Aurelia Butler

Turkey has almost doubled its main interest rate, as the central bank’s new leadership takes the first steps to break with the politically-motivated policies that stoked inflation and sent foreign investors fleeing.The central bank, helmed by newly-appointed governor Hafize Gaye Erkan, on Thursday boosted its benchmark one-week repo rate to 15 per cent from 8.5 per cent.Local business executives and international investment banks had hoped for a bigger increase in borrowing costs to around 20 per cent. The lira fell 2.9 per cent to a fresh record low of 24.24 against the dollar after the decision, according to FactSet data.“The rate hike is below expectations, but can be considered as the first of several steps,” said Enver Erkan, chief economist at Istanbul-based brokerage Dinamik Yatırım Menkul Değerler. Central bank watchers have been betting on a shift in stance from the low rate policies pushed by President Recep Tayyip Erdoğan since May’s presidential election, which Erdoğan won. Their optimism has been fuelled by the president’s appointment of Mehmet Şimşek, an investor-friendly former deputy prime minister, as finance minister and Erkan, a former Goldman Sachs executive, as central bank chief. The low rates deployed over the past two years have triggered a surge in inflation to a peak of above 85 per cent. Inflation remains high at just below 40 per cent. Rate-setters hinted at further increases in the coming months, saying they would tighten policy “as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved”.A series of rate cuts since 2021 sent the lira tumbling to record lows against the dollar and added to serious imbalances across the $900bn economy. The loose monetary policy, on top of government giveaways before May’s election, has led many economists to say Turkey’s economy is running too hot. While higher rates will help slow activity, a rise of the scale announced is unlikely to have a dramatic impact. Dinamik’s Erkan noted that rates paid on commercial loans and bank deposits were already well higher than the new central bank policy rate. While Thursday’s move marked a shift towards more conventional policies, investors warn that Erdoğan, who has led Turkey for two decades, has been down this path before only to shift course. Former central bank governor Naci Ağbal was sacked in early 2021 just months into his term after boosting borrowing costs. More

LONDON (Reuters) -The Bank of England raised interest rates by a bigger-than-expected half a percentage point on Thursday, after it said there had been “significant” news suggesting British inflation would take longer to fall.The BoE’s Monetary Policy Committee (MPC) voted 7-2 to raise its main interest rate to 5% from 4.5%, the highest since 2008 and its largest rate increase since February, following stickier inflation and wage growth since policymakers last met in May.”The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it,” BoE Governor Andrew Bailey said after the decision. “If we don’t raise rates now, it could be worse later,” he added.Economists polled by Reuters had expected a move to 4.75%, although financial markets earlier on Thursday had seen a nearly 50% chance of a rise to 5%, following higher-than-expected inflation data released on Wednesday.Sterling briefly spiked higher against the U.S. dollar while two-year bond yields briefly dipped below 5% after the BoE decision. An inversion of the two-year to 10-year yield curve, often a sign that investors expect a recession, deepened. Joseph Little, Global Chief Strategist at HSBC Asset Management, said Britain was in the worst position of major Western economies, hit not only by the cost of living crisis but also a shortage of workers and fast-rising wages. “Inflation pressures show more persistency and more momentum than other western economies, and that forces the Bank into a hawkish corner,” Little said. “Today’s statement has increased concerns of a much-higher terminal policy rate, perhaps as high as 6%.”BoE policymakers had given little indication that a half-point rate increase was under consideration in the run-up to Thursday’s announcement.”There has been significant upside news in recent data that indicates more persistence in the inflation process,” the MPC said. “Second-round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge.”MPC members Silvana Tenreyro and Swati Dhingra opposed the rate rise – as they have all others this year – saying that much of the impact of past tightening had yet to be felt, and forward-looking indicators pointed to steep falls in inflation and wage growth ahead.Britain’s high inflation rate is also a problem for Prime Minister Rishi Sunak, who has pledged to halve the pace of price growth this year in an attempt to win back voter support ahead of a national election expected in 2024.A spokesperson for Sunak said shortly before Thursday’s rates announcement that Sunak supported Bailey. Finance minister Jeremy Hunt said the BoE had his full support and “tackling inflation relentlessly must