Central banks around the world raising interest rates to tame inflation

During the pandemic, central banks in both advanced and emerging market economies took unprecedented measures to ease financial conditions and support the economic recovery, including interest-rate cuts and asset purchases.

With inflation at multi-decade highs in many countries and pressures broadening beyond food and energy prices, policymakers have pivoted toward tighter policy. Central banks in many emerging markets proactively started to hike rates earlier last year, followed by their counterparts in advanced economies in the final months of 2021.

The monetary policy cycle is now increasingly synchronized around the world. Importantly, the pace of tightening is accelerating in several countries, particularly in advanced economies, in terms of both frequency and magnitude of rate hikes. Some central banks have begun to reduce the size of their balance sheets, moving further toward normalization of policy.

Stable prices are a crucial prerequisite for sustained economic growth. With risks to the inflation outlook tilted to the upside, central banks must continue normalizing to prevent inflationary pressures from becoming entrenched. They need to act resolutely to bring inflation back to their target, avoiding a de-anchoring of inflation expectations that would damage credibility built over the past decades.

Monetary policy can’t resolve remaining pandemic-related bottlenecks in global supply chains and disruptions in commodities markets due to the war in Ukraine. It can however slow overall demand to address demand-related inflationary pressures, so a tightening of financial conditions is the goal.

The high uncertainty clouding the economic and inflation outlook hampers the ability of central banks to provide simple guidance about the future path of policy. But clear communication by central banks about the need to further tighten policy and steps required to control inflation is crucial to preserve credibility.

Clear communication is also critical to avoid a sharp, disorderly tightening of financial conditions that could interact with, and amplify, existing financial vulnerabilities, putting economic growth and financial stability at risk down the road.

 

 

German aluminium foundry struggling for survival

Gerd Roeders is reluctantly preparing for the temporary shutdown of his German aluminium foundry to survive Europe's growing gas crunch. He hopes by moving the 200-year-old plant to three weeks of 24-hour shifts followed by a one-week shutdown, he can maintain output while cutting his gas consumption.

His bill has already more than doubled this year from last, he said, fearing it will triple or even quadruple in 2023.

The plan will save the cost of gas needed to fire up the ovens every morning, Roeders calculates, even if it means paying staff at family-owned G.A. Roeders more to work night shifts.

Survival for G.A. Roeders GmbH and Germany's 600 other foundries, most of which are small-to-medium enterprises with less than 250 staff, will mean cost cuts and tough talks with customers.

"We're laying out our prices to customers and telling them they have to pay more," 59-year-old Roeders told Reuters as workers prepared the plant for the first week of rest. "We can't deliver parts if we invest and don't earn anything back."

G.A. Roeders, with plants in Germany and the Czech Republic employing around 500 people, produces more than1,000 parts. It serves auto makers like Volkswagen and Continental, airline manufacturers and medical technology firms, yielding annual revenues of 60 million euros.

While contracts for foundries generally include a clause that allows them to charge more when the cost of metal increases no such clause exists for energy.

Roeders said he has always sought to be frugal on energy - the business' second-largest expenditure after staff - a habit he learnt from his father who would turn off office computers at night and switch off the lights during lunch breaks. But the firm is now facing unprecedented rises.

The price of the front-month Dutch TTF gas contract, the benchmark for Europe, has almost tripled since the start of the year due to the slowdown of Russian gas deliveries through Nord Stream 1 and a tight global market.

And while the firm still has a 30,000-litre oil tank on site, which has not been used for years, to use it again would feel like a backward step, Roeders said.

Germany's energy regulator is pleading for businesses, government and consumers to reduce their gas intake and has asked the biggest firms to submit emergency plans to cut usage further in the winter.

Yet chief executives of German carmakers including Mercedes-Benz and Volkswagen have warned in recent weeks that maintaining output levels under emergency plans will only work if their suppliers can continue to deliver parts.

Producers of the aluminium, steel and glass essential to making cars rely even more heavily on natural gas than the automakers themselves, prompting fears of a ripple effect across their global client base if they are forced to halt production.

German manufacturers of car components sell to more than 3,000 direct customers in the United States, Europe and Japan with their products reaching over 100,000 second-tier customers, supply chain analytics firm Interos estimates.

The energy crisis is the latest in a string of upheavals, from carbon emissions curbs and supply chain bottlenecks to stricter due diligence laws, which small businesses say they will struggle to overcome without more support.

