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.

MNI ECB WATCH: ECB To Hike As Inflation Risks Persist

The European Central Bank is set to increase its Deposit Rate by 25 basis points to 2.5% after a meeting in Berlin on Thursday, with policymakers highlighting upside risks to inflation.

A fresh set of projections will revise headline inflation slightly higher for 2027, while reducing this year’s estimate, but the changes will be outweighed in insignificance by persistent risks of higher inflation, particularly as a result of the crisis in the Middle East, which is proving worryingly long-lived.

Overnight index swaps imply around a 64% chance of another rate hike by December but ECB President Christine Lagarde is unlikely to provide more clarity on the path for rates beyond this week, given the high degree of uncertainty and the absence so far of second-round effects from higher energy costs. (See MNI SOURCES: ECB To Re-Stress Inflation Risks With Sept. Hike)

September’s staff projections are expected to show headline inflation revised 0.2 percentage points lower for 2026 to 2.8%, reflecting a better-than-expected Q2 outcome, with 2027 nudging 0.1 percentage point higher to 2.4%. GDP growth is seen 0.2 percentage points higher for 2026 to 1%.

While higher bond yields are tightening financing conditions, officials insist that so far there is no sign of any interference with the transmission of monetary policy around the eurozone.

With the expected rate hike to 2.5%, ECB rates will arrive in the upper bound of the range of estimates of the neutral interest rate.

MNI INTERVIEW: RBNZ's Gai Sees Gradual Return To Midpoint

It is a priority for the Reserve Bank of New Zealand to return inflation to the 2% target midpoint, but only by around mid-to-late 2027 rather than as quickly as possible and not "at all costs," Monetary Policy Committee member Prasanna Gai told MNI.

The RBNZ is balancing price pressures against growth risks from the unique shock created by the closure of the Strait of Hormuz, Gai said, adding that it would adjust policy depending on the economy and inflation.

But Gai pushed back against the idea that the RBNZ was taking a gradual approach to raising the OCR, noting policy decisions should be driven by what is necessary to return inflation to the midpoint over the forecast horizon. If that requires firmer action to bring inflation expectations under control, the MPC will have to consider it, he said. 

Whether the RBNZ raises the OCR again in October or waits until November will depend on more than the third-quarter inflation data due Oct 22, Gai said. The MPC will assess how the economy evolves over the coming weeks before deciding whether to raise the OCR again or wait, he added, saying that he did not think in terms of specific inflation thresholds for the next decision. More forward-looking indicators, including inflation expectations and survey evidence on firms' price-setting behaviour, will be important in determining the policy outlook, he added.

GROWTH CONSIDERATION

Gai, a former Bank of England senior adviser who joined the Committee as an external member in 2024, said economic growth was a secondary consideration for the Bank, but that the Strait of Hormuz closure had created a particularly difficult policy challenge. (See MNI INTERVIEW: RBNZ Keeps Eye On Growth During Inflation Fight)

"It has characteristics of a supply shock, but it's not only and always a pure supply shock," he added. "What that means is that we're threading a needle through two different things. One is the risks of inflation, and the other is the consequences for output."  

"That's just whether you have a single mandate or anything else. Central bankers are very mindful of both consequences for price stability as well as output volatility. That's very natural. I don't think anyone on the committee would be classed as an inflation nutter."

Policymakers would be comfortable if inflation continued to track towards the midpoint over the latter part of 2027, he added, following the RBNZ's 25-basis-point hike to the 2.75% Official Cash Rate last week. (See MNI RBNZ WATCH: Breman Takes Cautious Stance On Further Hikes)

The inflation impact of disruption in the Strait of Hormuz is likely to be front-loaded, with higher costs potentially giving firms an opportunity to raise prices more than warranted. The consequences for economic activity, however, are likely to emerge more gradually as the economy recovers from its earlier weakness, he noted. 

"[The RBNZ] provided a fair amount of stimulus, and so we do expect to see that economy recovering. But we're clearly conscious that raising interest rates would potentially risk slowing that recovery." 