be the immediate priority”.Bailey has been criticised by some lawmakers from Sunak’s Conservative Party for not acting sooner and more aggressively on inflation.RATE EXPECTATIONS SURGEExpectations for BoE rate tightening have surged in recent days – sharply raising the cost of new mortgages – and before Thursday’s decision financial markets expected the BoE’s Bank Rate to peak at 6% by the end of the year. By contrast, economists polled by Reuters last week saw a 5% peak.Britain’s economy – which was hit by the shock of Brexit as well as the COVID-19 pandemic and the surge in gas prices caused by Russia’s invasion of Ukraine – has dodged a widely expected recession so far in 2023.However, unlike most other big rich economies, output has barely recovered to pre-pandemic levels and growth this year looks set to be a minimal 0.25%, according to BoE forecasts last month. The BoE’s rate increase follows the European Central Bank’s decision last week to raise rates by a quarter-point to 3.5%, and rate rises by the Swedish and Norwegian central banks earlier on Thursday.While Britain faces a tricky inflation challenge as inflation has been slow to fall from the 41-year high of 11.1% struck last year, other central banks see challenges too. Bundesbank President Joachim Nagel described inflation as a “very greedy beast” on Wednesday, and the U.S. Federal Reserve Chair Jerome Powell said further rate rises remained “a pretty good guess”, despite last week’s pause.The BoE retained its previous guidance on future policy, which stated that if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.The central bank also noted that short-dated British government bond yields had risen sharply – pricing in an average level of Bank Rate of 5.5% for the next three years.The BoE said it would keep a close eye on the impact of higher rates on mortgage costs, as well as rising costs in Britain’s rental market.Official figures on Wednesday showed consumer price inflation was unchanged at 8.7% in May and underlying inflation rose to its highest since 1992.Last month the central bank forecast that inflation would fall to just over 5% by the end of this year and be below its 2% target in early 2025. 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South Korea exported more goods to the US than to China last year for the first time in almost two decades, underlining shifting trade patterns as Washington draws more allies into its supply chains and Beijing boosts its manufacturing self-reliance. Goods exports from South Korea to China fell almost 10 per cent to $122bn between 2021 and 2022, according to data released by the Bank of Korea this week. By contrast goods exports to the US increased by more than 22 per cent over the same period to $139bn.It is the first time since 2004 that South Korea — the world’s tenth largest economy with companies such as Samsung that are a bellwether of global trade — has exported more goods to the US than to China.The figures reflect a surge in US demand for Korean cars, while exports of Korean semiconductors to China have slumped amid a slowdown in the global memory chip market. The US is the only one of South Korea’s top 10 export partners to which exports have grown over the past five years. Led by battery makers LG Energy Solution, SK On and Samsung SDI, and solar company Hanwha Q-Cells, South Korean companies have also been among the largest foreign investors in the US semiconductor and clean tech sectors.By contrast China is waning in importance. A study published this month by the Korea International Trade Association showed that since 2021, the share of Korean exports going to China has declined in sectors including petroleum products, petrochemicals, steel, auto parts and displays.In the first three months of 2023, Korean exports to China fell below 20 per cent of the total for the first time since 2005, according to the trade association.Analysts at the Korea Center for International Finance have attributed the structural decline in Korean exports to China to Beijing’s “Made in China 2025” strategy to use subsidies to boost its manufacturing of machinery and precision tools.“Many Chinese business are manufacturing intermediate goods, which we mainly export,” Rhee Chang-yong, the governor of the Bank of Korea, told lawmakers last month. “The decade-long support from the Chinese economic boom has disappeared.”In an interview with the FT last year, South Korean trade minister Ahn Duk-geun cited Beijing’s policy to “arbitrarily interfere with businesses” as well as its “dual circulation” import substitution policies as the most important factors driving foreign companies to reduce their exposure to China.He added that over the course of the next decade, the “structure of trade” between South Korea and China “will be changed”, moving down the value chain as the exchange of sensitive technologies is increasingly controlled.Park Chong-hoon, head of Korea research at Standard Chartered, said: “There has been a structural change going on in Korean-Chinese economic relations over recent years as Chinese companies, with Beijing’s support, move up the technological value chain.“But we should remember that the most important Korean export to China is high-end semiconductors, which are going through a downturn at the moment. As the global IT sector picks up again, so will Korean exports to China.” More

