United States: Fed cuts interest rates

The US Federal Reserve has cut interest rates by 50 basis points, signaling the central bank’s confidence that its war against inflation is coming to an end. How far and how fast the Fed cuts rates moving forward remains to be seen.

Fed Chair Jerome Powell told lawmakers earlier this year that the era of near-zero interest rates is likely over, the central bank projected in June that the median interest rate would drop to 4.1% in 2025 and 3.1%in 2026.

The Fed further lowered its median rate forecast Wednesday to 3.4% next year and 2.9% in 2026, as well as in the long run, according to new economic projections.

“This would only be the first cut of a rate-cutting cycle. The size and frequency of future cuts will give us a better understanding of whether the Fed believes they are behind, or ahead of, ‘the curve,’” said Jonathan Ernest, an economics professor at Case Western Reserve University.

The jobless rate ticked up to 4.3% in July and clocked at 4.2% last month. That’s relatively low by historical standards but still a sign of labor market “cooling” the Fed had been watching for as it waited to cut rates.

While some economists believe the Fed could have started cutting rates in July, the next few months are critical as the central bank attempts to bring the economy in for a “soft landing,” maintaining its dual mandate of low inflation and maximum employment as it brings down rates.

 

Pakistan Stock Exchange benchmark index gains 1,261 points to close at 47,494 level

Pakistan Stock Exchange (PSX) remained positive throughout the week ended on October 06, 2023. The benchmark index gained 1,261 points to close at 47,494 level.

In a meeting with the Senate Standing Committee on Finance, Dr. Shamshad Akhtar made a promising statement that the caretaker government will deliver on the IMF program to secure US$700 million under the SBA. 

Pakistan is also seeking foreign investments from Saudi Arabia in Reko Diq’s copper and gold mining projects while companies like OGDC, PPL, and GHPL are contemplating on selling their partial or full stakes in an attempt to boost the country’s foreign exchange reserves.

As of September 28, 2023, foreign exchange reserves held by State Bank of Pakistan (SBP) declined by US$21 million to US$7.62 billion, while country’s total foreign exchange reserves were reported at US$13.03 billion.

International oil prices of Brent and WTI were on a steady decline and closed at US$83.88/barrel and US$82.08/barrel, which was reflected in the latest revision in local petrol and HSD prices.

Trade deficit for September 2023 was reported at US$1.49 billion, down by 30%MoM when compared to US$2.1 billion in August 2023.

CPI rose to 31.4% in September 2023 when compared to 27.4% in August 2023, amidst higher fuel prices and a lower base last year.

Overall, average trading volumes was reported at 291 million shares as compared to 202 million shares a week ago.

Other major news flows during the week included: 1) Government debt hit historic high of PKR 64 trillion by August end, 2) Foreign debt ratio exceeded 38% of total public debt in FY23, 3) September 2023 cement dispatches decline by almost 4%YoY, 4) Cotton arrivals rose by 29% but Punjab faced setback, 5) Money supply shrank by 1.3% in Q1 as cash holdings drop, 6) A 50bps hike in policy rate added PKR300 billion to domestic debt, 7) SBP mopped up PKR104.8 billion through PIB auction, and 8) Textile exports declined 12% to US$1.35 billion in September 2023.

Engineering, Refinery, and Cable & Electric goods were amongst the top performing sectors, whereas, Synthetic & Rayon, Vanaspati & Allied Industries, and Close end mutual funds were amongst the worst performers.

Major net selling was recorded by Brokers (US$3.48 million) and Mutual Funds (US$0.2 million). Banks and Companies absorbed most of the selling with a net buy of US$13.6 million and US$2.1 million respectively.

Top performers during the week included: KEL, ISL, AGP, CNERGY, and PGLC, while top laggards were: JDWS, PSEL, IBFL, THALL, and HINOON.

Going forward, the market's performance is anticipated to be significantly influenced by the upcoming IMF review scheduled for November.

Regarding the political landscape, while the expected timeline for elections is given, providing exact dates for the elections would be a positive development.

Additionally, upcoming inflation readings and current account data would remain in the limelight.

Overall, analysts continue to advise investors to remain cautious while investing and consider companies with strong fundamentals and high dividend-yielding companies.

 

 

Pakistan Stock Exchange closes almost flat

The market remained lackluster throughout the week ended on September 28, 2023.

Despite the visit of the Caretaker Prime Minister to the UN, no significant positive developments or outcomes were observed.

On the macroeconomic front, the federal government is intensifying its efforts to reduce spending following a recommendation from the World Bank, aiming to simultaneously increase revenues. The news flows indicated a possible reduction in the PSDP spending.

 Inflation for this month is still expected to remain high, around 30%YoY. Meanwhile, the Pakistani rupee continues to strengthen against the greenback, posting a weekly gain of 1.4% to close at PKR287.7/US$ by week-end.

Internationally, oil prices have resumed their upward trend, amid supply crunch, after a brief easing earlier in the week, with Brent crude currently hovering at US$95.6 per barrel.

Overall, average trading volumes improved by 45.6%WoW rose to 202 million shares as compared to 139 million shares traded in the earlier week.

The benchmark KSE-100 Index lost 189 points during the week, depicting a 0.4% decrease in the index.

Other major news flows during the week included: 1) profit repatriation surged by 74% in July-August, 2) Jul-Aug period borrowing from multiple financing sources rose to US$3.206 billion, 3) RDA inflows reported at US$6.6 billion for August, 4) CGS of KSA Armed Forces met President, and 5) Pakistan owed US$1.2 billion to Chinese power producers.

Transport, Tobacco, and Paper & Board were amongst the top performing sector. Vanaspati and allied industries, Technology and Textile were amongst the worst performing sector.

Major net selling was recorded by Banks with net selling of US$6.3 million. Individuals and companies absorbed most of the selling with a net buy of US$3.7 million and US$1.4 million, respectively.

Top performing scrips of the week were: EFUG, PGLC, CEPB, NRL, and PAKT, while top laggards were: POL, GADT, SYS, FFBL, and HBL.

Looking ahead, the market's performance is anticipated to be significantly influenced by the upcoming IMF review scheduled for November.

Regarding the political landscape, while the expected timeline for elections is given, providing exact dates for the elections would be a positive development.

Upcoming inflation readings and current account data would remain in the limelight. Overall, we continue to advise our investors to remain cautious while investing and consider companies with strong fundamentals and high dividend-yielding companies.

US growth a puzzle for policymakers

US economic growth, still racing at a potentially inflationary pace as other key parts of the world slow, could pose global risks if it forces Federal Reserve officials to raise interest rates higher than currently expected. The longer the US economy outperforms, the more Fed officials wonder if they understand what's happening.

The Fed's aggressive rate increases last year had the potential to stress the global financial system as the US dollar soared, but the impact was muted by largely synchronized central bank rate hikes and other actions taken by monetary authorities to prevent widespread dollar funding problems for companies and offset the impact of weakening currencies.

Now Brazil, Chile and China have begun cutting interest rates, with others expected to follow, actions that international officials and central bankers at last week's Jackson Hole conference said are largely tuned to an expectation the Fed won't raise its rate more than an additional quarter percentage point.

