Aurelia Butler

Prime Minister Sheikh Hasina quit and fled to India last week after student-led protests against her spiralled into some of the worst violence since Bangladesh’s 1971 independence from Pakistan, killing 300 people and injuring thousands. An interim government, led by Nobel prize winning economist Muhammad Yunus, has been appointed to plug a power vacuum and hold elections, but the protests have widened to target officials appointed during Hasina’s term, including the central bank chief and four deputy governors, who have resigned. A new central bank governor has been appointed. “We see risk of policy inaction and a potential slowdown in financial reforms,” S&P Global Ratings credit analyst Shinoy Varghese said. Weakness in the banking industry, including a lack of liquidity, thin capital buffers and ailing asset quality, has worsened while the departure of senior central bank officials could delay ongoing structural reforms, the rating agency said.The anti-government protests emerged from a movement in July against quotas in government jobs, as the $450-billion economy – the world’s fastest-growing just years earlier – struggled with youth unemployment, inflation and shrinking reserves. These conditions drove Hasina’s government to seek a $4.7 billion bailout from the International Monetary Fund, which was approved in January 2023.Weeks of unrest have fanned inflation, which reached 11.66% in July – when the government imposed a nationwide curfew, shutting down transport, offices and the mainstay garments industry for days – from 9.72% the previous month, according to official data.Moody’s (NYSE:MCO) Analytics said last week it has provisionally revised Bangladesh’s GDP growth forecast for this year to 5.1% from 5.4% previously. “Bangladesh’s recovery from the currency crisis hinges on the ability of any replacement government to meet public concerns and reestablish social order,” it said in a note.The Asian Development Bank, a key development partner for Bangladesh, said it would work with the interim government towards macroeconomic and fiscal sustainability.”A second priority is the expansion of private sector development to enhance competitiveness and create new employment opportunities,” the ADB said in a statement. “This includes working with the interim government to streamline government-to-business services to reduce the cost of doing business in Bangladesh.” More

TOKYO (Reuters) – Outgoing Japanese Prime Minister Fumio Kishida on Wednesday urged his colleagues to embrace change and seek out a candidate that will transform an unpopular incumbent party with bleak electoral prospects.Kishida, 67, announced he would not stand for re-election as Liberal Democratic Party boss next month, amid one of the lowest public support rates ever recorded by the scandal-ridden party, which has ruled Japan for most of the past eight decades. “It is necessary to show the people how the LDP has evolved and has been reborn,” Kishida said at a press conference.In an opinion poll released by public broadcaster NHK this month only a quarter of respondents said they backed his government against more than half who did not.A general election must be held by the third quarter of 2025, giving the new party chief just over a year at most to revive the party’s fortunes. “The new leader needs to be a fresh face, whether that means young or not associated with Kishida, and reform-minded,” said Rintaro Nishimura, an associate at Washington-based strategic advisory firm The Asia Group. That effectively ruled out establishment candidates, such as party secretary-general Toshimitsu Motegi, he said.  Motegi, 68, an LDP insider who had led the foreign and trade ministries, has yet to say whether he will run. Among Kishida’s potential replacements, he most closely aligns with the type of candidate the faction-riven LDP has historically coalesced around in the past.However, recent opinion polls suggest he is not the public’s choice.Polls published by local media over the past several weeks showed former defence minister Shigeru Ishiba, 67, was the most popular candidate to succeed Kishida. A rare voice of dissent within the ruling party, Ishiba has run and lost in four LDP leadership contests. However, in a voter poll released by Kyodo News last month he was backed by 28.4% of respondents, while only 2.5% percent picked Motegi.In second place at 12.7% was Shinjiro Koizumi, a former environment minister and the son of former prime minister Junichiro Koizumi, who at 43, would represent a rare generational shift in leadership if picked by the LDP. “It’s a time for transition of power between generations,” Tokyo resident Nobuo Koide, 82, told Reuters, calling Kishida’s move “a great decision.”However, the retiree, like most members of the public, will not have a say in selecting Japan’s next prime minister. In the first round of LDP voting next month, when votes will be evenly split between lawmakers and rank-and-file members, the field of candidates will narrow to two if no one secures a majority. In the second round, lawmakers will hold most of the votes, giving an advantage to the candidate who has the backing of party heavyweights. More

