Even talk about hike in interest rate causes major decline at US stock exchanges

Over the years, I have been saying that Pakistan suffers from cost pushed inflation and any hike in interest rate erodes competitiveness of Pakistani businesses.

However, the policy planners in Pakistan, living in utopia have been persistently increasing interest rate having the least realization. I am sure this news will help the policy makers in understanding my point of view.

In the United States, stocks closed sharply down on Friday following comments from Federal Reserve Chairman Jerome Powell that the Fed will press forward with raising interest rates amid lingering inflation.

Higher interest rates can restrain economic growth by making borrowing money more expensive and slowing consumer spending. 

The Dow Jones Industrial Average dropped more than 1,000 points, while the Nasdaq composite dropped almost 500 points. The S&P 500 dropped by more than 140 points.

All three declines meant a more than 3% drop. All are still slightly above their levels a month ago, but much of their gains in that time were erased on Friday.

Powell gave a keynote address at the Fed’s annual policy summit in Jackson Hole, Wyo., saying that the central bank would be willing to take forceful and rapid steps to address inflation, even if it means potentially higher unemployment rates and a recession. 

The Bureau of Economic Analysis revealed on Friday that inflation slowed to 6.3% in July from exactly a year ago. This figure is down from the 6.8% annual inflation rate that was reported in June. 

But the Fed’s goal is to get inflation down to 2%, and Powell said the drop from last month is far short of what the Fed needs to see before it can be confident that inflation is dropping. 

The Fed has already raised interest rates from a range of 0 to 0.25% in March to 2.25% to 2.5% in July. This included two consecutive increases of 0.75 percentage points, the largest monthly increases in almost 30 years.

Powell said the Fed’s decision on how much to raise interest rates next month will be based on the data it receives.

 

Ukraine termed defaulter by S&P and Fitch

"Given the announced terms and conditions of the restructuring, and in line with our criteria, we view the transaction as distressed and tantamount to default," S&P said.

Global rating agencies Fitch and S&P lowered Ukraine's foreign currency ratings to selective default and restricted default as they consider the country's debt restructuring as distressed.

Earlier last week, Ukraine's overseas creditors backed the country's request for a two-year freeze on payments on almost US$20 billion in international bonds. The move will save Ukraine some US$6 billion on payments.

Fitch cut the country's long-term foreign currency rating to "RD" from "C," as it deems the deferral of debt payments as a completion of a distressed debt-exchange.

S&P also said the macroeconomic and fiscal stress stemming from Russia's invasion of Ukraine may weaken the Ukrainian government's ability to stay current on its local currency debt and lowered the Eastern European country's local currency rating to "CCC-plus/C" from "B-minus/B".

Battered by Russia's invasion, which started on February 24, Ukraine faces a 35% to 45% economic contraction in 2022 and a monthly fiscal shortfall of US$5 billion.

It may be recalled that in July Ukraine aimed to strike a deal up to US$20 billion program with the International Monetary Fund (IMF) before year-end to help shore up its war-torn economy, the country's central bank governor Kyrylo Shevchenko had told Reuters.

Shevchenko, speaking during his visit to London, also said he hoped to agree on a swap line with the Bank of England.

It was the first time Ukraine has put a number on the fresh financing it needs from the Washington-based lender. A US$20 billion program would be the second largest currently active loan from the IMF after Argentina.

The central bank chief said a new program should provide measures that will help stabilize the economy. That could ensure a return to pre-war conditions, such as a flexible exchange rate, no limits on the currency market, decreasing non-performing loans in the banking sector and a balanced fiscal policy.

The IMF's latest loan to Ukraine was a US$1.4 billion emergency financing support agreed in March - the equivalent of 50% of the country's quota in the fund.

Separately, Kyiv is now in talks with its international creditors over a freeze in debt payments to ease its liquidity crunch. Lately, Ukrainian energy firm Naftogaz became the country's first government entity to default since the start of the Russian invasion.

"I hope that Naftogaz, together with the ministry of finance of Ukraine, that they will find a solution," said Shevchenko.

Some relief on foreign exchange revenue and liquidity would also come from the deal agreed between Moscow and Kyiv to allow safe passage for grain shipments in and out of Ukrainian ports.

However, those revenues and shipments would only pick up in earnest next year, when under the central bank's "conservative" estimates exports could hit 5 million tons per month and generate approximately US$5 billion in 2023, Shevchenko said.

Speaking about the central bank's intervention in currency markets as well as its bond buying program, Shevchenko said both would continue for now, though the latter would cease as soon as the war ended.

He added that operating in times of war had seen a whole new host of vocabulary spring up, with expressions such as maturity of war - a term to describe the time frame of a debt instrument used in the context of the conflict.