NEUTRAL RATE

Gai said the RBNZ's neutral interest-rate range is sufficiently broad for operational purposes, (see chart) but noted that global real interest rates have likely risen as the economic consequences of the conflict increase infrastructure and defence investment requirements.

To the extent that New Zealand's neutral rate is linked to global interest rates, there could be some upward pressure on the domestic neutral rate, although the magnitude is uncertain, he added.

While the OCR may already be within the neutral zone, the key point is that the Bank has gradually withdrawn monetary stimulus over the past six or seven months, bringing policy closer to neutral and guarding against renewed inflationary pressures, Gai concluded.

MNI INTERVIEW: BOE MPC Shouldn't Lead QT - ex-MPC's Saunders

The Bank of England’s Monetary Policy Committee is likely to vote this month to slow the pace of quantitative tightening to GBP50 billion, including just GBP20 billon of active sales, but it would be well advised to stop setting such precise targets and to transfer responsibility for asset management to its executive, former MPC member Michael Saunders told MNI.

While some members of the executive, including Deputy Governor for Markets Dave Ramsden, also sit on the MPC, the committee collectively lacks the expertise to assess such things as stresses in the gilt market, and does not have the remit to weigh interest risk, Saunders said in an interview.

Instead of setting a precise target, the MPC should set a broad range for QT, he said. It should also transfer a portion of the gilts acquired through quantitative easing from the Asset Purchase Facility special purpose vehicle to the Bank’s main balance sheet, he said. In addition, the executive should set out a long-term vision for those holdings, according to Saunders.

The MPC had a legitimate monetary policy interest in lowering the APF’s gilt holdings sufficiently to ensure there is sufficient room for the BOE to perform future QE if necessary, Saunders noted, adding that this point has now passed, with its size falling from a GBP875 billion peak to below GBP500 billion. (See MNI INTERVIEW: UK Fiscal Rules Allow Loan Lift- ex-OBR's King)

“That was a clear monetary policy reason. From here, that argument ... doesn't have much force because there's plenty of headroom," said Saunders, now senior advisor at Oxford Economics.

Another argument for doing QT has been to reduce interest rate risk, as the BOE hold gilts on one side of its balance sheet, and reserves remunerated at Bank Rate on the other. But this lies outside the MPC's remit, according to Saunders.

Reducing balance sheet interest rate risk is "a task of the Bank of England's executive. It's really nothing to do with monetary policy," he said.

"I just don't think the MPC has the expertise to judge the appropriate pace of QT. I don't think it needs to be that involved in it.”

Having the MPC set a range for QT would mean the existing arrangements would not need to be formally reset.

"They would still be setting the QT target, but they just wouldn't be setting it precisely as an exact figure. They'd just be setting a rough indication, and then let the Bank's executive get on with it," Saunders said.

FUTURE VISION

The September QT announcement will be made at an interim MPC meeting, with no press conference and no quarterly Monetary Policy Report, an arrangement which is no coincidence, Saunders noted.

"The original intention of choosing September was precisely that it was not an MPC month and this was a way ... of showing that the QT decision is as boring as watching paint dry," Saunders said.

"The logical thing ... would be for Dave [Ramsden] to give a speech soon after on the QT process, and [Executive Director for Markets Vicky Saporta] or the Governor to give a speech on the future balance sheet," Saunders said.

Saunders advocates transferring gilts from the APF to the Bank's balance sheet to match the currency stock and then holding them to maturity, which could assuage market concerns over future gilt sales. 

GILT TRANSFER

If the BOE does plan to transfer the gilts from the APF down the line "they might as well say it, because then that removes ... any upward effect on gilt yields from the perceived overhang of future APF sales," he said.

While transferring APF gilts to the Bank's balance sheet would raise questions over future losses, as the gilts were typically purchased well above par and current market prices, Saunders said this problem would be relatively easy to address.