LONDON (Reuters) – Logic suggests that U.S. companies will benefit when the Fed’s interest rate-cutting cycle gets underway, because they will pay less to service their debt, but counterintuitively, they may not see much of a net benefit at all this time around.When the Fed raised rates between March 2022 and July 2023, corporate America’s net interest payments actually fell. That’s because the majority of firms borrow at fixed rates on longer terms. As interest rates rose, these companies received more interest on the huge cash piles they amassed during the pandemic, compared to what they paid out on their loans, on average.    The degree to which most firms emerged unscathed from the most aggressive rate-hiking cycle in 40 years is remarkable. Net interest payments made by U.S. firms as a share of GDP halved during the most recent tightening cycle, according to a recent Staff Report on the U.S. Economy from the International Monetary Fund. Analysts at Ned David Research estimate that since the Fed started raising rates in March 2022, companies’ net interest payments have declined $118 billion while cash flow has increased by more than $450 billion. As a result, net interest payments as a percentage of cash flow have fallen to 3.8%, the lowest level since 1957.     Net interest payments have fallen in many sectors. Information technology was a major beneficiary, as one might expect when Big Tech companies are sitting on huge cash balances. But the sector that benefited most was manufacturing – and it wasn’t even close.     The manufacturing sector, which profited disproportionately from pandemic-related fiscal stimulus, saw net interest payments fall by $15 billion, according to S&P Capital IQ.     In every other tightening cycle over the last 50 years, an increase in the federal funds rate was matched by a proportional rise in U.S. corporate net interest payments.     The recent divergence may explain why the broad tightening of financial conditions generated by higher interest rates had a much more limited impact on corporate investment and hiring than most experts anticipated. Unemployment has defied all expectations and remained anchored below 4% for two and a half years.     It may also help explain why the most widely forecast recession in history has yet to materialize.    The robustness of America Inc. was brought into sharp focus last Wednesday when U.S. corporate borrowing hit its highest level this year. Seventeen firms issued nearly $32 billion of debt in total, all of which was hoovered up by eager buyers.     This was only 48 hours after world markets were rocked by a brief but historic spike in U.S. equity volatility as investors dumped U.S. mega tech stocks and unwound yen carry trades. To successfully borrow so much amid such turmoil is impressive.     But this counterintuitive trend may not be so helpful when the Fed begins to cut. As the IMF notes, the negative correlation between the Fed’s policy rate and firms’ net interest costs has distorted the central bank’s transmission mechanism. So when the Fed begins to ease policy, those cuts may not have as much of a stimulative impact as they would have in the past.    Additionally, those excess corporate cash piles that generated significant interest income as rates rose are unlikely to remain at these elevated levels. That’s important given that corporate net interest costs would have been around one third higher during the recent rate-hiking cycle if firms’ cash-to-asset ratio had remained at pre-pandemic averages, the IMF said.    So what happens when the Fed’s easing cycle begins?Analysts at JP Morgan estimate that companies’ net interest expenses are likely to be “significantly higher” moving forward, especially if interest rates do not go back down to the ultra-low pre-pandemic levels. That’s because firms will receive lower rates of return on dwindling cash balances at the same time that they’re rolling over pre-pandemic debt at higher rates than they were paying in the near-zero interest rate era.Joe Kalish, chief global strategist at Ned Davis Research, agrees, but says this is not necessarily bad news.”Smaller firms are more exposed to floating rate debt so they should benefit more from falling interest rates. This should bring a better balance to the economy,” he reckons.Since the pandemic, economic rules of thumb have often become less helpful – whether we’re looking at the inverted yield curve or the mix of stubbornly high inflation and 50-year low unemployment. The relationship between interest rate changes and companies’ financial well-being may be another one to add to this list.    (The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever; Editing by Toby Chopra) More

