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Financial News Update: BoC to consider 50 bpts rate hike

  • Bank of Canada to consider another half-point rate rise, Macklem says

Alexandra White in New York –

Canada’s central bank is expected to consider combating surging inflation with another half-point rise in interest rates, its governor told a parliamentary committee on Monday.

Bank of Canada governor Tiff Macklem said policymakers would again consider such a move, having already lifted the main interest rate by half a percentage point to 1 percent earlier this month — the biggest increase since May 2000.

“The economy needs higher interest rates and can handle them,” said Macklem in opening remarks to the House of Commons Finance Committee. “We need higher rates to bring the economy into balance and cool domestic inflation.”

“Looking ahead to our next decisions . . . I expect we will be considering taking another 50-basis-point step,” he added.

Inflation surged to a three-decade high of 6.7 percent in March and is expected to continue to increase, as the Ukraine war has driven up commodity prices and further disrupted the global supply chain.

Macklem said that inflation is too high and the Canadian central bank is committed to using its “tools”, if need be “forcefully”, to tame inflation.

Last week, Macklem said he would not “rule out” a rate increase that exceeded a half percentage point, but on Monday conceded that such a move would be “very unusual”. The bank has typically raised rates by smaller quarter percentage point increments and Macklem said last month’s decision was itself an “unusual” step for the central bank.

Central Banks around the world are tightening monetary policy to combat surging inflation. The US Federal Reserve is expected to raise its benchmark rate by half a percentage point at its next meeting in May. However, Christine Lagarde has suggested the European Central Bank would be less aggressive than the Fed given the risks to the bloc’s growth and the fact that price pressures in Europe broadly stem from supply-related constraints.

  • Twitter accepts Elon Musk’s $44bn takeover offer

Twitter’s board has accepted a $44bn offer to sell the company to Elon Musk, handing control of the influential social media platform to the world’s richest man.

“The Twitter Board conducted a thoughtful and comprehensive process to assess Elon’s proposal with a deliberate focus on value, certainty, and financing,” said Bret Taylor, Twitter chair, in a statement on Monday.

He added: “The proposed transaction will deliver a substantial cash premium, and we believe it is the best path forward for Twitter’s stockholders.”

Twitter shareholders will receive $54.20 in cash for each share of Twitter common stock that they own upon closing of the transaction. The purchase price represents a 38 per cent premium to the company’s closing price on April 1, the day before Musk announced he had amassed a 9 per cent stake in the company.

After Musk first made his offer for the platform, Twitter launched a poison pill to limit his ability to gain a substantial shareholding. But the board was forced to the negotiating table at the weekend after he secured financing for the deal.

If completed, it would be one of the largest leveraged buyouts in history — a feat that few on Wall Street thought possible given the size of the transaction.

Trading in shares of the company was halted ahead of the announcement.

  • US stocks spared from China-led sell-off

US stocks rebounded late on Monday after concerns about new lockdowns in China and fears of a slowdown in economic growth pushed investors to search for safety earlier in the day.

Wall Street’s benchmark S&P 500 index closed 0.6 per cent higher, having dropped as much as 1.7 per cent earlier in the day. The tech-heavy Nasdaq Composite rose 1.3 per cent.

The late turnround in the US contrasted with sharp drops in European and Asian markets, including the biggest one-day decline in mainland China’s CSI 300 since February 2020. Panic-buying gripped Beijing on Sunday and Monday as residents braced for harsh social restrictions due to Covid-19 similar to those in Shanghai.

The prospect of a further economic slowdown in the world’s largest oil importer knocked the price of Brent crude, the international oil benchmark, which fell 4.1 per cent to $102.32 a barrel.

Meanwhile, government bond prices rallied on Monday as traders looked for low-risk assets.

The yield on the benchmark 10-year Treasury note dropped 0.08 percentage points to 2.82 per cent as the price of the debt instrument rose significantly. Eurozone and UK bonds went further, with the UK’s 10-year gilt yield down 0.12 percentage point to 1.84 per cent and the equivalent German yield off 0.14 percentage points to 0.83 per cent.

The dollar index, which measures the US currency against a basket of peers and which also tends to climb in times of uncertainty, rose 0.5 per cent to its highest since late March 2020.

  • US dollar hits the highest level in more than 2 years

The US dollar rallied to its highest level since March 2020 on Monday and is on track for its best month since January 2015, buoyed by expectations that the Federal Reserve will have to lift interest rates aggressively to tame inflation.

The dollar index, which tracks the US currency against six others including the euro and sterling, rose by as much as 0.8 per cent to a high of 101.86. The index has risen roughly 12 per cent in the past year.

The gains come at a time when the Fed is expected to tighten policy more aggressively than other G-10 central banks. The higher interest rates, and higher yields on US government debt, have lured foreign investors into US Treasuries. The value of the dollar rises as investors sell holdings denominated in local currencies in favour of dollar-denominated investments.

Bets on ever-tighter Fed policy have continued as inflationary pressures have persisted: Russia’s invasion of Ukraine has lifted commodity prices, and rising coronavirus cases in China have prompted fresh lockdowns that threaten to further disrupt supply chains. Beijing health officials reported that several neighbourhoods would lock down on Monday, triggering fresh fears about the global economy.

The futures market is expecting the Fed to raise its key interest rate to 2.7 per cent by the end of 2022 — up from expectations of around 0.8 per cent at the start of the year — including three half-point raises in the coming months.

  • PBoC pledge to support the economy pauses sell-off in Chinese stocks

A promise from the Chinese central bank to support the economy paused a sell-off in the country’s equities on Tuesday, a day after its benchmark index saw its biggest daily decline since the beginning of the pandemic.

The CSI 300 was flat in morning trading on Tuesday, after losing 4.9 per cent the day before. Hong Kong’s Hang Seng index gained as much as 1.1 per cent, after closing 3.7 per cent lower on Monday. The Hang Seng Tech index, which tracks Hong Kong listed technology groups, gained as much as 3.5 per cent.

On Tuesday the People’s Bank of China republished an extract of an interview with one of its officials in which it pledged to use a “prudent” monetary policy to support small and medium businesses, boost banks’ capacity to create liquidity by raising the limit on how much they can re-loan and said that Beijing would seek to minimise the economic impact of the pandemic on the country.

Markets have been spooked this year by China’s strict adherence to its zero-Covid policy which saw the commercial and financial hub Shanghai locked down for weeks and led a number of financial institutions to downgrade their growth forecasts for the country.

Oil prices also rose, after declining on Monday, with Brent crude, the international benchmark, gaining 0.5 per cent to hit $102.79 a barrel, and West Texas Intermediate, the US market, up 0.4 percent to $98.90.

Source: Financial Times –

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