While US inflation has fallen and policymakers largely agree they are nearing the end of rate hikes, economic growth has remained unexpectedly strong, something Fed Chair Jerome Powell noted in remarks on Friday could potentially lead progress on inflation to stall and trigger a central bank response.

That sort of policy shock, at a moment of US economic divergence with the rest of the world, could have significant ripple effects.

"If we get to a point where there is a need for ... doing more than what's already priced in, at some point markets might start getting nervous ... Then you see a big increase in the risk premia in different asset classes including emerging markets, including the rest of the world," said International Monetary Fund chief economist Pierre-Olivier Gourinchas. "The risk of a financial tightening, a very sharp financial tightening, I think we cannot rule that out."

After the pandemic shock and the inflationary rebound that had most countries raising rates together, it's normal now for policies to diverge, Cleveland Fed President Loretta Mester told Reuters on the sidelines of the Jackson Hole conference on Saturday.

"The economy is a global economy, right? It's an interconnected economy," Mester said. "What we do with our policy - if we can get back to 2% in a timely way, in a sustainable way, if we have a strong labor market - that's good for the global economy."

Fed policymakers will deliver a crucial update to their economic outlook at the 19-20 September meeting, when they are expected to leave their policy rate unchanged at 5.25% to 5.5%.

Yet Fed officials remain puzzled, and somewhat concerned, over conflicting signals in the incoming data.

US gross domestic product is still expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8%. US GDP expanded at a 2.4% annualized rate in the second quarter, and some estimates put the current quarter's pace at more than twice that.

The contrast with other key global economies is sharp. The euro area grew at an annualized 0.3% in the second quarter, essentially stall speed. Difficulties in China, meanwhile, may drag down global growth the longer they fester.

European Central Bank President Christine Lagarde noted after the Russian invasion of Ukraine last year, the outlook was for a euro-area recession, and a potentially deep one in parts of it.

"We expected all that to be a lot worse. It has turned out to be much more robust, much more resilient," Lagarde said.

U.S. fiscal policy is driving some of the difference with $6 trillion in pandemic-era aid still bolstering consumer spending. A recent investment push from the Biden administration is supporting manufacturing and construction.

China may also play a role, economists say. Its slowdown after a short-lived growth burst earlier this year could pinch Germany's exports and slow Europe's growth, for instance.

But, Citigroup Chief Economist Nathan Sheets said, "When you hear economists give you three or four reasons for something, that's usually because we really don't know."

India: Implications of scraping 2000 rupee note

India will withdraw its highest denomination currency note from circulation, the central bank said on Friday. The 2000 rupee note, introduced in 2016, will remain legal tender but citizens have been asked to deposit or exchange these notes by September 30, 2023.

The decision is reminiscent of a shock move in 2016 when the Narenda Modi-led government had withdrawn 86% of the economy's currency in circulation overnight.

This time, however, the move is expected to be less disruptive as a lower value of notes is being withdrawn over a longer period of time, according to analysts and economists.

When 2000-rupee notes were introduced in 2016 they were intended to replenish the Indian economy's currency in circulation quickly after demonetization.

However, the central bank has frequently said that it wants to reduce high value notes in circulation and had stopped printing 2000 rupee notes over the past four years.

"This denomination is not commonly used for transactions," the Reserve Bank of India said in its communication while explaining the decision to withdraw these notes.

While the government and the central bank did not specify the reason for the timing of the move, analysts point out that it comes ahead of state and general elections in the country when cash usage typically spikes.

"Making such a move ahead of the general elections is a wise decision," said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings. "People who have been using these notes as a store of value may face inconvenience," she said.

The value of 2000 rupee notes in circulation is 3.62 trillion Indian rupees (US$44.27 billion). This is about 10.8% of the currency in circulation.

"This withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity," said Nitsure. "Also in the past 6-7 years, the scope of digital transactions and e-commerce has expanded significantly."

But small businesses and cash-oriented sectors such as agriculture and construction could see inconvenience in the near term, said Yuvika Singhal, economist at QuantEco Research.

To the extent that people holding these notes chose to make purchases with them rather than deposit them in bank accounts, there could be some spurt in discretionary purchases such as gold, said Singhal.

As the government has asked people to deposit or exchange the notes for smaller denominations by September 30, bank deposits will rise. This comes at a time when deposit growth is lagging bank credit growth.

This will ease the pressure on deposit rate hikes, said Karthik Srinivasan, group head - financial sector ratings at rating agency ICRA Ltd.

"Since all the 2000 rupee notes will come back in the banking system, we will see a reduction in cash in circulation and that will in turn help improve banking system liquidity," said Madhavi Arora, economist at Emkay Global Financial Services.

Improved banking system liquidity and an inflow of deposits into banks could mean that short-term interest rates in the market drop as these funds get invested in shorter-term government securities, said Srinivasan.

New expressions being used to describe Pakistan-IMF relations

Some scary words were heard about Pakistan politics and economy on Thursday about. Historically, politics has always remained volatile in Pakistan. However, the current status of economy needs utmost as well as immediate and focused attention of all the stakeholders.

A statement came out from IMF yesterday morning saying that the Fund remains engaged with Pakistan on the program, despite the recent happenings in politics which give some confidence to market participants.

However, the same statement says that the country will ‘durably allow, market-based exchange rate and will scrap the fuel subsidy program. PKR depreciated and was very close to crossing the PKR300 mark.  

Another IMF statement on Pakistan yesterday said that the country requires ‘significant’ more financing in order for IMF SLA to go through.

The explicit meaning of ‘durably allow’ and ‘significant’ is very unclear right now as it is difficult to understand what exactly more is required from the IMF side.

Finance Minister also spoke in an event yesterday saying we will not accept IMF demands any more as a lot has already been done and Pakistan will not default, without the IMF.

It appears he meant to say Pakistan will not default without IMF under his remaining tenure which is of less than 3 months now before the term of current government ends.

 

Corporate financial health to worsen in 2023

Corporate financial health will worsen across the globe this year, failing to gain respite from signs that inflation has peaked and hopes for an economic soft landing, asset manager Janus Henderson said in a report released on Monday.

Its global credit risk monitor's indicators - debt loads, access to capital markets, cash flow and earnings - all flashed red in the fourth quarter of 2022, signalling caution to investors.

The firm, which manages around US$275 billion in assets, expects earnings growth to weaken in 2023, with energy and input costs eroding companies' cash flows.

While companies' financial metrics have been resilient so far, the second half of 2023 is when corporate margins will decline as weaker consumer confidence and higher interest rates bite, the study found.

All companies it tracks across global regions had flat or negative earnings forecast revisions for this year. Earnings are then expected to rebound in 2024, particularly in emerging markets.

Although an economic soft landing looks more likely, the asset manager remains cautious given the retreat in inflation is too late to prevent further deterioration in the credit cycle.

It said economic activity data point to a recession and government bond yield curves moved deeper into inversion territory - often a reliable signal of an upcoming recession - while central banks continue to withdraw liquidity and inflation-adjusted rates spikes translate into high borrowing costs.

More positively, a buoyant market for debt sales signalled strong demand for credit, though that may not last.

