MNI INTERVIEW: Problem If Belgian 30-Year Hits 4.5%-Debt Chief

Belgium’s 30-year bond yields are about 10-20 basis points away from levels which would make issuance at that maturity unattractive, the head of the country's debt agency told MNI.

The 30-year is currently at levels which are "still expensive, but ... acceptable for us,” Jean Deboutte said in comments on Tuesday, when it traded at 4.3%. The bond yielded about 4.39% on Thursday afternoon in London.

"It starts to become difficult for us to issue when we would reach 4.5% or 4.75% that are levels that we should, of course, think twice before being willing to issue a lot,” Deboutte said.

"It's valuable ... to issue in the long term and to preserve this structure and the stability in the government portfolio," he said, after the agency conducted a 30-year auction on Monday, but adding that it would be reassuring for the 30-year yield to return to 4%.

The 10-year, at around 3.4%, is much more comfortably below problematic levels, he said.

"10-year rates have never been problematic ... that would have to go to 4% before we really get into another mood," he said. (See MNI INTERVIEW: Fiscal Concerns Overstated - Belgian Debt Chief)

"The long-term average of 10-year rates in Belgium is around three and a half percent, if you calculate that over 20 to 30 years. So, why should we complain too much?" he said.

"We are perfectly capable of managing this government debt and finding really good offer in the market for investment, so no panic here," Deboutte said, adding that Belgian bonds have seen "significant improvement in yields for three weeks now [since the U.S.-Iran ceasefire was announced], which is quite material."

Although the ECB's latest move was a hike, the level of interest rate is "certainly not problematic." (See MNI SOURCES: Cheaper Oil Gives ECB Room Before Next Hike)

DEFICIT

Moody's downgraded Belgium's rating to A1 from Aa3 in April.

While Deboutte said he did not consider investors "overly concerned ... I think they want to see something done, they want to see something credible ... and I'm quite sure that we will deliver that [in the budget] at the end of September.”

"To really impress them, we should come up with a plan that brings this deficit close to 4% [of GDP] because now it looks at it will be a little bit higher than 5%," he said.

He added that ratings agencies may "become more positive about what is happening in Belgium if the government proves that indeed again it has taken these difficult decisions."

Eurozone fiscal deficits have increased alongside the crisis in Iran, but the rise has not been dramatic, he said. Some countries like Italy and Greece have seen improvements in their position, while Belgium and France have not but remain "in a position that is a relatively high rating."

"I would be very surprised" by a new eurozone debt crisis in the coming years, he said.

"The euro is established. We have an ESM now. We are much better prepared than before. The ECB also has its instruments that it can deploy, so a eurozone crisis, that would require a lot of new problems and new catastrophes."  (See MNI INTERVIEW: Belgian Yields Rise As Market Awaits ECB Hike)

MNI INTERVIEW: German Pensions Model For EU Reform - Rocholl

Germany’s proposed EUR35-billion-a-year government-backed pension fund has the potential to accelerate integration of European Union capital markets, driving investment throughout the continent, a member of the special commission which recommended the changes to German Chancellor Friedrich Merz told MNI.

“I hope that the creation of capital-backed elements will have strong positive externalities for the rest of Europe, and that it will help bring about the closer integration of European capital markets, and strengthening of capital markets,” Joerg Rocholl said in an interview, as Germany’s CDU-SPD coalition government announced on July 2 that it would back all 33 recommendations from the independent expert commission on pension reforms in a parliamentary vote in coming months.

“Maybe the capital markets union will get a boost from this decision. It could even be that other countries might rethink their current pension policies, and use this as a moment in which Europe can deploy its strengths,” said Rocholl, president of ESMT Berlin business school and chair of the advisory board of the Federal Ministry of Finance, adding that Europe does not lack capital, but suffers from poor capital allocation.

The EUR35 billion a year of payroll contributions that will flow into the new public pension fund to be created under the reforms will be at arm’s length from political interference, he said. (See MNI INTERVIEW: EU Needs 'Credible Threat' Against China)

“My hope is that this money is channelled much more in the direction of growth and investment in the future - and I would say that it’s realistic to associate such developments with these reforms,” he said, noting that 40% of German savings are currently held in regular bank accounts.

