30
Sector reviews
Fixed interest CPD Questions 7–9
7. What was the BOE’s policy decision at its February MPC meeting? a) It cut interest rates to a fresh all-time low b) It raised interest rates by 10 bps c) It kept interest rates unchanged d) It reduced QE 8. What is/are the risk/s to the BOE’s optimistic outlook? a) The evolution of the pandemic b) The transition to the Brexit trade arrangements between the UK and the EU c) Household and business response to developments on COVID-19 and Brexit d) All of the above 9. The BOE declared that it would take interest rates below zero at its next meeting. a) True b) False Alternatives
www.financialstandard.com.au 22 February 2021 | Volume 19 Number 03
Fixed interest
Figure 1: BOE Bank rate target 6.0
Figure 2: UK inflation 6
PERCENT
ANNUAL CHANGE %
Bank Rate
5.0
10Y GILTS
All Items (HICP)
5
Core
4
4.0
3
3.0 2
2.0
Prepared by: Rainmaker Information Prepared by: FSIU Source: Rainmaker / Sources: Factset
1
1.0
0
0.0
-1
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Negative interest rates baked in forecasts Ben Ong
“Hoping for the best, prepared for the worst, and unsurprised by anything in between.” - Maya Angelou he Bank of England (BOE) gave financial T markets what they wanted and kept monetary policy settings unchanged – Bank Rate at a record low 0.1% and QE at £895 billion – at its first MPC meeting on February 4. It was hoping for the best outcome. In BOE governor Andrew Bailey’s words: “The monetary policy committee’s central forecast assumes that COVID-related restrictions and people’s health concerns weigh on activity in the near term, but that the vaccination programme leads to those easing, such that gross domestic product is projected to recover strongly from the second quarter of 2021, towards pre-COVID levels.” The BOE forecasts GDP to contract by
4.2% in the March 2021 quarter before recovering in the following three quarters to end with a 5.0% expansion this year and return to pre-pandemic levels by the first quarter of 2022. “CPI inflation is currently below the MPC’s 2% target, largely reflecting the direct and indirect effects of COVID-19. As temporary effects fade and the impact of spare capacity diminishes over 2021, inflation rises towards the target,” The BOE said. However, the “Monetary Policy Report” stressed that: “The outlook for the economy remained unusually uncertain. It depended on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom. It would also depend on the responses of households, businesses and financial markets to these developments.”
Reasons behind the BOE’s preparation for the worst? “While the Committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future. The MPC therefore agreed to request that the PRA [Prudential Regulation Authority] should engage with PRA-regulated firms to ensure they commence preparations in order to be ready to implement a negative Bank Rate at any point after six months,” it said. No need to speculate whether the BOE will take the Bank Rate below zero or not, the Monetary Policy Report suggests it will. “The MPC’s projections are conditioned on the market path for interest rates, which is close to zero over the forecast period.” fs
CPD Questions 10–12
10. What is the International Energy Agency’s 2021 forecast for global oil demand? a) Decrease by 8.8 mbd b) Decrease by 0.6 mbd c) Increase by 5.5 mbd d) Increase by 8.8 mbd 11. What is the International Energy Agency’s 2021 forecast for global oil supply? a) Ddecrease by 6.6 mbd b) Decrease by 1.0 mbd c) Increase by 1.0 mbd d) Increase by 1.2 mbd 12. OPEC+ announced easing of oil production restrictions in January. a) True b) False
Go to our website to
Submit
All answers can be submitted to our website.
Alternatives
Figure 1: Crude oil prices
Figure 2: World oil demand, supply & price
80
30
US$/BARREL
'000 BARRELS PER DAY
US$/BARREL
150
60
20
125
40
10
100
0
75
Brent
20
West Texas Intermediate
Prepared by: Rainmaker Information Prepared by: FSIU Source: IEA Sources: / Factset
50
-10
0
-20
-20
Demand less supply (12mth moving average) Sep
IEA forecast
Brent oil price -RHS JAN 19
0
-30
-40 APR 19
JUL 19
OCT 19
JAN 20
APR 20
JUL 20
OCT 20
JAN 21
2011
25
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Demand-supply equation lifts crude oil Ben Ong
C
rude oil prices jumped to one-year highs – WTI oil to US$58.46 per barrel; Brent oil to US$55.73 – this early in the New Year. Well, they have to bounce some time especially given the battering they received in 2020 as the COVID-19 pandemic grounded planes, trains and automobiles and cruise liners and shuttered most factories and businesses on planet earth, driving down overall global demand and therefore, the price of oil. Demand for oil had been boosted by the cold weather in the US and in Asia at the start of the year. But this would go away when winter gives way to spring. Likewise, demand for oil would be crimped by the renewed lockdowns (in Europe and parts of Asia) in efforts to contain the resurgence of infections and the mutated variant of the virus.
These prompted the International Energy Agency (IEA) to downgrade its global oil demand forecast by 0.6 million barrels per day for the first quarter of this year. However, the agency expects a 5.5 mb/d increase in oil demand this year overall, a significant turnaround from the 8.8 mb/d drop recorded in 2020. “This recovery mainly reflects the impact of fiscal and monetary support packages as well as the effectiveness of steps to resolve the pandemic,” IEA said. The supply side of crude oil’s demand/supply equation is also constructive. This from the IEA’s January 2021Oil Market Repor: “Anticipating weaker demand, OPEC+ decided in January to delay a further easing of cuts and Saudi Arabia surprised with an additional 1 mb/d supply reduction in February and March.” The group’s more proactive production re-
straint looks set to hasten a drawdown in the global stock surplus that got underway in earnest during 3Q20. “Assuming OPEC+ achieves 100% compliance with the latest agreement, global oil stocks could draw by 1.1 mb/d, or 100 mb, in 1Q21, with the potential for much steeper declines during the second half of the year as demand strengthens,” it said. As such, the IEA expects world oil supply to increase by 1.2 mb/d this year, up from the 6.6mb/d decline recorded in 2020, but that: “Much more oil is likely to be required, given our forecast for a substantial improvement in demand in the second half of the year.” “Our balances assume that during 2H21, OPEC+ will still withhold 5.8 mb/d of oil from the market as per the group’s April 2020 agreement.” But 2020’s mantra remains in play, crude oil prices remain hostage to COVID-19. fs