The BoE’s Monetary Policy Committee (MPC) voted 7-2 to raise its main interest rate to 5% from 4.5%, its highest since 2008 and its largest rate increase since February, following stickier inflation and wage growth since policymakers last met in May.In choppy trading, the pound seesawed, as did gilt yields. Traders scrambled to price in a peak to UK rates of as much 6% and its implications for the risk of recession, and rate-sensitive stocks like banks and homebuilders slid. MARKET REACTION:FOREX: Sterling was last up 0.1% against the dollar at $1.27830, having bounced off a low of $1.2740. STOCKS: The FTSE 100 was down 1.2% on the day, compared with a loss of 0.9% prior to the decision. MONEY MARKETS: UK 2-year gilts dropped sharply, then rose after the decision but were last unchanged at 5.04%. An inversion of the two- to 10-year yield curve, often a sign that investors expect a recession, deepened further.COMMENTS: JAMIE NIVEN, SENIOR FUND MANAGER, CANDRIAM, LONDON:”Ultimately, while a hawkish surprise, it may result in a return of credibility to the bank and result in a recovery of some cross-market underperformance seen recently.” “If base rates are to remain at these levels (or indeed move to levels priced by the market of around 6%) we fully expect the consumer to be hit hard, with the housing market a particular channel for potential stresses. The reaction of sterling is quite telling in this regard given a small sell-off, at this stage, despite the hawkish surprise.”JAMES SMITH, DEVELOPED MARKETS ECONOMIST, ING, LONDON:”Unsurprisingly, the bank hasn’t offered up many – or really any – hints on what might come next, though of course markets think subsequent hikes could take rates above 6% from today’s 5% level.It was always quite unlikely that the bank would pre-commit to any particular course, or push back against market pricing, given the recent tendency of inflation to overshoot expectations.But even if the bank hasn’t offered up any new guidance, the rate decision itself is revealing. BoE policymakers are always keen to stress they don’t take decisions on future rate hikes in advance, but they will be acutely aware that the decision to hike by 50 bps today will be read by investors as an implicit endorsement of market pricing for the rest of this year.”SEEMA SHAH, CHIEF GLOBAL STRATEGIST, PRINCIPAL ASSET MANAGEMENT, LONDON:”For the bank, there is no space for dithering or confusing messages now. The UK has the unenviable title of highest core inflation rate in the G7, and by quite some margin. It requires the central bank to adopt a clearly hawkish attitude that signals further sizeable moves over the coming months, emphasising the severity of the situation.A sharper slowdown of the UK economy will be an unfortunate, but necessary, fallout from monetary policy.”CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP, LONDON: “The BoE has come down on the side of a 50 bps hike, in a move that seems to set the tone for the next few meetings. The fight against inflation clearly has to step up a gear, and the task now for the BoE is to get ahead of the curve once again. A nod to ‘persistent inflation’ should put everyone on notice that Bailey and co have overcome their reticence about more aggressive hiking.”PAUL OBERSCHNEIDER, CEO, HILLTOP CREDIT PARTNERS, LONDON:“The BOE continues to get it very wrong. Raising the cost of money when growth is at virtually zero, and inflation is being caused by factors outside of consumption control, is a recipe for disaster. The focus should be on addressing the underlying causes of today’s inflation, including a lack of housing supply caused by a broken planning system and out of date mortgage products, and fiscal measures that don’t cause more consumer pain. The UK economy is precariously positioned, with real-term UK wages at 2005 levels and the impact of the government’s 400 billion-pound COVID bailout now finally catching up with the Treasury.”ROBERT JEFFREE, CHIEF EXECUTIVE OF OMNIS INVESTMENTS, LONDON: “After May’s hot inflation report, the Bank of England faced a dilemma when it came to its interest rate decision today. They can’t risk letting inflation expectations get higher and the worrisome acceleration of prices in the service sector risks just that, even if goods prices are falling.””Having said that, their policy is now more data dependent, the bank had to deliver a rate increase. A greater step change – 50 bp rather than 25 bp suggests a more discernible hawkish tilt which is bad news for borrowers and good news for savers.”GARY SMITH, PARTNER IN FINANCIAL PLANNING, EVELYN PARTNERS, LONDON: “Expect more mortgage market mayhem after this big bazooka rate hike. Lenders were probably already pricing in a 25 basis point move, but the repricing of home loans looks like it will now be more dramatic and protracted.””With the benchmark interest rate undergoing a step-change to a level not seen since September 2008, the coming weeks are likely to see a procession of raised loan rates – and a succession of eye-watering estimates of how much monthly and annual loan payments will increase as borrowers come off their cheap fixed deals.” More

