- British economy expected to grow 4 percent
- ECB Vice President Guindos: “2021 inflation will be above the last ECB forecast”
- IMF: Central banks shouldn’t ignore negative interest rates
British Economy Expected to Grow 4 Percent
British Finance Minister Rishi Sunak stated that the British economy is expected to grow 4 percent in 2021.
Speaking at the British parliament on the UK’s budget regulations, British Finance Minister Rishi Sunak said that the country is expected to grow by 4 percent in 2021 and 7.3 percent in 2022.
He also added that the country’s economy is expected to grow 1.7 percent in 2023, 1.6 percent in 2024 and 1.7 percent in 2025.
Reminding that the predictions were made by the UK’s independent Budget Responsibility Office (OBR), Minister Sunak said, “Today, these estimates show that the method we apply against the epidemic has worked.”
Stating that the British government has spent a record 270 billion pounds so far to eliminate the economic effects of the epidemic, Sunak stated that the 5 percent cut in the value added tax for the tourism sector in the country will continue until the end of September 2021.
He also said that the salary support program, which has been continuing in the UK since March, and 80 percent of the salaries of those who cannot work due to the epidemic are paid by the government, are given until the end of September 2021.
In his speech, Rishi Sunak said that unemployment in Britain is expected to reach its peak at 6.5 percent next year.
Stating that the corporate tax in the country will be increased to 25 percent in 2023, minister said that despite this increase, Britain will have the lowest corporate tax among the G-7 countries.
In his speech, Rishi Sunak underlined that only companies with an income of over £250,000 would be taxed at the level of 25 percent, and said that medium and small-sized companies would be protected, and that the minimum income level for taxation in income tax would be increased to £12,750 next year, keeping the rates in income tax constant until 2026.
Stating that the British government has gone to borrowing at the level of 355 billion pounds annually, Sunak noted that the government is expected to borrow at the level of 234 billion pounds in 2022.
He also noted that Britain can still borrow at low cost, but if interest rates increase in the upcoming period, this may cause changes in current plans.
Pointing out that the British government has allocated 65 billion pounds of resources to support the economy within the scope of the budget arrangements, the total budget allocated in 2021 and 2022 to eliminate the effects of the epidemic reached 352 billion pounds in order to support the housing sector. He noted that it would be possible to become a home owner. In his speech, Mr. Sunak said that a total of 700 thousand people have lost their jobs in the UK since March 2020, and that the sharpest contraction in the last 200 years has been observed in the economy due to the epidemic.
ECB Vice President Guindos: “2021 Inflation Will be Above the Last ECB Forecast”
ECB Vice President Guindos announced that inflation will exceed the target this year.
ECB Vice President Luis de Guindos said inflation in the Eurozone will be clearly above the target this year, but the inflation increase will be temporary.
Guindos commented that price increases will be weak in the coming years after the temporary increase. “Growth may be below estimates in the first quarter due to pandemic measures,” he said.
Guindos stated that the growth in 2021 will be close to the projection of 3.9 percent. He stated that they expect a very strong recovery in the second half of the year.
Growth on the other hand could fall short of projections in the first quarter due to widespread pandemic-related restrictions, even if full-year activity is still seen in line with the bank’s 3.9% projection made in December, de Guindos said in a webinar with investment bank Berenberg.
The ECB earlier forecast inflation at 1% in all of 2021 but private forecasters see price growth surging towards 2% in the coming months before a decline at the end of the year.
Talking about the rise in the bond yields, the Vice President told that The European Central Bank has the flexibility to counter any undesired rise in bond yields.
His remarks came after those of Bank of France Governor Francois Villeroy de Galhau, who said the bank can and must respond to any unjustified rise in bond yields that threatens the Eurozone economy’s results. He went on to say that the ECB should start using its bond-buying program to lower bond yields.
“We will have to see whether this increase in nominal yields will have a negative impact on financing conditions,” de Guindos told Público on Tuesday.
“If we reach the conclusion that it will, then we are totally open to recalibrating our program, including the envelope of our Pandemic Emergency Purchase Programme if necessary,” de Guindos said, after commenting that the bank would need to see whether an increase in nominal yields would have a negative impact on the financial system. “We have room for maneuver, and we have ammunition.”
The ECB will boost its inflation forecasts for 2021 at its policy meeting next week, but since most of this year’s increase would be temporary, de Guindos added, the bank is not worried about increasing prices in the short term.
IMF: Central Banks Shouldn’t Ignore Negative Interest Rates
Many central banks may be forced to consider negative interest rates “sooner or later,” given evidence the policy has succeeded in easing financial conditions, the International Monetary Fund said in a blog posted on Wednesday.
“NIRP was and remains politically controversial, partly because it is often misunderstood,” the global financial body stressed in a new report.
Reminding that many central banks have implemented negative interest rate policy starting from 2012 such as ones in Japan, Sweden, and Switzerland turned to negative interest rate policies, as their economies faced cyclical headwinds, the report stated that this policy continues to be a politically controversial issue as it raises many questions and is partially misunderstood.
The report pointed out that the negative interest rate policy came to the fore again in the crisis caused by the Covid-19 epidemic, and it was noted that the transition to the negative interest rate policy was effective in money market interests, long-term returns and bank rates.
“The transmission of NIRP has been effective in money market rates, long-term yields, and bank rates,” it said, adding it has likely backed up growth and inflation.
Emphasizing that the negative interest rate policy has contributed significantly to the decrease in long-term returns, it is stated that the bank lending volumes have generally increased and the bank profits have not deteriorated significantly until this time.
The IMF report noted that the absence of a significant impact on profitability could often be a short-term effect that could potentially be reversed over time:
“Negative interest rate policy probably supported growth and inflation. The effects of negative interest rate policy on inflation and output can be compared to traditional rate cuts or other unconventional monetary policies. However, since there is no evidence that the negative interest rates applied so far have triggered these problematic effects, there may be a freedom to push interest rates further negatively. “
The report states that while some central banks adopt a negative interest rate policy while others resist it may be related to institutional and country characteristics, the evidence so far suggests that central banks should not ignore negative interest rate policy and keep it as part of their toolkit even if they are less likely to use it.
The report highlighted that given the low neutral real interest rates, many central banks may have to consider a negative interest rate policy sooner or later, although it has negative side effects.