Aurelia Butler

Borrowing costs in Britain are projected to nearly triple to 6.25 per cent by May, after the Bank of England’s chief economist warned that the government’s new debt-laden economic plan required a “significant monetary response”.Huw Pill’s intervention came as Kwasi Kwarteng, chancellor, prepared to reassure markets that he would control debt in a new medium-term fiscal plan, with ministers hoping to pledge that debt will fall within five years.The new plan, to be published in November, implies tight public spending controls continuing into the second half of this decade, as the chancellor tries to restore order to the public finances after announcing £45bn of debt-funded tax cuts.Futures markets are now forecasting interest rates will hit 6.25 per cent by May, the highest level in 25 years, as the BoE attempts to prop up the pound and rein in inflation. Rates currently stand at 2.25 per cent, already the highest since the global financial crisis.And the IMF on Tuesday evening said it was “closely monitoring recent economic developments in the UK”. “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” the global institution said. The turmoil on the markets has created the first tensions between Kwarteng and Liz Truss, prime minister, as they grappled with the fallout of the chancellor’s economic statement last week.Truss was initially reluctant for the Treasury and BoE to issue statements on Monday to support the pound — preferring not to react to market turmoil — but eventually agreed with Kwarteng that it was the right course of action.The tensions, first reported by Sky News, have been confirmed by senior government officials. One said the exchanges were “testy” and that relations between No 10 and No 11 were under strain.That was denied as “weapons-grade bollocks” by allies of Truss, while others said there had been no raised voices in the meeting; Kwarteng and Truss are longstanding allies.In the Treasury statement issued on Monday, Kwarteng promised to publish a new road map for dealing with debt on November 23, replacing existing fiscal rules that say debt must be falling as a share of GDP within three years.Those familiar with Kwarteng’s thinking have told the Financial Times the new rules will say debt must be falling within the five-year forecast period of the independent Office for Budget Responsibility, which will publish its forecasts on the same day.Kwarteng told City bosses on Tuesday he would publish “a credible plan to get debt to gross domestic product falling”. Tight public spending totals already agreed will remain in place until 2025, with tough controls expected to remain into the future.Futures markets are now betting on a wave of interest rate increases by the bank in coming months, following Pill’s comments at the Barclays-CEPR International Monetary Policy Forum.Speaking a day after sterling hit an all-time low against the dollar, Pill had said the BoE’s Monetary Policy Committee was “certainly not indifferent” to the sell-off in the pound and gilt markets.

As the gilt sell-off intensified, 10-year yields rose 0.26 percentage points to 4.5 per cent, the highest level since 2008. Thirty-year borrowing costs rose to 5 per cent, the highest since 2002, ahead of a sale of new 30-year debt later this week. Pill highlighted the combined effect of the government’s new fiscal stance, “significant” reaction in the markets and the broader context of rising interest rates in other countries. “All this will require a significant monetary response.” However, he signalled that the central bank did not plan to act before its next scheduled meeting in November, pushing back against calls from some investors for an emergency interest rate rise to shore up the currency and restore confidence in the UK economy.He said the best time to carry out a “necessarily comprehensive assessment” of not just fiscal policy but also energy and labour market developments would be when the BoE updates its forecasts alongside its November decision on interest rates. Pill said that when the BoE last published forecasts for the UK economy in August they had shown the economy falling into a prolonged recession, partly because the government had yet to set out measures to protect households and businesses from higher energy prices.This had created a difficult trade-off, because aggressive action to curb inflation would spark a severe downturn, he said.Now that the government had set out fiscal plans that would support household incomes, “that has freed monetary policy to do its job”, said Pill, adding: “That freedom will have to be used.” The pound was trading flat by late afternoon trading in London at just under $1.07 giving up earlier gains. Sterling has fallen about 20 per cent against the US currency this year and remains close to its lowest levels since 1985.UK high-street banks have begun pulling mortgage loans in response to rising yields, with mortgage rates expected to rise substantially. More

Nigeria’s central bank has raised interest rates to an all-time high of 15.5 per cent as it struggles to contain a surge in inflation. The bank raised its benchmark interest rate by 150 basis points — its third consecutive rate rise — to combat price pressures that have left citizens facing soaring costs for fuel and food. Central bank governor Godwin Emefiele said after a two-day meeting that the committee could not rule out further tightening, adding that it was “imperative” to rein in price pressures. “Inflation in the last four months has gone up aggressively. It is difficult for us to not go in the aggressive way we have today. This is the best option at this time,” Emefiele told reporters at a press briefing.Annual inflation in August was 20.5 per cent. Core inflation, which excludes volatile food and energy prices, is 17.2 per cent. The naira currency had weakened sharply to a fresh low against the US dollar ahead of the interest rate decision, threatening to raise the price of imported products further.Emefiele said the decision to raise rates was unanimous, but committee members disagreed about the scale of tightening needed. Ten of the committee’s 12 members voted to raise rates by 150 basis points, one voted to lift by 100 basis points and the other a 50 basis points increase.