ON REFORM”Even with the capital that the World Bank and the MDBs (multinational development banks) have, there is clearly potential …to increase financing capacity,” said U.S. Treasury Secretary Janet Yellen, whose country is the World Bank’s biggest shareholder. Yellen said an additional 200 billion dollars could be unlocked over a decade.”We are certainly not ruling out at some later stage a capital increase. But I think that these banks need to function better individually and as a system first, expand their mission to address global challenges, better utilize the capital they have.”ON NATURAL DISASTER CLAUSES “We would also like to see the World Bank offer borrowers the option to add climate resilient debt clauses to their loan agreements. These clauses would help ease pressures on countries if a natural disaster strikes,” Yellen said.ON UNLOCKING PRIVATE SECTOR FINANCING”We need to mobilise the private sector a lot more, there is a lot of liquidity, a lot of money in that world,” said French President Emmanuel Macron.ON FAILURE OF INTERNATIONAL FINANCIAL ARCHITECTURE”It is clear that the international financial architecture has failed in its mission to provide a global safety net for developing countries,” said U.N. Secretary General Antonio Guterres. More

ZURICH (Reuters) -The Swiss National Bank raised its policy interest rate by 25 basis points on Thursday as the central bank pressed ahead with its campaign to dampen stubborn inflation and signalled that more tightening was likely to come.Chairman Thomas Jordan pointed to rising inflationary pressures and the danger of price increases becoming entrenched as the SNB hiked Swiss rates for the fifth time in succession.Although Swiss inflation ebbed to 2.2% in May from 2.6% in April, there was still more work to be done to tackle rising prices, Jordan told reporters.”The marked decline in recent months is very welcome,” Jordan said. “Nevertheless the underlying inflationary pressure has risen further.”That means most likely that tighter monetary policy is necessary to bring inflation sustainably below 2%,” he said, “But we can also afford the more gradual approach.”While inflation globally has been coming down from its multi-decade peaks, central banks around the world are not quite done yet with their monetary tightening campaigns to bring price rises under control.Although modest by international standards, Swiss inflation has remained above the SNB’s 0-2% target range since February 2022.On Thursday, the SNB increased its policy rate and the rate it charges on sight deposits to 1.75% from the 1.5% level set in March. The increase, in line with forecasts in a Reuters poll, meant Swiss interest rates were now at their highest level since October 2008.Still, the Swiss franc fell 0.2% against the dollar after the decision, which disappointed some market players who bet on a bigger 50 basis point move.The latest SNB hike followed an increase by the European Central Bank, which last week raised euro zone borrowing costs to their highest level in 22 years.Although the U.S. Federal Reserve left interest rates unchanged last week, it signalled further hikes by the end of the year. Even with the Thursday’s rate increase, the SNB forecast Swiss inflation would remain above its 0-2% target by 2026.The central bank also raised its inflation forecasts for 2024 and 2025. The projected above-target inflation can be seen as indicating further tightening in the future.The SNB said it also remained ready to intervene in currency markets. In recent months the central bank has been selling foreign currencies to boost the value of the Swiss franc, whose strength has reduced the effect of more expensive imports.Jordan said that although Switzerland had lower inflation than other countries, it was dangerous to sit back and accept the current level of price increases.”Inflation would most likely not stabilize but would rather go up again and we would have to fight inflation further down the road with more rate increases,” he said.Analysts said they expected another hike at the SNB’s next meeting in September, especially following latest rise and Jordan’s comments.”The message is that the job is not done,” said Gero Jung, an economist at Mirabaud. “In sum, quite a hawkish hike.”Charlotte de Montpellier at ING said Thursday’s action made her change her outlook. “Before today’s meeting, I thought that this rate hike was going to be the last of the cycle,” she said. “However, in view of the inflation forecasts and the message, I am going to revise my forecast and anticipate a further rate hike in September.” More