Transferring at par "creates a loss to the Bank of England at that point, to which the Treasury then has to issue gilts to top up. So, if you want to avoid that, then you just transfer them at purchase price," he said.

When the bonds eventually mature there would be losses, but "those losses would average about half a billion per year, and would be comfortably exceeded by the interest income earned on the gilt portfolio," he said. (See MNI: Financial Tightening Complicates BOE Hike Calculations)

MNI SOURCES: ECB To Re-Stress Inflation Risks With Sept. Hike

The European Central Bank’s staff projections next week will revise headline inflation slightly higher for 2027, while reducing this year’s estimate, but these changes remain overshadowed by significant upside risks, with the Governing Council set to hike the deposit rate again in line with expectations, Eurosystem sources told MNI.

Uncertainty remains extreme, particularly with regards to gas prices, and the ECB will retain its meeting-by-meeting approach while flagging that inflation risks tilt higher as the crisis in the Middle East drags on, despite the absence of second-round effects so far, officials said.

“I cannot tell you for sure that this will be the last hike of the cycle. Nor that it won't, but this is part of our meeting-by-meeting approach,” one source said, adding that the steep rise in bond yields may also help to contain inflation.

“Financial conditions obviously remain tight, which effectively means our policy is being transmitted before we even move,” another official said. “We certainly have to keep an eye on the volatility for financial stability concerns, but that doesn't appear to be an issue at the moment.”

Upside inflation risks remain the dominant theme, and will be highlighted by Christine Lagarde, though even the more hawkish Governing Council members are unclear as to the timing of any further hikes following next Thursday’s almost-guaranteed 25-basis-point increase to 2.5%, around the upper bound of the ECB’s range of estimates of the neutral rate of interest.

PROJECTIONS

“We'll hike and [there’ ll be] little change if any in the wording of the statement. The latest inflation data underlines both the need to hike now and the upside risks," another national central bank official said, pointing also to slightly-better-than-expected economic growth. “If this resilience stretches out and inflation remains above target, we may need to be a little more restrictive in our policy settings. But that is a vigilance message. It certainly isn't a call now for further policy tightening later this year.” (See MNI SOURCES: ECB Closes In On Sep Rate Hike But Unclear Beyond)

September’s projections are expected to show headline inflation revised 0.2 percentage points lower for 2026 to 2.8%, reflecting a better-than-expected Q2 outcome, with 2027 nudging 0.1 percentage point higher to 2.4%, one source said, with others concurring on the downward revision for this year and upwards for 2027. Officials have been surprised by the resilience of the economy, with GDP growth seen revised 0.2 percentage points higher for 2026 to 1%. 

“Between the last meeting in July we haven’t had much new info. There is little evidence of second-round effects,” another source said.

One official pointed to IEA estimates suggesting oil could reach USD200 per barrel by year-end if current supply conditions persist -- an outcome that would add 1.5 to 2 percentage points to inflation. But others pointed to gas as the major concern.

“On energy, what worries me most is gas. I see it as difficult to recover production quickly and it could affect us more and more. The scenarios can change quickly if events do not improve,” one source said.

"BENIGN" WAGES DATA

While the lack of second-round effects so far, with “remarkably benign” wages data, removes some of the pressure on the ECB, the absence of any immediate prospect of a resolution to the Middle East is concerning.

"In the broader picture, the overall scenario picture is little changed, hovering around the baseline scenario. But duration is obviously becoming a greater concern as prices remain mixed and relatively high -- oil closer to mild scenario and gas closer to adverse," one source said.

Higher bond yields, though uncomfortable for governments, are not impeding the transmission of monetary policy across the eurozone, officials noted. (See MNI: Chance Of French 2027 Budget Deal With Limited Tax Rises)

President Christine Lagarde is likely to repeat her call for action to strengthen the euro area economy whilst maintaining sound public finances in her opening remarks, though the inclusion of any comment on the fiscal situation in the monetary policy statement is unlikely, an official said.

An ECB spokesperson declined to comment.