FUNGIBILITY

“What I would hope for is a high level of fungibility and transparency, so that it’s possible to switch between funds in real time, with private options perhaps able to offer certain riskier options and asset classes. “

Possible future tax breaks for middle earners would add to the pot of money available for private investment, Rocholl said.

“Pension reform could be seen as a trigger point for - or giving moment to - the broader package of reforms that is needed to bring the economy back to growth,” he said, though he warned that the commission’s proposals could be watered down in parliament.

“The recommendations that we presented have to be seen as a package, because there are interdependencies between different recommendations, and these recommendations only come to full power if they're implemented together. Our report should not be seen as a buffet, where you pick this or you don't pick that.”

Still, Rocholl acknowledged criticisms that compelling individuals with so-called “mini-jobs” to make pension payments could lead to a reduction in part-time positions, while increased labour costs could negatively impact some self-employed workers, together with doubts over the progressive increase in the retirement age, saying these warrant careful discussion.

“We feel it's important also for them to have precautionary measures in place, and by allowing a three-year grace period it should not place too much of an immediate liquidity burden on individuals and companies,” he said. (See MNI INTERVIEW: ECB Rates Already Too High - Bofinger)

BOOST TO CONFIDENCE

“We also have a couple of measures in place that will bring down, or at least will dampen, the increase in labour costs, including the slower increase in pension payments and the gradual increase in the retirement age.”

A key effect of the changes will be to boost the confidence of the young in the future of the German pension fund, said Rocholl, citing positive feedback from ESMT students.

“That in turn makes it much easier for them to stay and build their professional lives in Germany, and to attract outside talent to Germany. So I see overarching value in this, as well,” he said.

MNI SOURCES: Cheaper Oil Gives ECB Room Before Next Hike

Steeper-than-expected falls in oil prices together with June’s encouraging flash readings for both headline and core inflation are boosting the chances the European Central Bank will be able to avoid rushing into another rate increase, Eurosystem sources told MNI, though several officials wanted more proof inflationary pressures are contained.

While another 25-basis-point increase in September is still seen as the likelier outcome, an increasing number of policymakers are becoming receptive to the idea of a hold that month, and of taking additional time before pulling the trigger on what will still very probably be a single additional tightening move following June’s. 

While oil prices have come down, some inflationary effect is inevitable, sources said.

"We must be cognizant of the damage already done. There is already pass-through and that has the possibility of becoming more embedded," one source said, adding that the likeliest scenario is still a September hike. Another official agreed, despite acknowledging that the speed of the retreat in energy prices has taken the ECB by surprise.

"A September hike remains the most likely outcome given where we are, but things could change. Perhaps energy will flow quicker than thought and we won't need to hike, and headline inflation dipping back towards 2% could reinforce some thinking like that," a third official said, echoing a growing camp of policymakers who could support a pause in September if incoming data, including new projections, so permit.

The perceived fragility of the U.S.-Iran Memorandum of Understanding is adding to the uncertainty. While energy prices could continue to fall on the back of rising supply from established and new producers, they are equally capable of snapping back sharply if hostilities resume in the Strait of Hormuz, officials said, noting that this dynamic underlines the wisdom of the Governing Council's meeting-by-meeting, data-dependent stance. (See MNI SOURCES: ECB September Meeting 'Live' Despite Iran Deal )

PROGRESS IN CORE INFLATION

Governing Council members have largely maintained a unified front since the Gulf crisis began, but persistent geopolitical uncertainty, and the fact that while there has been some inflation pass-through, June’s readings were lower than expected, are beginning to expose fault lines over the timing of any further tightening. Macroeconomic forecasts are heavily dependent on unpredictable variables, while moves in oil futures markets can prove ephemeral, sources said.

“For September, I will be very attentive on how core inflation evolves. It is important for deciding to move or not,” one official said. “Because the mood that can be around, and how it is reflected in futures is one thing. Another thing is the data that we will be receiving. I need to see progress in core inflation to justify skipping.”