"Converting to electricity-driven units requires massive renovation and is at best conceivable in the medium term," a spokesperson for the German Association of Foundries said.

"No technology other than firing up machines with gas is currently available," the spokesperson added.

Together with an alliance of other aluminium makers and a university, G.A. Roeders has received government funding to design a prototype smelting oven which could operate on a mix of 30%-40% hydrogen and 60%-70% gas. The aim is to eventually run exclusively on hydrogen.

Interest in the project has multiplied since Russia's invasion of Ukraine, Roeders said, but there are still many hurdles before it can become operational - from scaling up the technology to setting up a hydrogen charging network.

"To industrialize something like this usually takes at least five years," he said. "We'll have to dress up warm; we won't have a hydrogen oven yet."

 

US adamant at keeping Iran out of oil market

Having imposed economic sanctions on Iran for more than four decades, especially after signing of nuclear deal with Iran in 2015, United States remains adamant at keeping Iran out of oil market. It may be recalled that when the things were taking some shape, President, Donald Trump withdrew his country from the deal in 2018.

Nuclear negotiators who have gathered in Vienna after a five month-hiatus have indicated that they are optimistic about reviving the 2015 nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA).

“We stand five minutes or five seconds from the finish line,” Russian Ambassador Mikhail Ulyanov told reporters outside Vienna’s Palais Coburg on Sunday, four days into the talks. He said there are “three or four issues” left to be resolved.

“They are sensitive, especially for Iranians and Americans,” Ulyanov said. “I cannot guarantee, but the impression is that we are moving in the right direction.”

Enrique Mora, the European Union’s top negotiator who acts as mediator between Iran and the US, also said he is “absolutely” optimistic about the talks’ progress so far.

“We are advancing and I expect we will close the negotiations soon,” he told Iranian media.

The Wall Street Journal also said negotiations between Iran and the US on reviving the JCPOA are close to completion, Mora said on Sunday evening.

The text of an agreement could be closed in coming hours, said Mora.

According to the Iranian diplomats, experts are focusing on technical issues about Iran’s nuclear program.

Behrouz Kamalvandi, the spokesman for the Atomic Energy Organization of Iran (AEOI), had confirmed on Saturday that the talks were mainly focused on Safeguards issues.

One of Iran’s demands is that the IAEA should stop unsubstantiated allegations regarding PMD that had already been resolved in July 2015, when the nuclear deal was struck.

In a telephone call with UN Secretary General Antonio Guterres on Sunday afternoon, Iran’s Foreign Minister Hossein Amir-Abdollahian said, “We believe that the Agency should completely resolve the remaining issues related to the Safeguards Agreement by distancing itself from irrelevant and non-constructive political issues and through the technical channel.”

He added, “Nuclear weapons have no place in the defense doctrine of the Islamic Republic of Iran and are in contradiction to our policies and beliefs,” referring to a fatwa (religious decree) by Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei declaring that the production, stockpile and use of nuclear weapons as forbidden.

"The Leader's fatwa that prohibits the use of nuclear weapons is clear-cut and is the final say for everybody," Iran's Foreign Minister said.

 

Oil prices being manipulated by western media

This morning I picked up this news item from Reuters. It covers some of the usual mantras i.e. deal with Iran, inventory data, supply disruptions. I am forced to infer that ‘media drives oil prices’ and the sponsors are famous seven sisters, who have now reduced to ‘big four’ after the successive mergers. 

They love to keep prices high to maximize their profits. Since many of them are of ‘US Origin’, I have reasons to believe that they enjoy the support of the US administration.

Crude oil prices pulled back slightly on Tuesday on the latest progress in last-ditch talks to revive the 2015 Iran nuclear accord, which would clear the way to boost its crude exports in a tight market.

Brent futures fell 14 cents to US$96.51 a barrel at 0404 GMT, paring a 1.8% gain from the previous session. US West Texas Intermediate (WTI) futures declined 16 cents to US$90.60 a barrel, after climbing 2% in the earlier session.

"The specter of a US-Iran nuclear deal continues to hover over the market," ANZ Research analysts said in a note.

The European Union late on Monday put forward a "final" text to revive the 2015 Iran nuclear deal, awaiting approvals from Washington and Tehran. A senior EU official said a final decision on the proposal was expected within "very, very few weeks".