A stunning hike by Norges Bank today, with a 50bps move to 3.75 per cent.Admittedly, consensus was split, but it was clear something needed to be done to curb price increases. A further 25bps on top of the one markets had expected looks increasingly probable.Here’s Citi:In an even more hawkish spin, the rate path was lifted more than we had expected, to show the policy rate now peaking at 4.21% by 4Q-23 up from 3.60% in the March MPR forecasts. We had expected the new rate path to peak at around 4.0%, in line with our own forecast for the terminal rate. The rate path is now consistent with a 25bp hike at the August interim meeting and almost another 25bp in September. The much higher rate path (an unusually large shift over just three months) suggests that today’s surprising 50bp hike is not simply a catch-up to higher-than-expected realised inflation, but rather a more fundamental re-assessment of how tight monetary policy needs to be to bring down future inflation.Goldman also expects 25bps in both August and September.Ida Wolden Bache and the gang have come under hefty pressure to protect the long-suffering krone, which has traded weaker than expectations while inflation has continue to come in hot (March CPI was 1.3pp above expectations at 6.7 per cent). Graph via ING of how projections now stand:

Rate-setters hands’ have been slightly tied by their own model, ING analyst notes:Not only has the central bank gone further than that at this meeting, but it is now signalling a peak rate of 4.25% later this year – some 60bp higher than previously anticipated. By historical standards, that’s a pretty big revision.To some extent that’s not surprising, given that the last set of forecasts came amid the US banking crisis. Global interest rate expectations have since recovered, which mechanically pushes up Norges Bank’s forecast for its own policy rate. NOK was as much as 5.5% weaker at the end of May on a trade-weighted basis, relative to what the central bank had been assuming back in March, though that difference has narrowed over recent days. That weakness also requires higher rates, according to the bank’s model.All in all, it’s tough times for one of Scandinavia’s best-known countries. Alphaville would hate to be Norwegian right now.Further reading— Live news: Bank of England and Central Bank of Turkey raise rates (FT)— Robin goes on pat leave (Twitter) More

MANILA (Reuters) – The Philippine central bank kept its benchmark interest rate steady at 6.25% for a second straight meeting on Thursday, and its governor hinted the rate could stay there longer with inflation on an easing trend. Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla said the central bank could afford to extend the rate hike pause for a third successive meeting barring any policy surprises from the Federal Reserve. “Clearly, a pause will be, at least in my view, at least three meetings. Now we have two already,” Medalla said after overseeing what could be his last policy meeting unless he is re-appointed by President Ferdinand Marcos Jr.Medalla is completing the unexpired term of predecessor Benjamin Diokno, the current finance secretary, which ends next month. A decision on the top BSP post is expected within days. While the BSP was confident inflation will return to its 2% to 4% target range by October, Medalla said it may be forced to act should the Fed deliver a big hike, to keep Philippines and U.S. rate differentials stable. Keeping interest rates steady on Thursday “was a clear choice,” Medalla said, given upside inflation risks from transport and wage increases and an expected moderation in economic activity. The BSP’s latest consumer price forecast showed inflation would average 5.4% in 2023, slightly lower than its earlier projection of 5.5%. For next year, inflation is expected to average 2.9%, a tad higher than its earlier forecast of 2.8%.”The BSP remains prepared to resume monetary tightening as necessary, in line with its data-dependent approach to ensuring price and financial stability,” Medalla said. All 24 economists polled by Reuters had expected the benchmark overnight borrowing rate would stay unchanged on Thursday. A strong majority forecast rates will stay at 6.25% for the rest of the year as price pressures ease.Asked whether the tightening cycle was approaching its end, Medalla said he wanted to see two consecutive months of below 4% inflation before considering cutting rates.He said a rate cut was “unlikely in the near future”. Medalla oversaw the central bank’s most aggressive tightening cycle in years to tame red-hot inflation that has dented economic growth. Some economists in the Reuters poll believed the BSP is done hiking rates, with three predicting a cut by end-2023 and another 10 expecting a cut in the first quarter of 2024. ING economist Nicholas Mapa in a Tweet said he expected the central bank to be on hold for at least two more policy meetings should Medalla be re-appointed. Those meetings are every six weeks, with the next policy review on Aug. 17. More