LONDON (Reuters) -And just like that… it was gone.It may be a wee bit premature to wave goodbye to the above-target inflation rates that have blighted western economies for the past three years. But it looks increasingly wide of the mark to argue that the episode has firmly entrenched expectations of higher inflation.If expectations have been firmly “re-anchored”, a large part of the central banks’ recent battle has been won and the only risk is that they now leave it too late to ease credit again.On Monday, the New York Federal Reserve’s latest household survey showed that the median 3-year inflation outlook has fallen to the lowest point in the 11-year history of the series. It is now just 2.3%. To be sure, inflation forecasts over other time horizons were nearer to 3%, but the whole survey is basically eliciting the same responses that it was in the years before the pandemic. This may suggest that the “old normal” has returned to some degree.Declining cost pressures on small businesses also indicate the price pain may be dissipating even as confidence in the wider economy improves.While July’s NFIB survey showed high inflation remains the single most important problem among small firms, it also noted that the net number of them planning price rises has fallen to the lowest point since April 2023. The number of owners expecting to raise employee compensation is also at the lowest level in three years.And financial markets have virtually pulled the plug on above-target inflation expectations as well.”Breakeven” inflation assumptions embedded in Treasury-protected securities subsided to within a whisker of the Fed’s 2.0% target last week on both 5- and 10-year trajectories. That was the lowest in more than three years.True, pricing in the so-called TIPS market can get distorted by the ebb and flow of bond market speculation or demand-related over-valuation. But the 5-year-forward inflation-linked swaps showed a similar-sized drop last week as well. At 2.44%, the swap has lost 15 basis points this month alone and is some 35 bps below the long-term inflation reading it suggested as recently as April.HOT AND COLD Bank of America’s latest global fund manager survey showed a rapid reduction in managers identifying higher inflation as the biggest risk to portfolios.While as many one-in-three said it was the biggest “tail risk” in July, only one-in-eight thought so this month.Could energy prices shift the whole dial again? There is little doubt about the power of oil and gas prices to affect inflation and fears of it. That much was clear after the 2022 Ukraine invasion. But crude prices have been down on a year-on-year basis for the first sustained period since February. And those base effects will bear down on headline inflation for months to come.Also, an energy-driven spike in inflation seems highly unlikely if there is parallel fear of recession sapping oil demand. While the number of BofA survey respondents expecting a “hard landing” for the economy over the next 12 months remains low, it crept up this month to 13% – its highest point since January. So one of the big questions is whether all the hoopla about a post-pandemic “Great Inflation” or world economies “running hot” for years was just hot air itself?University of California, Berkeley professor Brad DeLong recently puzzled over why the market’s implied inflation picture changed so suddenly. “The marginal TIPS-nominal Treasury arbitrageur looks to be taking the ‘economy runs too hot over the next five years’ scenarios off the table,” DeLong wrote in a blog.Going further, he suggests the Fed may actually face the risk of undershooting its inflation target for much of the next five years, if implied inflation rate in markets at around 2% is an average and over that time and with current rates still between 2.5% and 3.0%.If investors really do think the Fed now faces years of potentially undershooting its target again, then must also be entertaining the chance of some return of the “secular stagnation” theme that haunted the pre-pandemic era.And if that is correct, then the Fed may well have kept things too tight for too long already. On one hand, last week’s spike in market volatility showed how changeable markets can be with even a minor catalyst. But even accepting market twists and turns, there is clearly little in public or corporate surveys to suggest high future inflation is seen a major problem.The opinions expressed here are those of the author, a columnist for Reuters.(by Mike Dolan X: @reutersMikeDEditing by Marguerita Choy) More

WINDHOEK (Reuters) -Namibia’s central bank cut its main interest rate by 25 basis points on Wednesday, citing a slowdown in inflation and inflation expectations.The Bank of Namibia reduced its repo rate to 7.50% from 7.75%, where the rate had been since June 2023.Namibia’s inflation was at 4.6% year on year in July, the same level as in June but down from 4.9% in May.The central bank revised down its average inflation forecast for this year to 4.7%, versus a 4.9% forecast given at its last Monetary Policy Committee meeting in June.It attributed the downward revision to an appreciation of the Namibian dollar and a moderation in crude oil prices.”With inflation and inflation expectations slowing and nominal interest rates unchanged, real interest rates have increased thereby signalling an effective tightening of monetary policy,” central bank Governor Johannes !Gawaxab said in a statement accompanying the decision.”Considering these factors, the MPC felt that a moderate easing of monetary policy was warranted.”The central bank reduced its 2024 economic growth forecast by 0.6 percentage point to 3.1%, partly because of a severe drought gripping the southern African region. More

LUSAKA (Reuters) -Zambia’s central bank kept its benchmark lending rate unchanged on Wednesday, saying that although inflation remained high its stance was appropriate given the economic impact of a severe drought.The decision to hold the Monetary Policy Rate at 13.50% follows six successive meetings at which it was raised. So far this year the Bank of Zambia has implemented a 100 basis point hike in May and a 150 basis point increase in February.”While actual and projected inflation remain elevated relative to the 6%-8% target band, the committee judged that the current monetary policy stance is appropriate,” central bank Governor Denny Kalyalya told a news conference.Inflation has been rising since the middle of last year, reaching 15.4% year on year in July, fuelled by a slide in the kwacha currency and the worst drought in the southern African region in decades.The central bank now anticipates inflation will average 15.3% in 2024, up from the 13.7% forecast it gave at its last policy meeting in May.Kalyalya said the completion of Zambia’s external debt restructuring and implementation of structural reforms remained critical to lower inflation.Weighed down by delays in restructuring talks and limited foreign-currency inflows, the kwacha hit repeated record lows against the dollar from November to February and has been highly volatile since.”In taking the decision to maintain the Policy Rate as opposed to raising it, the committee also took into account the impact on the stability of the financial system and growth, particularly in 2024, in the wake of the drought,” Governor Kalyalya said. More