"While the details around the timing of the resumption of Iran's oil exports remain uncertain even if the accord is revived, there is certainly scope for Iran to increase oil exports relatively quickly," Commonwealth Bank analyst Vivek Dhar said in a note.

He said Iran could boost its oil exports by 1 million to 1.5 million barrels per day, or up to 1.5% of global supply, in six months.

"A revival of the 2015 nuclear accord will likely see oil prices fall sharply given that markets probably don't believe a deal will be reached," Dhar said.

However, signs that demand may not be dented as much as feared are keeping a floor under the market for now, following stronger-than-expected trade data from China on the weekend and the surprising acceleration in US jobs growth in July.

The oil market has remained under pressure recently over global recession fears, with Brent prices suffering their biggest weekly drop last week.

China, the world's largest crude oil importer, brought in 8.79 million barrels per day of crude in July, 9.5% lower from a year earlier but up from June's import volumes, according to China's customs data.

Traders will also be watching out for weekly US oil inventory data, first from the American Petroleum Institute on Tuesday and then the Energy Information Administration on Wednesday.

Five analysts polled by Reuters expect crude stockpiles fell by around 400,000 barrels and gasoline stockpiles declined also by about 400,000 barrels in the week to August 5, while distillate inventories, which include diesel and jet fuel, were unchanged.

Western components found in Russian weapons

A British defense think tank identified 450 unique microelectronic components in Russian military equipment left in Ukraine that appeared to be manufactured by United States, European and East Asian companies.

In partnership with Reuters, the Royal United Services Institute (RUSI) released a report on Monday detailing inspections of 27 Russian weapons systems and pieces of military equipment expended or lost since Russia invaded Ukraine and the group said the majority of the apparent Western components were manufactured by US companies.

“The preponderance of foreign-made components inside these systems reveals that Russia’s war machine is heavily reliant on imports of sophisticated microelectronics to operate effectively,” the group said in its report.

“This is despite persistent efforts by the Russian government to replace imports – in all aspects of its economy, including the military sector – with domestically produced materials in order to withstand international sanctions,” it continued.

Russia has been fighting Ukrainian forces for more than five months after invading the country on February 24. After failing to quickly take the capital city of Kyiv, Moscow refocused its efforts on the country’s industrial heartland in the east, known as the Donbas region, with no end to the conflict in sight.

RUSI said 317 of the 450 identified Western components appear to be from US companies, while components from Japan, Taiwan, Switzerland, the Netherlands, Germany, China, South Korea, the U.K. and Austria were also present.

The think tank cautioned it is possible the components are counterfeits of Western brands but indicated that wasn’t likely.

“Russia’s well-documented historical dependence on Western technology, and the critical role that some of the components play in the effective operation of the systems in which they were found, has led the research team to assume that the components are likely genuine,” the group said.

RUSI’s report states 56 US companies manufactured the “vast majority” of the components, and more than 200 of them appear to have been manufactured by just 10 companies. Texas Instruments was the most frequent US brand, accounting for 51 of the components. 

Of the 450 identified components, RUSI indicated 18% were assigned an Export Control Classification Number (ECCN), which would have required a government license for export to Russia even before Moscow invaded Crimea in 2014.

Others would have fallen under an EAR99 classification, RUSI said, which would not have required a license prior to Russia’s invasion in February.

“The presence of a large number of EAR99 and some ECCN classified items in Russian military equipment suggests that these components were either purchased by military equipment manufacturers from distributors in Russia, that they were procured under fake end-user certificates or that they were diverted for military applications at a later point,” the think tank said in its report.

Bill approved by the US Senate to jeopardize electric vehicle adoption targets

A group representing General Motors, Toyota Motor, Volkswagen and other major automakers said a US$430 billion bill approved by the US Senate will put achieving US electric-vehicle (EV) adoption targets for 2030 in jeopardy.

"Unfortunately, the EV tax credit requirements will make most vehicles immediately ineligible for the incentive;" said the Alliance for Automotive Innovation's Chief Executive, John Bozzella, adding the bill "will also jeopardize our collective target of 40% to 50% electric vehicle sales by 2030."

The group had warned Friday that most EV models would not qualify for a US$7,500 tax credit for US buyers under the bill.

To be eligible for the credit, vehicles must be assembled in North America, which would make some current EVs ineligible as soon as the bill takes effect.

The Senate bill imposes other restrictions to deter automakers from using Chinese-made materials by phasing in required percentages of North American-sourced battery components.