Others argue that a clear improvement in the ECB’s macroeconomic projections would give policymakers more time to wait until October or December to confirm or rule out the second hike, even if this is still very likely.

"I think whether we raise rates in September or not will basically depend on the forecast. If we indeed see that inflation is returning to the target more quickly and in a sustainable way, it can wait," one source said.

Some officials noted that there could be tactical advantages in deferring action to October or even to December, when a fresh set of ECB projections would provide cleaner analytical grounds for a decision. "For me, there may be advantages to holding in September to give us more time," said one policymaker, who nonetheless kept a second hike firmly on the table. "The inflation and labour market data will help us make the decision."

Others, though, cautioned that waiting to see whether inflation becomes embedded could risk acting too late, while a hike in September could be followed quite quickly by a cut if necessary.  Any increase could "easily be reversed in H2 if need be and it would not be a policy mistake," one source said, arguing that some signal from the Council of its determination to contain inflation is warranted regardless, while a durable end to the Gulf conflict could prompt enough of a recovery in euro area sentiment to render further tightening unnecessary.

An ECB spokesperson declined to comment.

MNI: PBOC’s New Overnight Tool To Lower Rates Over Time

The People's Bank of China's new overnight reverse repo tool will help lower overall interest rates as its influence grows, despite the central bank's cautious rollout aimed at tempering expectations of policy easing and limiting its immediate impact on money markets, economists and advisers told MNI.

The PBOC launched the overnight reverse repo facility in its open market operations this week using a fixed-rate, quantity-tender approach, injecting CNY300 billion on Monday and CNY600 billion on Tuesday.

Dong Ximiao, chief economist at Merchants Union Consumer Finance, said the PBOC's decision not to disclose the interest rate immediately reflected caution during the pilot phase of the new instrument, as policymakers wanted to assess the market's reaction while avoiding an overinterpretation of the move as a rate cut. Sources later confirmed the rate was set at 1.25%, unchanged over the two days and below the market expectation of 1.35%.

The tool would complement the existing seven-day reverse repo by providing a shorter maturity, allowing the central bank to manage liquidity more precisely, Dong added. (See MNI INTERVIEW2: PBOC Short-Term Rates Focus To Cap Volatility)

Sources also said the Bank withheld the rate to avoid fuelling expectations of policy easing that could have pushed the DR001 rate lower. Weak credit demand left the interbank market awash with liquidity in April and May, driving the DR001 rate down to 1.20%, well below the 1.4% policy rate, prompting the PBOC to drain liquidity to push DR001 back higher. Since June, DR001 has gradually recovered to around 1.4%. On Monday, however, the weighted average DR001 rate fell 5.4 basis points from the previous trading day to 1.30%.

The PBOC intends the new facility to serve as a neutral tool in its initial phase to smooth liquidity at critical times, meaning its immediate impact on funding rates remains limited, sources told MNI. The central bank did not conduct overnight operations on Wednesday.

LOWER RATES

Lian Ping, director of the China Chief Economist Forum, said because the overnight repurchase rate is below the seven-day reverse repo rate, its growing role as the policy benchmark in future would gradually pull down overall interest rates, particularly given the limited scope for conventional policy rate cuts.

Dong noted the facility is designed to better meet cross-quarter liquidity demand at the end of the first half, when banks face funding pressures due to end-June regulatory assessments, while also allowing the central bank to respond more flexibly to intraday liquidity needs. 

He argued the move represents an important step toward making the overnight reverse repo a regular policy instrument since the PBOC began building its interest rate corridor in 2024, improving management of short-term interest rates. (See MNI: PBOC Targets Monetary Policy Reform Via Overnight Rate)

LIQUIDITY STANCE

The new tool has done little to ease market concerns that the central bank will continue draining liquidity. Despite the PBOC's overnight injections this week, seven-day reverse repo operations recorded a net withdrawal, resulting in a rare net drain of CNY174 billion at quarter-end.

The overnight reverse repo effectively replaced part of the maturing seven-day reverse repo operations with shorter-term funding, helping prevent excess liquidity from idling in the interbank market and mitigating the surplus liquidity created by weak credit demand, sources said.