The risk premium on euro and US investment-grade corporate bonds has fallen some 19 basis points since the start of the year. The cost of insuring exposure to junk debt has fallen by 86 bps, according to S&P Global Market Intelligence.

"Optimism in a central bank retreat has allowed markets to reopen, but this too may prove fleeting," Jim Cielinski, the firm’s global head of fixed income, said.

"We are not out of the woods yet, although the decline in inflation seen in the last three months is a critical prerequisite to the elusive soft landing that investors cherish."

US Fed indicates further rate hikes

According to Reuters, US Federal Reserve policymakers on Wednesday signaled they will push on with more interest rate hikes, with several supporting a top policy rate of at least 5% even as inflation shows signs of having peaked and economic activity is slowing.

"I just think we need to keep going, and we'll discuss at the meeting how much to do," Cleveland Fed President Loretta Mester said in an interview with the Associated Press.

The remarks appeared to reflect a widely shared view among her fellow policymakers, most of whom as of December 2022 had penciled in a 5.00%-5.25% policy rate in coming months.

Mester said that for her part she expects the Fed's policy rate to need to go a bit higher than that, and stay there for some time to further slow inflation.

The Fed's benchmark overnight lending rate currently hovers in a target range of 4.25% to 4.50%, and investors expect the Fed to lift that rate by a quarter of a percentage point at the end of its January 31-February 01 meeting.

Spending, inflation, and manufacturing - all reported earlier on Wednesday - have helped stoke expectations that the Fed will end its current round of rate hikes sooner than Mester and most of her colleagues expect, with the policy rate just shy of 5%.

The central bank began raising borrowing costs in March 2022, when the policy rate was in the 0%-0.25% range and inflation was starting to make a climb that would see it rise to 40-year highs, several times the Fed's 2% target.

Like Mester, St. Louis Fed President James Bullard, speaking with the Wall Street Journal earlier, said he too sees the policy rate rising to the 5.25%-5.50% range, and added that policymakers should get it above 5% as quickly as we can.

Several Fed officials have expressed support for slowing to quarter-percentage-point rate increases, after last year's much faster pace of rate hikes in mostly 75-basis point and half-point increments.

Bullard expressed more impatience. Asked if he was open to a half-percentage-point increase at the Fed's upcoming meeting, he asked "why not go to where we're supposed to go? ... Why stall?"

The answer may in part be found in the latest "Beige Book" report published by the Fed on Wednesday. The compilation of survey data from the central bank's districts around the country showed that while prices continued to increase, the pace in most districts was reported to have slowed.

And while employment continued to grow at a modest to moderate pace in much of the country, and several Fed districts reported modest economic growth, the New York Fed reported a contraction in activity, four other districts reported slowdowns or slight declines, and most expected little growth ahead.

Still, Fed policymakers say the mistake they do not want to make is to stop short of defeating inflation, only to have to raise rates even more to do the job later on, as happened in the 1970s and 1980s

Even Philadelphia Fed President Patrick Harker, who is generally less hawkish than Mester or Bullard and wants the Fed to switch to quarter-percentage-point hikes ahead, sees a few more rises in borrowing costs before a pause.

Dallas Fed President Lorie Logan also supports a slower rate hike pace ahead because of the uncertain outlook and the need to be flexible. But she also signaled the Fed may need to raise rates higher than is widely expected to keep financial conditions tight enough to press down on inflation.

"I believe we shouldn’t lock in on a peak interest rate," Logan said in Austin, Texas. She added that even once inflation is headed convincingly down to 2% and the Fed does stop raising rates, the risks will be two-sided and that further rate hikes could be in the offing.

In an interview with Reuters on Wednesday, outgoing Kansas City Fed President Esther George said she felt rates would have to move higher than many of her colleagues anticipate, but that she also would have been willing to move in smaller increments.

“People’s expectations about inflation are beginning to move down,” George said, an observation based on conversations with contacts in her Midwest district. “So I’m comfortable beginning that stepped-down process ... I’d be happy to do 25s if I were there.”

George will retire right before the Fed's next meeting and will not participate in it.

But she added, “We still have upside risk to inflation. I don’t think I’ve reached a point where I think it is clearly falling. There are enough issues out there to say we have to guard against them.”

Fed Chair Jerome Powell, who tested positive for COVID-19 on Wednesday and is experiencing mild symptoms from the virus, said after last month's policy meeting that the inflation battle had not been won and that more rate hikes were coming in 2023.

 

 

 

 

Asia losing growth momentum

Asia’s strong economic rebound early this year is losing momentum, with a weaker-than-expected second quarter. International Monetary Fund (IMF) has cut growth forecasts for Asia and the Pacific to 4.0% this year and 4.3% next year, which are well below the 5.5% average over the last two decades. Despite this, Asia remains a relatively bright spot in an increasingly dimming global economy.

Waning momentum reflects three formidable headwinds, which may prove to be persistent:

1-      A sharp tightening of financial conditions, which is raising government borrowing costs and is likely to become even more constricting, as central banks in major advanced economies continue to raise interest rates to tame the fastest inflation in decades. Rapidly depreciating currencies could further complicate policy challenges.

2-      Russia’s invasion of Ukraine, which is still raging and continues to trigger a sharp slowdown of economic activity in Europe that will further reduce external demand for Asian exports.

3-      China’s strict zero-COVID policy and the related lockdowns, which, coupled with a deepening turmoil in the real estate sector, has led to an uncharacteristic and sharp slowdown in growth, that in turn is weakening momentum in connected economies.

After near-zero growth in the second quarter, China will recover modestly in the second half to reach full-year growth of 3.2% and accelerate to 4.4% next year, assuming pandemic restrictions are gradually loosened.

In Japan, IMF expects growth to remain unchanged at 1.7% this year before slowing to 1.6% next year, weighed down by weak external demand. Korea’s growth in 2022 was revised up to 2.6% due to a strong second-quarter growth but revised down to 2% in 2023 reflecting external headwinds.

India’s economy will expand, albeit more slowly than previously expected, by 6.8% this year and 6.1% in 2023, owing to a weakening of external demand and a tightening of monetary and financial conditions that are expected to weigh on growth.

Southeast Asia is likely to enjoy a strong recovery. In Vietnam which is benefitting from its growing importance in global supply chains, IMF expects 7% growth and a slight moderation next year. The Philippines is forecast to see a 6.5% expansion this year, while growth will top 5% in Indonesia and Malaysia.

Cambodia and Thailand will expand faster in 2023 on a likely pickup in foreign tourism. In Myanmar, which has endured a deep recession due to the coup and pandemic, growth this year is expected to stabilize at a low level amid continued unrest and suffering.

The outlook is more challenging for other Asian frontier markets. Sri Lanka is still experiencing a severe economic crisis, though the authorities have reached an agreement with IMF staff on a program that will help to stabilize the economy.

In Bangladesh, the war in Ukraine and high commodity prices has dampened a robust recovery from the pandemic. The authorities have preemptively requested an IMF-supported program that will bolster the external position, and access to the IMF’s new Resilience and Sustainability Trust to meet their large climate financing need, both of which will strengthen their ability to deal with future shocks.

High debt economies such as Maldives, Lao PDR, and Papua New Guinea, and those facing refinancing risks, like Mongolia, are also facing challenges as the tide changes.

