direction of monetary policy to Canadians, adding that volatility in investor bets about the path of rates over the last year reflects an unsettled time for the economy.

“That’s really markets at work. To the extent that they understand our objectives, to the extent they understand our reaction function, that assessment I think is a healthy thing,” Macklem said after a speech in Halifax, Nova Scotia on Monday. (See MNI TRANSCRIPT: Interview With Bank of Canada Governor Macklem)

“That doesn’t in the end mean that we don’t have to do the right thing. We can’t just let markets do it,” he said. “We have to take a judgement as to what we really need to do.”

Since President Donald Trump imposed the first round of tariffs last spring, Canadian investors and economists have priced in bets on two rate cuts, a hold into 2028, and as many as three hikes this year. There are only two meetings left this year and in recent weeks views have consolidated around a couple of hikes by early next year. 

HUMBLE GUIDANCE

Decisions must come one meeting at a time and officials have a duty to explain the outlook to Canadians, he said. Those comments come as new Federal Reserve Chair Kevin Warsh says he won't give much forward guidance and instead wants to take signals from financial markets to help meet his inflation and full employment mandates.

“We have to talk about the future. We have to be humble about the fact the future’s unpredictable," Macklem said. "We have to think about the risks, and I think we need to be careful about giving too much forward guidance for the many of the reasons Chairman Warsh has outlined.”

“But you have to find that balance, and I’m generally comfortable with our balance,” he said. 

Canadians need to understand that monetary policy acts with a lag to help them align the Bank's ultimate goal with what's going on at the moment, he suggested.

“The fact that inflation is above target now is not the key thing that feeds into our decision. The key thing is where do we think it’s going to be a year, a year-and-a-half from now, and do we need to change the interest rate to get it back to the 2% target over that horizon,” Macklem said.

GOING TO BE TROUBLE

Global bond yields have risen in recent weeks on signs that inflation and budget deficits are becoming bigger concerns, and that the continuing Iran war will push up gasoline prices in particular. Asked about his earlier warning that sovereign debt markets face risks as hedge funds take on a large share of the market, Macklem said there are some market problems that can be curbed while fiscal policy is a more fundamental question.

“There’s been a lot of issuance globally, there’s a lot of debt to absorb, and hedge funds have been doing it very efficiently,” Macklem said. 

"In Canada as in other countries we are looking at, are there some things we can do to the infrastructure of the bond market that would improve its resilience given the fact that the buyers have shifted to more private sector and more hedge fund,” he said. 

“Obviously, some countries have unsustainable fiscal policies. You’re not going to smooth those over with some new infrastructure," Macklem said. “Countries with unsustainable fiscal policies have to get fiscal policy on a sustainable track, or yeah, there’s going to be trouble.”