Analysts had predicted a modest hike of between 50 to 100 basis points. Virág Fórizs, Africa economist at Capital Economics, a research firm, said Nigeria’s central bank was “reluctantly hawkish” and forecast a lowering of interest rates early next year.Many economies are struggling because of the strength of the US dollar and the impact of higher US rates on global borrowing costs. However, Nigeria’s economic woes have been compounded by the lacklustre performance of its oil sector in 2022. Africa’s most populous nation usually earns more than 80 per cent of its foreign currency from crude but has not benefited from rising oil prices this year because of massive theft of an estimated 400,000 barrels per day, under-investment in infrastructure and the cost of fuel subsidies. Nigeria lost its crown as Africa’s largest oil producer to Angola last month when it produced 1.1mn barrels of crude a day, far short of its Opec quota of 1.8mn. Low oil production has led to a scarcity of US dollars in its import-heavy economy. Imports have become more expensive as businesses raise prices to reflect the high cost of sourcing dollars from the black market where it trades freely and is almost 50 per cent higher than the central bank’s official exchange rate. The Nigerian currency has depreciated almost 25 per cent against the dollar on the black market since the start of the year. Nigeria’s decision comes amid soaring inflation across west Africa. Ghana is experiencing 33.9 per cent inflation, its highest since 2001, forcing its central bank to raise rates by 300 basis points to 22 per cent at an emergency meeting last month.Economic insecurity will be a key issue as Nigeria goes to the polls to replace outgoing president Muhammadu Buhari in February. More

In times of trouble, the dollar is the world’s refuge and strength. This is true even when the US is the source of the trouble, as happened in the financial crisis of 2007-09. It is true again now. A series of shocks, including high inflation in the US, has triggered a familiar upward movement in the dollar. Moreover, this has not been just against the currencies of emerging economies, but also against those of other high-income countries. Meanwhile, the general story of the dollar cycle underlies some specific ones. Messing up one’s macroeconomic policies, especially fiscal management, proves particularly dangerous when the dollar is strong, interest rates are rising and investors seek safety. Kwasi Kwarteng, please note.The nominal effective exchange rate of the US dollar appreciated by 12 per cent between the end of last year and Monday, according to JPMorgan estimates. Over the same period, the yen’s effective rate depreciated by 12 per cent, the pound’s by 9 per cent and the euro’s by 3 per cent. Against the dollar alone, movements are larger: sterling has depreciated by 21 per cent, the yen by 20 per cent and the euro by 16 per cent. The dollar is king of the castle.So why has this happened? Does it matter? What can be done about it?As to the why, the answer is that the world economy has suffered four linked shocks since 2020: the pandemic; a huge fiscal and monetary expansion; to post-pandemic supply side, in which pent-up (and lopsided) demand hit supply constraints in industrial inputs and commodities; and, finally, Russia’s invasion of Ukraine, which hit energy, particularly for Europe.The results have included enhanced uncertainty, strong inflationary pressure in the US, a need for monetary policy, particularly that of the Federal Reserve, to catch up, and powerful recessionary forces, especially in Europe. With the Fed’s tightening ahead of that of its peers in the high-income countries, the dollar has strengthened. Meanwhile, the divergent outcomes of emerging economies are determined by how well their economies are managed, whether they export commodities and their indebtedness.Within the G20, surprisingly, currencies of many emerging countries have fared better than those of the high-income ones. Russia’s rouble has appreciated sharply. At the bottom are sterling, the Turkish lira and Argentine peso. What company the pound now keeps!Does the dollar’s strength matter?Yes, it does, because, as a recent paper co-authored by Maurice Obstfeld, former chief economist of the IMF, notes, it tends to impose contractionary pressure on the world economy. The roles of US capital markets and the dollar are far bigger than the relative size of its economy suggests. Its capital markets are those of the world and its currency is the world’s safe haven. Thus, whenever financial flows change direction from or to the US, everybody is affected. One reason is that most countries care about their exchange rates, particularly when inflation is a worry: only the Bank of Japan can be happy about its weak currency. The danger is greater for those with heavy liabilities to foreigners, even more so if denominated in dollars. Sensible countries avoid this vulnerability. But many developing countries will now need help.These recessionary forces emanating from the US and the rising dollar come on top of those created by the big real shocks. In Europe, above all, there is the way in which higher energy prices are simultaneously raising inflation and weakening real demand. Meanwhile, the determination of China’s leader to eliminate a virus circulating freely in the rest of the world is hitting its economy. The Chinese Communist party may control the Chinese people. But it cannot hope to control the forces of nature in this way indefinitely.What can be done? Not that much.There is some talk of co-ordinated currency intervention, as happened in the 1980s, with the Plazaand then Louvre accords, first to weaken the dollar and then to stabilise it. The difference is that the former, in particular, suited what the US then wanted. This made intervention credibly consistent with its domestic goals. Until the Fed is content with where inflation is going, that cannot be the case this time. Currency intervention aimed at weakening the dollar by just one or even several countries is unlikely to achieve that much.A more important question is whether monetary tightening is going too far and, in particular, whether the principal central banks are ignoring the cumulative impact of their simultaneous shift towards tightening. An obvious vulnerability is in the eurozone, where domestic inflationary pressure is weak and a significant recession is probable next year. Nevertheless, as Christine Lagarde, ECB president, underlined last week: “We will not let this phase of high inflation feed into economic behaviour and create a lasting inflation problem. Our monetary policy will be set with one goal in mind: to deliver on our price stability mandate.” This may indeed turn out to be overkill. But central banks have little option: they have to do “whatever it takes” to curb inflation expectations.No one knows how much tightening that might need. No one knows either how far the debt overhang will help, by acting as a powerful transmission belt, or harm, by causing a financial meltdown. What is known is that the central banks’ ability to support the markets and economy are for a while gone. In such a time the perceived sobriety of borrowers matters once again. This is true for households, businesses and, not least, governments. Even previously credible G7 governments, such as the UK’s, are learning this truth. The financial tide is going out: only now do we notice who has been swimming [email protected] Martin Wolf with myFT and on Twitter More