IMF expects growth across Pacific Island Countries to rebound strongly next year to 4.2% from 0.8% this year as tourism-based economies benefit from eased travel restrictions.

Inflation now exceeds central bank targets in most Asian economies, driven by a mix of global food and energy prices, currencies falling against the US dollar, and shrinking output gaps. Core inflation, which excludes volatile food and energy prices, has also risen and its persistence—driven by inflation expectations and wages—must be closely monitored.

Meanwhile, the US dollar has strengthened against most major currencies as the Federal Reserve raises interest rates and signals further hikes to come. Most Asian emerging market currencies have lost between 5% and 10% of their value against the dollar this year, while the yen has depreciated by more than 20%. These recent depreciations have started passing through to core inflation across the region, and this may keep inflation high for longer than previously expected.

Finally, spikes in global food and energy prices early this year threatened to abruptly raise the cost of living across the region, with particularly strong implications for the real incomes of lower-income households that spend more of their disposable income on these commodities.

Amid lower growth, policymakers face complex challenges that will require strong responses.

Central banks will need to persevere with their policy tightening until inflation durably falls back to target. Exchange rates should be allowed to adjust to reflect fundamentals, including the terms of trade—a measure of prices for a country’s exports relative to its imports—and foreign monetary policy decisions. But if global shocks lead to a spike in borrowing rates unrelated to domestic policy changes and/or threaten financial stability or undermine the central bank’s ability to stabilize inflation expectations, foreign-exchange interventions may become a useful part of the policy mix for countries with adequate reserves, alongside macro-prudential policies. Countries should urgently consider improving their liquidity buffers, including by requesting access to precautionary instruments from the Fund for those eligible.

Public debt has risen substantially in Asia over the past 15 years—particularly in the advanced economies and China—and rose further during the pandemic. Fiscal policy should continue its gradual consolidation to moderate demand alongside monetary policy, focused on the medium-term goal of stabilizing public debt.

Accordingly, measures to shield vulnerable populations from the rising cost of living will need to be well-targeted and temporary. In countries with high debt levels, support will need to be budget-neutral to maintain the path of fiscal consolidation. Credible medium-term fiscal frameworks remain an imperative.

Beyond the short term, policies must focus on healing the damage inflicted by the pandemic and war. Scarring from the pandemic and current headwinds are likely to be sizable in Asia, in part because of elevated leverage among companies that will weigh on private investment and education losses from school closures that could erode human capital if remedial measures aren’t taken today.

Strong international cooperation is needed to prevent greater geo-economic fragmentation and to ensure that trade aids growth. There is an urgent need for ambitious structural changes to boost the region’s productive potential and address the climate crisis.

 

 

US Fed minutes hint more rate hikes but at slower pace

US Federal Reserve officials saw little evidence late last month that US inflation pressures were easing and steeled themselves to force the economy to slow down to control an ongoing surge in prices, according to the minutes of their July 26-27 policy meeting.

While not explicitly hinting at a particular pace of coming rate increases, beginning with the September 20-21 meeting, the minutes released on Wednesday showed US central bank policymakers committed to raising rates as high as necessary to tame inflation - even as they began to acknowledge more explicitly the risk they might go too far and curb economic activity too much.

"Participants agreed that there was little evidence to date that inflation pressures were subsiding," the minutes said.

Though some reduction in inflation, which has been running at four-decade highs, might occur through improving global supply chains or drops in the prices of fuel and other commodities, much of the heavy lifting would have to come by imposing such high borrowing costs on businesses and households that they would spend less, the minutes stated.

"Participants emphasized that a slowing in aggregate demand would play an important role in reducing inflation pressures," the minutes said.

Yet despite that arch tone on inflation as their top concern, the minutes also flagged what will be an important dimension of the Fed's debate in coming months - when to slow down the pace of rate increases, and how to know if rate hikes have gone past the point needed to beat rising prices.

While judged as generally dovish by traders who increased their bets the Fed would approve just a half-percentage-point hike at the September meeting, Bob Miller, Head of Americas Fundamental Fixed Income at BlackRock, said the minutes seemed to be giving the Fed more scope to react as data flowed in.

"The intended message was much more nuanced and reflected a need to optionality by a central bank trying to assess conflicting economic data and shocks”, he said. "Staking out some conditionality going forward seems sensible given the unprecedented nature of this particular cycle."

The pace of rate increases indeed could ease as soon as next month, with the minutes stating that, given the need for time to evaluate how tighter policy is affecting the economy, it would become appropriate at some point to move from the large, 75-basis-point increases approved at the Fed's June and July meetings, to half-percentage-point and eventually quarter-percentage-point hikes.

Some participants said they felt rates would have to reach a sufficiently restrictive level and remain there for some time in order to control inflation that was proving far more persistent than anticipated.

Many, on the other hand, noted the risk that the Fed could tighten the stance of policy by more than necessary to restore price stability, particularly given the length of time it takes for monetary policy to change economic behavior.

Referring to the rate increases already telegraphed by the Fed, participants generally judged that the bulk of the effects on real activity had yet to be felt, the minutes stated.

As of the July meeting, Fed officials noted that while some parts of the economy, notably housing, had begun to slow under the weight of tighter credit conditions, the labor market remained strong and unemployment was at a near-record low.

The Fed has lifted its benchmark overnight interest rate by 225 points this year to a target range of 2.25% to 2.50%. The central bank is widely expected to hike rates next month by either 50 or 75 basis points.

For the Fed to scale back its rate hikes, inflation reports due to be released before the next meeting would likely need to confirm that the pace of price increases was declining. Inflation by the Fed's preferred measure is more than three times the central bank's 2% target.

Data since the Fed's July policy meeting showed annual consumer inflation eased that month to 8.5% from 9.1% in June, a fact that would argue for the smaller 50-basis-point rate increase next month.

But other data released on Wednesday showed why that remains an open question.

Core US retail sales, which correspond most closely with the consumer spending component of gross domestic product, were stronger than expected in July. That data, along with the shock-value headline that inflation had passed the 10% mark in the United Kingdom, seemed to prompt investors in futures tied to the Fed's target policy interest rate to shift bets in favor of a 75-basis-point rate hike next month.

Meanwhile, a Chicago Fed index of credit, leverage and risk metrics shows continued easing. That poses a dilemma for policymakers who feel that tighter financial conditions are needed to curb inflation.

Job and wage growth in July exceeded expectations, and a recent stock market rally may show an economy still too hot for the Fed's comfort.

 

 

West must stop its unconditional support for Zelensky

Amid the Russia-Ukraine war, Nato and the  European Union offer a perfect example of a type of “war communication”. In terms of censorship, disinformation and propaganda, the world is witnessing a replay of the happenings during the Gulf War and the 2003 invasion of Iraq.

The only voices authorized to speak are those giving the official party line, Nato spokespersons, retired officers converted to the lucrative business of security consulting, geopolitical experts (those who stick to the script), Russia’s political opponents, Ukrainian deputies and other allies of President Volodymyr Zelensky.

The mythification of Zelensky has reached absurdist levels, partly by the acting talents of Zelensky, a professional comedian who has shrewdly seized the moment to radically rebrand himself as a symbol of resistance, freedom and democracy.