Lian explained that as bank lending becomes less dominant and bond, equity and money market financing play a larger role, money market rates will fluctuate more frequently, increasing the need for the overnight rate to become a policy benchmark. While replacing the seven-day reverse repo with the overnight rate as the key policy rate is the long-term direction, further progress is needed in interest rate liberalisation, policy transmission and liquidity circulation, he said.

To some extent, the Federal Reserve's decision to keep interest rates unchanged, or even raise them further, has constrained the PBOC's room to cut rates. Moreover, with borrowing costs already low and credit demand weak, an additional 10bp cut would likely do little to stimulate the economy.

MNI INTERVIEW: ECB Strategy For Uncertain Times -Kazaks

The eurozone remains exposed to negative supply shocks with near-term risks still posed by the wars in the Gulf and Ukraine and global trade rules, underlining why the European Central Bank is right to step away from complex forward guidance to data-led policy, Bank of Latvia Governor Martins Kazaks told MNI.

"What we've seen is that one shock doesn’t play out, but a second comes along. The shocks tend to lay on the top of each other, complementing and interacting with each other," said Kazaks, who declined to comment on possible policy options over the next few months, as other Governing Council officials indicate that a further rate hike in September is not guaranteed.

"We stick with the meeting-by-meeting, data dependent approach as uncertainty remains very high," Kazaks said in an interview at the ECB Forum in Sintra, adding that the ECB's policy destination "is very clear," having to "deliver 2% inflation medium term, that's our target". 

Risks to the outlook also include global trade conflict and extended equity valuations, he said.

"The frothiness in the equity markets driven by the AI boom and the risk of a sharp market correction that might spill over the wider economy globally," is a concern, said Kazaks, adding that Europe’s economy also faces longer-term issues identified in the Draghi and Letta Reports including "structural adjustments and how successful Europe is going to be improving its productivity growth." (See MNI INTERVIEW: ECB 'May Have To Do A Little Bit More' - Wunsch)

POLICY FRAMEWORK

The ECB's strategy of stepping away from “complex'” forward guidance to a data-led approach, as outlined by its President Christine Lagarde in her June 29 Sintra speech "is absolutely in line with [last year’s] strategy review update. The target is still the same, the reaction function is still the same, forceful and persistent is still the same," Kazaks said.

"Forward guidance is a good instrument to use when you get close to effective lower bound -- but we are not there at the moment," he added. (See MNI INTERVIEW: September Hike Not Guaranteed - ECB's Demarco)

IRAN FALLOUT

While the economic fallout from the Iran conflict has been more limited than those of the Ukraine War or the reopening shocks post-Covid, it is not negligible, the Latvian central bank chief said.

"The shock is smaller than the past shocks that we've seen, but it was there for three to four months and there are some [price] mechanisms that have already been put into motion," he said.

"That means we cannot through look through this shock and that's why we acted by hiking the rates by 25 basis points in June," he added.

Kazaks added that recent debate over a slight rise in the neutral rate, reinvigorated by comments by Chief Economist Philip Lane, was of little importance to the current policy debate.

"The neutral rates is unobservable, so it's a theoretical concept, and the most quoted range is 1.75% to 2.5%.  With the discount rate at 2.25%, I think we're very clearly still within the neutral range, so the rates are not constraining significant economic growth," he said.

MNI INTERVIEW: Price Falls Supports US Factory Growth - ISM

Falling energy prices are likely to support ongoing growth and potentially fresh hiring in coming months for a manufacturing sector that experienced a steadying of growth last month, Institute for Supply Management manufacturing chair Susan Spence told MNI.

"If the situation in the Middle East really does improve and the prices continue to drop, which I think you will see that given oil prices, then I think it fuels the expansion," she said in an interview Wednesday. 

The ISM manufacturing index eased 0.7ppts to 53.3 in June, slightly below market expectations. The headline measure has been in a narrow range between 52.4 and 54.0 in each of the first six months of the year, after almost all of the prior three years just below 50. 