After 2023, vehicles with batteries that have Chinese components could not receive the credit, while critical minerals also face limitations on sourcing.

Senator Joe Manchin, who pushed for the restrictions, said EVs should not depend on foreign supply chains while Senator Debbie Stabenow of Michigan said the credit is "unworkable”.

The bill creates a US$4,000 tax credit for used EVs. The package provides billions in new funding for EV production as well as US$3 billion for the US Postal Service to buy EVs and battery-charging equipment.

The new EV tax credits, which would expire in 2032, would be limited to trucks, vans and SUVs priced no more than US$80,000 and cars up to US$55,000. Families with adjusted gross incomes of up to US$300,000 would be eligible.

President Joe Biden in 2021 set a target for electric and plug-in electric vehicles to comprise half of new vehicle sales in 2030.

 

Sri Lanka stuck between India and China

Chinese Embassy in Sri Lanka has sought an urgent meeting with senior Sri Lankan authorities after Colombo sought a deferment of the planned docking of a high-tech Chinese research vessel at the strategic Hambantota port over which India had raised concerns.

The Chinese space and satellite tracking research vessel 'Yuan Wang 5' was scheduled to dock at the Hambantota Port from August 11 to 17, weeks after Sri Lanka witnessed a major political turmoil following massive mass protests over the country's worst economic crisis in decades.

A note from Sri Lanka's Foreign Ministry to the Chinese embassy in Colombo dated August 5 says, "The Ministry wishes to request that the arrival of the vessel Yuan Wang 5 in Hambantota to be deferred until further consultations are made on the matter."

Some media reports said that India was worried the vessel would be used to spy on its activities and that it had lodged a complaint with Sri Lanka.

Some Sri Lankan news portals also reported that Sri Lankan President Ranil Wickremesinghe held a closed-door meeting with China's Ambassador Qi Zhenhong after Colombo sought a deferment of the planned docking. But the President's Office denied the media reports over the meeting.

On July 12, amidst the political turmoil in Sri Lanka, the then government approved the Chinese vessel's docking at the Hambantota port.

The Chinese vessel was expected to dock at the Sri Lankan port for "refuelling and 'replenishment' and will conduct satellite control and research tracking in the northwestern part of the Indian Ocean region through August and September.

The southern deep-sea port of Hambantota is considered strategically important for its location. The port, located in the hometown of the Rajapaksa family, has been developed largely with Chinese loans.

According to media reports here, India has informed Sri Lanka that the docking of the high-tech Chinese research vessel could pose a threat to its national security.

Sri Lanka received strong messages of protests from India as the ship was said to have the capability to track satellites and intercontinental ballistic missiles, the report said.

India has said it carefully monitors any development having a bearing on its security and economic interests.

"We are aware of reports of a proposed visit by this vessel to Hambantota in August," External Affairs Ministry Spokesperson Arindam Bagchi said in New Delhi when asked about the reports of a proposed visit by a Chinese vessel.

"The government carefully monitors any development having a bearing on India's security and economic interests and takes all necessary measures to safeguard them," he said last month.

New Delhi is concerned about the possibility of the ship's tracking systems attempting to snoop on Indian installations while being on its way to the Sri Lankan port.

India has traditionally taken a stern view of Chinese military vessels in the Indian Ocean and has protested such visits with Sri Lanka in the past.

The ties between India and Sri Lanka had come under strain after Colombo gave permission to a Chinese nuclear-powered submarine to dock in one of its ports in 2014.

China is the main creditor of Sri Lanka with investment in infrastructure. Debt restructuring of Chinese loans would be key to the island's success in the ongoing talks with the International Monetary Fund for a bailout.

India on the other hand has been Sri Lanka's lifeline in the ongoing economic crisis.

India has been at the forefront of extending economic assistance of nearly US$4 billion to Sri Lanka during the year as the island nation is grappling with the worst economic crisis since independence in 1948.

As the new Sri Lankan president looks at pulling the country out of its economic crisis, India has said that it will continue to assist the island nation and support its people in their quest for stability and prosperity.

Prime Minister Dinesh Gunawardena last week said Sri Lanka was looking forward to settle the issue of the vessel's visit with an "approach of friendship".

India's concerns have been focused on Hambantota port in particular. In 2017, Colombo leased the southern port to China Merchant Port Holdings for 99 years, after Sri Lanka was unable to keep its loan repayment commitments, fanning fears over the potential use of the port for military purposes.