Zelensky is a populist demagogue and a manipulator; an autocrat at the head of a regime that can best be described as proto-fascist.

With his demagogic cry of “the people against the elites”, his rudimentary electoral program, his false promises to fight corruption that were forgotten as soon as he was elected, and his brutal authoritarian leanings, Zelensky is a perfect example of western populism.

The Kyiv regime also exhibits a growing number of proto-fascistic characteristics: the cult of the personality, which turns the head of state into a venerated and untouchable figure; the militarization of society; the saturation of media and cultural spaces with war propaganda.

Before the war, western media were recognizing the reality of that problem - but as soon as the war started, these groups were magically whitewashed as freedom fighters, and praised as heroic resistors through typical spin. Anyone who now raises the issue is immediately accused of disseminating Putin’s propaganda or being an agent of the Kremlin. 

Even more shocking, yet typical of war propaganda, has been the systematic censorship by dominant western media of any information that would undermine the Zelensky worship and unconditional support for the Kyiv regime. 

In a March presidential decree, Zelensky banned the opposition by suspending the activities of 11 political parties accused of having links with Russia. Thus, the invasion was used in the most cynical manner as a convenient excuse to crack down on political opposition through false rhetoric about collaboration with the enemy. 

Zelensky also invoked the war to eliminate media freedom by merging and nationalizing Ukrainian television channels into a single information platform called “United News” - a platform entirely dedicated to his propaganda.

Zelensky regime is controlled by the most hawkish and extremist escalationists, both Ukrainian and foreign, starting with US President Joe Biden, who has been shunting aside any talk of diplomatic negotiations.

Though at first willing to negotiate and compromise, Zelensky has since fallen in line with the most extremist war hawks, none of whom appear to care about the rest of Europe, which they view merely as something to exploit for more arms and money.

Instead of being emboldened in this reckless military escalation of a war that is devastating his own population and country, Zelensky should instead be pushed towards the negotiating table - for his own sake, that of his suffering people, and the good of the world, which is now itself suffering from a slew of setbacks: inflation, energy and food shortages, and a military-industrial complex ecstatic at the prospect of having trillions of dollars redirected towards it for years to come. A deal to end the war seems feasible, as there a reasonable peace plan on the table. 

In additional to all its other consequences, the Russian invasion has further fractured the US-led post-war global order, which has become a battleground between the ever-more hawkish and imperialistic US, backed by the EU and with the instrumentalization of institutions such as Nato and the G7; and the anti-western bloc led by China and Russia, now officially designated as the West’s two main geopolitical existential threats. 

Given the heavy dependence of Middle East on all involved parties - Russia, Ukraine and the West - for food and energy supplies, as well as national security, they know they have nothing to gain but a lot to lose from direct involvement in this conflict, or from overtly picking sides. They have thus uncomfortably strived to distance themselves from the war without alienating anyone - a tough balancing act that can see them accused of siding with the enemy for shying away from the western sanctions regime.

In fact, many have actively refused to side with Ukraine and the West against Russia for a number of reasons, including perceived western hypocrisy on the professed principle of non-aggression and respect for territorial sovereignty (Iraq, Libya and Afghanistan loom large here); racist double standards on the treatment of refugees; and widespread distrust of the West in general.

State Bank justifies hike in interest rate

The Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) believes that the hike of 150bps on May 23, 2022 together with ‘much needed’ fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability.

It believes the headline inflation is likely to increase temporarily and remain on the higher side in FY23, but expects it to fall to 5% to 7% range in FY24, assuming moderating growth, normalizing global commodity prices and base-effect. NCPI currently is at a 2 year high driven primarily by perishable food items and core inflation. Nevertheless, central banks globally are responding to inflation.

Despite some respite in MoM current account deficit, the Rupee has remained under pressure due to the weak sentiment and a strengthening US dollar. Exports have continued their growth momentum along with robust remittances.

Moreover, growth in imports has been generally driven by crude oil, food items and chemicals including vaccines FY22 TD. Slight drop in volumes recently has been partially offset by higher oil and edible oil imports and higher international prices.

Pakistan is in a comfortable position to meet external financing requirements for FY23. Gross financing needs for Q4FY22 and FY23 stand at US$45 billion. Financing is available to the tune of US$51 billion – large part of which is multilateral loans. Pakistan expects a rollover of US$2.3 billion loan from China. 

Discussions with the International Monetary Fund (IMF) are progressing well in Doha. However, delays might occur given that the budget for FY23 is also part of the ongoing discussions. The IMF requires ‘political assurances’ which may not preclude a caretaker setup from negotiating the program as well. The IMF has negotiated with caretaker setups in other countries in past.

The incumbent coalition government headed by Shehbaz Sharif is keen on continuing with the low-cost housing schemes. However, given the need for fiscal consolidation lending targets assigned to commercial banks for lending to private developers etc. might be reviewed.

The MPC also emphasized the need for strong and equitable fiscal consolidation to complement monetary policy measures.

 

 

Africa faces new shocks with food and fuel price hikes

Sub-Saharan African countries find themselves facing another severe and exogenous shock. Russia’s invasion of Ukraine has prompted a surge in food and fuel prices that threatens the region’s economic outlook.

This latest setback could not have come at a worse time—as growth was starting to recover and policymakers were beginning to address the social and economic legacy of COVID-19 pandemic and other development challenges. The effects of the war will be deeply consequential, eroding standards of living and aggravating macroeconomic imbalances.

It is expected that growth will decelerate to 3.8% this year from last year’s better-than-expected 4.5%, according to the latest Regional Economic Outlook by the IMF.

Though the Fund projects annual growth to average 4% over the medium term, it will be too slow to make up for ground lost to the pandemic. Inflation in the region is expected to remain elevated in 2022 and 2023 at 12.2% and 9.6% respectively—the first time since 2008 that regional average inflation will reach such high levels.

There are three main channels through which Russia-Ukraine war is impacting countries—with notable differentiation both across and within countries:

Prices for food, which accounts for about 40% of consumer spending in the region, are rising rapidly. Around 85% of the region’s wheat supplies are imported. Higher fuel and fertilizer prices also affect domestic food production. Together, these factors will disproportionately hurt the poor, especially in urban areas, and will increase food insecurity.

Higher oil prices will boost the import bill for the region’s oil importers by about US$19 billion, worsening trade imbalances and raising transport and other consumer costs. Oil-importing fragile states will be hit hardest, with fiscal balances expected to deteriorate by around 0.8% of gross domestic product compared to the October 2021 forecast—twice that of other oil-importing countries. The region’s eight petroleum exporters, however, benefit from higher crude prices.

The shock is set to make an already delicate fiscal balancing act more difficult, increasing development spending, mobilizing more tax revenues, and containing debt pressures. Fiscal authorities generally aren’t well-positioned for additional shocks after the pandemic. Half of the region’s low-income countries are already in or at high risk of distress. Rising oil prices also represent a direct fiscal cost for countries through fuel subsidies, while inflation will make reducing these subsidies unpopular. Spending pressures will only increase as growth slows, while rising interest rates in advanced economies may make financing more costly and harder to obtain for some governments.