The report details point to a positive outlook for the sector. Sentiment among survey respondents broadly improved and the decline in the prices paid index bodes well for future growth, Spence said. "I'm overall optimistic, and this is the third month in a row."

The prices paid Index fell to 73.0 from 82.1, the largest one month decline since 2022. The new orders index eased to 56 from 56.8. The employment index rose 1.1ppts to 49.7. While the employment index remains in contraction, it's the highest since January 2025.

ENERGY PRICES 

With oil prices receding and the Strait of Hormuz more open than before, supply side indicators began to improve last month. "If oil prices hold and they don't go back up, there's a host of commodities that should settle down," she said. There were 27 commodities reported up in price versus 5 reported down in price, and 5 commodities were in short supply.

Spence laid out a potential path in which the U.S. central bank could see gains in both employment and price stability, perhaps obviating the need for upward rate adjustments. (See: MNI INTERVIEW: Fed’s Next Rate Move Most Likely Upward-Kohn) 

"If the prices index could settle back toward 50, it almost feels like equilibrium there, then I think the inflation worries die down," she said. "If there is an increase in employment, I think they're in a really good state. Then that'll certainly influence the Fed's decision, although they'll look at more than just manufacturing."

Spence, however, remains concerned about the path of tariff policy under the Trump administration. "The bad guy in the shadow is, what's going to happen with these 232 tariffs?"

MNI INTERVIEW: Fed Right To Hold Off On Hikes For Now - Keen

The Federal Reserve should wait to see how much inflation comes down in the next few months following an easing of Middle East tensions that have brought oil prices sharply lower, Benjamin Keen, a former consultant and visiting scholar at several regional Fed banks, told MNI. 

“A lot of the inflation was being driven by oil prices, and we’re starting to see oil prices go down. I would expect in the coming months for that to show up in the data,” he said.  

“The Fed still wants to get the economy back to its long run 2% inflation target,” said Keen, adding that whether rate hikes will be needed to achieve that outcome has “yet to be determined.”

Fed officials are right to be worried about above-target inflation, and Chair Warsh’s focus on price stability is understandable given economic conditions and his priors as a Fed governor during the 2008 financial crisis, said Keen. (See MNI INTERVIEW: Fed Can't Ignore Mounting Prices Pressures-Liang) 

NO RUSH 

Still, the direction of price pressures is not uncertain, and Warsh and the FOMC are probably right to take their time before rushing into any tightening move. 

“Based on what they’re seeing in the data, that seems to be a reasonable course of action,” said Keen, an associate professor at the University of Oklahoma. 

Like Warsh, Keen is optimistic about the prospect that the AI boom could unleash a new wave of productivity that also helps keep a lid on prices. 

“We could raise the natural rate from productivity build out, but as AI comes along and lowers per unit production cost, those will eventually be passed on to the consumer in terms of lower prices or lower growth in prices, which means what productivity shocks are disinflationary,” he said.

At the same time, the labor market is showing little hint of the kind of weakness that would require more accommodative policies from the Fed, said Keen.

“The macro data does not show the labor market needs support.  We do have a segment of the labor market, recent college graduates, that we have a problem with. But overall the macro environment looks good. That’s the Fed’s job, to worry about the overall macro. The Fed doesn’t need to be in the business of targeting unemployment rates for groups,” said Keen.

CONSENSUS

Warsh is trying to build consensus not just on the path of interest rates but also on his stated push for reform in areas like communications and the balance sheet, Keen said. 

The chair is right to shun forward guidance in a highly uncertain environment, he added. 

“It’s the assessment of the chair that forward guidance is tying our hands to some degree,” he said. “There’s a benefit to doing it when we are at the zero lower bound, but right now it comes with a greater cost because if the market is expecting one thing and they’re doing something different because new information has come in, then it’s going to catch the market by surprise.”

The Fed is still likely to want to avoid major market surprises, but the shift in communications approach could throw some curveballs.  

“We've gotten used to the current paradigm for a while, and now what he's suggesting is let's change that paradigm, and let's go back to, we walk into every meeting, we have a discussion on the facts on the ground, and the data that we're seeing,” Keen said.