Countries need a careful policy response to address these daunting challenges. Fiscal policy will need to be targeted to avoid adding to debt vulnerabilities. Policymakers should as much as possible use direct transfers to protect the most vulnerable households. Improving access to finance for farmers and small businesses would also help.

Countries that can’t provide targeted transfers can use temporary subsidies or targeted tax reductions, with clear end dates. If well-designed, they can protect households by providing time to adjust to international prices more gradually. To enhance resilience to future crises, it remains important for these countries to develop effective social safety nets. Digital technology, such as mobile money or smart cards, could be used to better target social transfers, as Togo did during the pandemic.

Net commodity-importers, such as Benin, Ethiopia and Malawi, will need to find resources to protect the vulnerable by reprioritizing spending. Net exporters, like Nigeria, are likely to benefit from rising oil prices, but a fiscal gain is only possible if the fuel subsidies they provide are contained. It is important that windfalls are largely directed to strengthen policy buffers, supported by strong fiscal institutions such as a credible medium-term fiscal framework and a strong public financial management system.

To navigate the trade-off between curbing inflation and supporting growth, central banks will need to monitor price developments carefully and raise interest rates if inflation expectations drift up. They must also guard against the financial stability risks posed by higher rates and maintain a credible policy framework underpinned by strong independence and clear communication.

The international community must step up to ease the food security crisis. The IMF’s recent joint statement with the World Bank, the United Nations World Food Program and the World Trade Organization called for emergency food supplies, financial support, including grants, increased agricultural production and unhindered trade, among other measures.

Following through on the commitment by Group of Twenty countries to re-channel US$100 billion of their IMF Special Drawing Rights allocation to vulnerable countries would be a major contribution to the region’s short-term liquidity needs and longer-term development. There are options for re-channeling SDRs, for example through the IMF’s Poverty Reduction and Growth Trust or the newly created Resilience and Sustainability Trust, which has received almost US$40 billion in pledges.

Finally, for some countries, restoring debt sustainability will require debt re-profiling or an outright restructuring of their public debt. To make this a reality, the G20 Common Framework needs to better define its debt restructuring process and timeline, and the enforcement of the comparability of treatment among creditors. Importantly, debt service payments should be suspended until an agreement is reached.

 

IMF Forecasts Disrupted Global Recovery

According to an IMF communique the continuing global recovery faces multiple challenges as the pandemic enters its third year. The rapid spread of the Omicron variant has led to renewed mobility restrictions in many countries and increased labor shortages. 

Supply disruptions still weigh on activity and are contributing to higher inflation, adding to pressures from strong demand and elevated food and energy prices. Moreover, record debt and rising inflation constrain the ability of many countries to address renewed disruptions.

Some challenges could be shorter lived than others. The new variant appears to be associated with less severe illness than the Delta variant, and the record surge in infections is expected to decline relatively quickly. The IMF’s latest World Economic Outlook therefore anticipates that while Omicron will weigh on activity in the first quarter of 2022, this effect will fade starting in the second quarter.

Other challenges, and policy pivots, are expected to have a greater impact on the outlook. IMF projects global growth this year at 4.4 percent, 0.5 percentage point lower than previously forecast, mainly because of downgrades for the United States and China. In the case of the United States, this reflects lower prospects of legislating the Build Back Better fiscal package, an earlier withdrawal of extraordinary monetary accommodation, and continued supply disruptions. China’s downgrade reflects continued retrenchment of the real estate sector and a weaker-than-expected recovery in private consumption. Supply disruptions have led to mark downs for other countries too, such as Germany. IMF expects global growth to slow to 3.8 percent in 2023. This is 0.2 percentage point higher than stated in the October 2021 WEO and largely reflects a pickup after current drags on growth dissipate.

IMF has revised up our 2022 inflation forecasts for both advanced and emerging market and developing economies, with elevated price pressures expected to persist for longer. Supply-demand imbalances are assumed to decline over 2022 based on industry expectations of improved supply, as demand gradually rebalances from goods to services, and extraordinary policy support is withdrawn. Moreover, energy and food prices are expected to grow at more moderate rates in 2022 according to futures markets. Assuming inflation expectations remain anchored, inflation is therefore expected to subside in 2023.

Even as recoveries continue, the troubling divergence in prospects across countries persists. While advanced economies are projected to return to pre-pandemic trend this year, several emerging markets and developing economies are projected to have sizeable output losses into the medium-term. The number of people living in extreme poverty is estimated to have been around 70 million higher than pre-pandemic trends in 2021, setting back the progress in poverty reduction by several years.

The forecast is subject to high uncertainty and risks overall are to the downside. The emergence of deadlier variants could prolong the crisis. China’s zero-COVID strategy could exacerbate global supply disruptions, and if financial stress in the country’s real estate sector spreads to the broader economy the ramifications would be felt widely. Higher inflation surprises in the United States could elicit aggressive monetary tightening by the Federal Reserve and sharply tighten global financial conditions. Rising geopolitical tensions and social unrest also pose risks to the outlook.

To address many of the difficulties facing the world economy, it is vital to break the hold of the pandemic. This will require a global effort to ensure widespread vaccination, testing, and access to therapeutics, including the newly developed anti-viral medications. As of now, only 4 percent of the populations of low-income countries are fully vaccinated versus 70 percent in high-income countries. In addition to ensuring predictable supply of vaccines for low-income developing countries, assistance should be provided to boost absorptive capacity and improve health infrastructure. It is urgent to close the US$23.4 billion financing gap for the Access to COVID-19 Tools (ACT) Accelerator and to incentivize technological transfers to help speed up diversification of global production of critical medical tools, especially in Africa.

At the national level, policies should remain tailored to country specific circumstances including the extent of recovery, of underlying inflationary pressures, and available policy space. Both fiscal and monetary policies will need to work in tandem to achieve economic goals. Given the high level of uncertainty, policies must also remain agile and adapt to incoming economic data.

With policy space diminished in many economies, and strong recoveries underway in others, fiscal deficits in most countries are projected to shrink this year. The fiscal priority should continue to be the health sector, and transfers, where needed, should be effectively targeted to the worst affected. All initiatives will need to be embedded in medium-term fiscal frameworks that lay out a credible path for ensuring public debt remains sustainable.

Monetary policy is at a critical juncture in most countries. Where inflation is broad based alongside a strong recovery, like in the United States, or high inflation runs the risk of becoming entrenched, as in some emerging market and developing economies and advanced economies, extraordinary monetary policy support should be withdrawn. Several central banks have already begun raising interest rates to get ahead of price pressures. It is the key to communicate well the policy transition towards a tightening stance to ensure orderly market reaction. Where core inflationary pressures remain subdued, and recoveries incomplete, monetary policy can remain accommodative.

As the monetary policy stance tightens more broadly this year, economies will need to adapt to a global environment of higher interest rates. Emerging market and developing economies with large foreign currency borrowing and external financing needs should prepare for possible turbulence in financial markets by extending debt maturities as feasible and containing currency mismatches. Exchange rate flexibility can help with needed macroeconomic adjustment. In some cases, foreign exchange intervention and temporary capital flow management measures may be needed to provide monetary policy with the space to focus on domestic conditions.

With interest rates rising, low-income countries, of which 60 percent are already in or at high risk of debt distress, will find it increasingly difficult to service their debts. The G20 Common Framework needs to be revamped to deliver more quickly on debt restructuring, and G20 creditors and private creditors should suspend debt service while the restructurings are being negotiated.

At the start of the third year of the pandemic, the global death toll has risen to 5.5 million deaths and the accompanying economic losses are expected to be close to US$13.8 trillion through 2024 relative to pre-pandemic forecasts. These numbers would have been much worse had it not been for the extraordinary work of scientists, of the medical community, and the swift and aggressive policy responses across the world.

However, much work remains to ensure the losses are contained and to reduce wide disparities in recovery prospects across countries. Policy initiatives are needed to reverse the large learning losses suffered by children, especially in developing countries. On average, students in middle-income and low-income countries had 93 more days of nation-wide school closures than those in high income countries. On climate, a bigger push is needed to get to net-zero carbon emissions by 2050, with carbon pricing mechanisms, green infrastructure investment, research subsidies, and financing initiatives so that all countries can invest in climate change mitigation and adaptation measures.

The last two years reaffirm that this crisis and the ongoing recovery is like no other. Policymakers must vigilantly monitor a broad swath of incoming economic data, prepare for contingencies, and be ready to communicate and execute policy changes at short notice. In parallel, bold, and effective international cooperation should ensure that this is the year the world escapes the grip of the pandemic.

 

Devaluation of Taka should be gradual, says Mostafa Kamal

Over the years I have been saying that Pakistan suffers from cost pushed inflation. The depreciation or devaluation of currency does not provide a sustainable solution to boost export or accelerate GDP growth rate. Today I am presenting the interview of Mostafa Kamal, a leading businessman of Bangladesh in support of my narrative.

The central bank should depreciate the taka against the US dollar gradually, if necessary, in order to avoid hurting the economic recovery and stocking inflationary pressures as Bangladesh is an import-dependent country, said Mostafa Kamal, chairman and managing director of Meghna Group of Industries.

“If the depreciation is not gradual, it will have a huge impact on every sphere of the economy and life,” he told The Daily Star in an interview.

Lately, the Bangladesh central bank brought about a major depreciation of the local currency to tackle pressure stemming from surging import payments and encourage remitters.

The interbank exchange rate hit Tk 86 per US$ for the first time in history, up from US$85.80 on Thursday, showed data from the central bank.

Kamal says the current interbank exchange rate is much lower than in the rate in the kerb market, where it stands at around Tk 90 per US$.

Importers used to buy US dollars for Tk 85 two months ago but it has gone past Tk 87 per US$.

Currency devaluation is preferred by exporters, but Kamal says depreciation is not a continuous solution.

“As Bangladesh is an import-based country, we have to strike a balance between the interests of importers and exporters.”

According to the noted businessman, any major devaluation of the taka will raise the prices of all goods. “It has a bigger effect on food and diesel prices and transport fare.”

“Policy-makers would have to find out whether the depreciation would be fast or gradual.”

Kamal says that most businessmen are importers. This is also true in the garment industry.

“We have been able to manufacture some accessories, but a majority of them are still imported.”

Speaking about the increased of commodity prices, he says the price of crude degummed soybean oil, or palm oil, has risen.

It used to cost US$500 to US$800 per ton in the past. Now it costs US$1,400. The duty has also increased.

“If the price increases by Tk 0.5 because of the currency devaluation, the price of the final goods will go up as well because import duties and other costs are added,” said Kamal.

He thinks it will not be a good idea to recommend curbing imports for the sake of keeping the foreign currency reserves stable as the move will rein in the growth of the economy.

Remittance flow to Bangladesh has slowed to some extent in recent months. But exports are performing well compared to the previous year.

A higher growth in the import of machinery means the economic stagnation has been over. It will generate jobs and accelerate economic activity.

“Imports have surged. Machinery imports have gone up after a lull for two years. There is no need to panic about rising machinery imports. Rather, it should be encouraged. People are returning to activities strongly.

“It is a good sign for the economy,” said Kamal.

He calls for looking at Turkey’s situation. The country’s currency, lira, has lost at least 35% of its value against US$. Inflation has touched a two-decade high. As a result, there is a crisis in the country.

“As we are import-dependent country, any major hike in the interbank rate will stoke inflationary pressure. The effects will be felt across the country,” Kamal said.

According to the entrepreneur, the economy has just started to return to normalcy from the coronavirus pandemic. “We, the businessmen, are optimistic.”

“Businessmen could not do well in 2020 and 2021. Now, they are more serious. Their business volume is growing. Businessmen hope that there will be a boom in the economy.”

Although the prices of imported goods and materials have gone up, the prices can’t be passed onto customers automatically, he said.

“Sometimes, we are compelled to raise prices. Sometimes, we keep the cost in the off-balance sheet. We will adjust the balance sheet when we make profit,” Kamal added.

 

Can emerging markets cope with the shift in US Fed policy?

For most of last year, investors priced in a temporary rise in inflation in the United States given the unsteady economic recovery and a slow unraveling of supply bottlenecks. Now sentiment has shifted. Prices are rising at the fastest pace in almost four decades and the tight labor market has started to feed into wage increases.

According to a report by International Monetary Fund (IMF), the new Omicron variant has raised additional concerns of supply-side pressures on inflation. The US Fed referred to inflation developments as a key factor in its decision last month to accelerate the tapering of asset purchases.

Inflation is likely to moderate later in year 2022 as supply disruptions ease and fiscal contraction weighs on demand. The Fed’s policy guidance that it would raise borrowing costs more quickly did not cause a substantial market reassessment of the economic outlook.

The history shows that the effects on emerging markets benign if tightening is gradual, well telegraphed, and in response to a strengthening recovery. Emerging-market currencies may still depreciate, but foreign demand would offset the impact from rising financing costs.

Spillovers to emerging markets could also be less benign. Broad-based US wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation. Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally.

These developments could come with a slowing of US demand and trade, which may lead to capital outflows and currency depreciation in emerging markets.

The impact of Fed tightening in a scenario like that could be more severe for vulnerable countries. In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the USD.

The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies, as the IMF highlighted in its October 2021 releases of the World Economic Outlook and Global Financial Stability Report.

Some emerging markets have already started to adjust monetary policy and are preparing to scale back fiscal support to address rising debt and inflation. In response to tighter funding conditions, emerging markets should tailor their response based on their circumstances and vulnerabilities.

Those with policy credibility on containing inflation can tighten monetary policy more gradually, while others with stronger inflation pressures or weaker institutions must act swiftly and comprehensively.

In either case, responses should include letting currencies depreciate and raising benchmark interest rates. If faced with disorderly conditions in foreign exchange markets, central banks with sufficient reserves can intervene provided this intervention does not substitute for warranted macroeconomic adjustment.

Nevertheless, such actions can pose difficult choices for emerging markets as they trade off supporting a weak domestic economy with safeguarding price and external stability. Similarly, extending support to businesses beyond existing measures may increase credit risks and weaken the longer-term health of financial institutions by delaying the recognition of losses. And rolling back those measures could further tighten financial conditions, weakening the recovery.

To manage these tradeoffs, emerging markets can take steps to strengthen policy frameworks and reduce vulnerabilities. For central banks tightening to contain inflation pressures, clear and consistent communication of policy plans can enhance the public’s understanding of the need to pursue price stability.

Countries with high levels of debt denominated in foreign currencies should look to reduce those mismatches and hedge their exposures where feasible. And to reduce rollover risks, the maturity of obligations should be extended even if it increases costs. Heavily indebted countries may also need to start fiscal adjustment sooner and faster.

Continued financial policy support for businesses should be reviewed, and plans to normalize such support should be calibrated carefully to the outlook and to preserve financial stability. For countries where corporate debt and bad loans were high even before the pandemic, some weaker banks and nonbank lenders may face solvency concerns if financing becomes difficult. Resolution regimes should be readied.

Beyond these immediate measures, fiscal policy can help build resilience to shocks. Setting a credible commitment to a medium-term fiscal strategy would help boost investor confidence and regain room for fiscal support in a downturn. Such a strategy could include announcing a comprehensive plan to gradually increase tax revenues, improve spending efficiency, or implement structural fiscal reforms such as pension and subsidy overhauls (as described in the IMF’s October Fiscal Monitor.

Finally, despite the expected economic recovery, some countries may need to rely on the global financial safety net. That may include using swap lines, regional financing arrangements, and multilateral resources. The IMF has contributed with last year’s US$650 billion allocation of Special Drawing Rights, the most ever.

While such resources boost buffers against potential economic downturns, past episodes have shown that some countries may need additional financial breathing room. That’s why the IMF has adapted its financial lending toolkit for member nations.

Countries with strong policies can tap precautionary credit lines to help prevent crises. Others can access lending tailored to their income level, though programs must be anchored by sustainable policies that restore economic stability and foster sustainable growth.

While the global recovery is projected to continue this year and next, risks to growth remain elevated by the stubbornly resurgent pandemic. Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence.

Increases in shipping rates and consumer prices in Asia

According to an IMF Report, as the world economy recovers from the pandemic, inflation is mounting in advance and emerging economies. Pent-up demand fueled by stimulus and pandemic disruptions is helping accelerate inflation, spread around the world through global factors like higher food and energy prices, and soaring shipping costs.

It is believed that Asia’s inflation has been more moderate as compared to other regions, affording central banks room to keep interest rates low and support economic recovery. However, Asia’s tepid price gains may see greater momentum in year 2022. The outlook remains uncertain, and central banks should be ready to tighten policy if inflation pressures and expectations mount.

Several factors explain Asia’s lower inflation. Among Asia’s emerging economies, a delayed recovery has kept core inflation—which strips out volatile food and energy costs—running at half the rate of peers in other regions. The cost of food—which makes up about one third of the consumer price index baskets—grew 1.6% over the past year as against 9.1% in other regions.

This reflects unique factors such as a solid harvest in India, a hog population rebound from a recent swine flu epidemic in China, and contained increases in rice prices. By contrast, lower inflation in Asia’s advanced economies reflects a different set of factors. The region has enjoyed more muted energy inflation than Europe and the United States.

Some Asian countries managed the pandemic in a way that avoided major supply disruptions and the associated pressure on prices. Korea embraced comprehensive contact tracing and testing, for example, while Australia and China contained infections with border closures and localized lockdowns.

Broad inflationary pressures will eventually moderate globally, as supply-demand mismatches ease and stimulus recedes. But in 2022, as the recovery strengthens, the persistent impact of high shipping costs could put an end to the benign inflation Asia has enjoyed in 2021.

One benchmark measure of global shipping costs, the Baltic Dry Index, tripled this year through October. IMF analysis shows such large increases in shipping costs boost inflation for 12 months, which could add about 1.5% points to the pace of Asia’s inflation in the second half of 2022.

Christmas without fanfare

Christmas is set to be spoilt for many Americans by rising prices. While retailers are forecasting a record holiday spending season, inequalities in the economic recovery will again be laid bare.

Inflation is especially taking a toll on lower-income families, who spend roughly a third of their earnings on essentials like food and energy, according to this report by Amelia Pollard and Olivia Rockeman.

It’s eating into recent wage increases, and the timing couldn’t be worse after federal pandemic relief expired for about 7.5 million people.

“Anything that in the very short run puts a lot of pressure on family budgets across the board will cause more stress and damage to low-income households because they just have less scope to absorb it,” said Josh Bivens, director of research for the Economic Policy Institute.

A majority of Americans flush with over US$2 trillion in excess savings accumulated during the pandemic are ready to splurge on gifts and holiday trips.

At the same time, more than 11% of Americans don’t plan to spend at all, the greatest share in at least 10 years and more than double that in 2020, according to a Deloitte survey.

And the Salvation Army is bracing for a holiday season similar to that after the 2008 financial crisis, according to National Commander Kenneth Hodder.

Nery Peña, a first-grade teacher and single mom of two in Washington, DC, says the child tax credit and stimulus checks were a lifeline this past year.

While she’s received around US$500 a month since July, the next tax-credit payment due around December 15, this year will be the last one unless Congress passes the social-spending package, and she’s already started to curb her spending.

“Food prices are going up, gas prices are going up — prices are going up everywhere,” said Peña. “Thank God my daughters understand, but as a mom, it just sucks to tell your kids Christmas won’t be that Christmassy this year.”

Analysts forecast proving wrong

Mass vaccinations were supposed to spur a major shift in spending away from goods, toward services. The thinking was that as more people traveled, dined out and attended entertainment venues, the less they would spend on merchandise. That would, in turn, help remove some of the strains on the supply chain., but that didn’t happen.

In part because the delta wave of the virus kept massive pent-up demand skewed toward merchandise and added further strain to supply chains.

Jobs

Another basic assumption was that as the pandemic receded and schools returned to in-person learning — freeing up home-bound parents — millions more Americans than have done would return to the job market. More workers would mean fewer bottlenecks and more supply, validating the “transitory” predictions for high inflation. The bitter reality is as of October, the participation rate, which measures those employed or looking for work, has recovered less than half of its pandemic-related collapse. 

Energy

With the fossil fuel industry having cut back investment over the years, in part amid pressure from tilt toward ESG investing and in part thanks to having over-invested in the previous cycle, energy companies haven’t been able to meet rising global demand. Labor shortages have only made things worse. This led to energy prices rising 30% from a year earlier, the largest annual advance since 2005. Gasoline is up nearly 50%. The price of electricity in October increased 6.5% from the same month a year ago, the most since March 2009.

Pricing-Power

Global competition and consumer expectations for stable prices had long eroded companies’ ability to pass along higher costs. There was no US inflation surge during the escalating tariff hikes with China, for example. But that’s all changed. Large companies have pushed through price increases after having to boost wages to lure workers, along with pay for higher input costs.

Forecasting inflation “has been incredibly challenging,” says Matthew Luzzetti, Chief US economist at Deutsche Bank AG. “And risks remain skewed to the upside for the inflation outlook.”

The Federal Reserve has been off in its forecasts just like everyone else, and will need to reassess next month, when policy makers update their projections.

Credit, though, to Lawrence Summers and Mohamed El-Erian, both contributors to Bloomberg, who have been warning of a prices problem for a while.