Aurelia Butler

The effort would raise the budget – originally proposed by the previous government of ex-President Ivan Duque – to 401.4 trillion pesos ($91.5 billion), the highest in Colombia’s history.”We could increase the budget by some 10 trillion pesos, with a basis in bigger tax income and some efforts in management of public assets and multilateral financing,” Ocampo said in a presentation to congressional economic committees.Ocampo said the increase does not take into account resources which would be raised by a tax reform put forward by the government of President Gustavo Petro. The tax reform is aimed at raising some 50 trillion additional pesos per year in tax revenue by 2026.”The possibility of increasing some spending in the budget will depend on the tax reform. That will be the focus of a bill to add to the budget which we will present next year,” he said.Ocampo revised economic growth projections for next year down to 2.2%, from a previous estimate of 3.2%, and well below the 6.5% expansion expected this year.($1 = 4,386.13 Colombian pesos) More

German inflation accelerated to a 40-year high of 8.8 per cent in the year to August, bolstering calls for the European Central Bank to accelerate the pace of interest rate rises when its policymakers meet next week.Consumer prices in Europe’s largest economy were mostly driven by the soaring cost of energy and food, lifting inflation 0.4 percentage points from July despite recent government measures to cushion the blow for households. The figures supported calls by ECB governing council members for the bank to be more aggressive in its policy response to the surge in inflation, which has hit its highest level since the euro was created 23 years ago and is expected to have accelerated further in August.Some, such as Austrian central bank boss Robert Holzmann, have publicly called for the ECB to discuss stepping up the pace of rate rises from an initial half percentage point rise in July to a three-quarter point increase at next week’s meeting.The fallout from Russia’s invasion of Ukraine has sent wholesale gas and electricity prices surging to record levels in Europe in recent weeks and pushed up the cost of fertiliser and other agricultural commodities such as wheat.In August, German energy prices rose 35.6 per cent and food prices 16.6 per cent. Core inflation, excluding food and energy, rose to 3.1 per cent, up from 2.8 per cent in July.Some ECB rate-setters worry the inflationary shock caused by the disruption of the invasion of Ukraine has been accentuated by the demand shock following the reopening of European economies as coronavirus restrictions were ended earlier this year.“The economy has held up well and some of the factors that helped in the second quarter are likely to carry over into the third quarter,” said Klaas Knot, the Dutch central bank governor, speaking at an event in Copenhagen hosted by Danske Bank on Tuesday.“The broadening and deepening of our inflation problem generates the need to act forcefully,” said Knot, adding that he expected the ECB to start shrinking its balance sheet by the end of this year, with the issue likely to be on the agenda in October or December.German inflation continued to rise despite government action, including lower duty on fuel and energy bills and a subsidised €9 monthly train ticket. Many of the measures will expire in September, making it likely that inflation will jump even higher. Joachim Nagel, head of Germany’s central bank, warned recently that inflation in the country was this year likely to rise at double-digit levels for the first time since 1951 and predicted prices would rise at least 6 per cent next year.Recent business surveys indicate supply bottlenecks have been easing for companies for several months, and many are reporting rising inventories of unsold products because of falling orders. But Carsten Brzeski, head of macro research at ING, said this did not mean inflation would start falling. “Even if pricing power in both industry and services seems to have peaked, we still expect the pass-through from higher costs to last for a few more months,” he said.The German inflation figures — combined with a jump in Belgian inflation to a 46-year-high of 9.9 per cent in August — reinforced expectations that overall eurozone price growth is likely to hit a record of at least 9 per cent when the data is released on Wednesday.However, Spain’s statistics agency said inflation there fell slightly to 10.3 per cent in August despite the price of electricity, food, eating out and package holidays rising at a “notable” pace. Spanish core inflation — excluding non-processed food and energy prices — rose 6.4 per cent in the year to August, the fastest rate since January 1993, it said. Are we heading towards a global recession? Our economics editor Chris Giles and US economics editor Colby Smith discussed this and how different countries are likely to react in our latest IG Live. Watch it here. More

Big investors are betting on a fresh surge in UK borrowing costs because of mounting concerns the energy crisis will inflame inflation and trigger further Bank of England rate rises. The darkening outlook for the £2tn gilt market comes as surging energy prices exacerbate Britain’s cost of living crisis and heighten fears of recession. Goldman Sachs on Monday said UK inflation could exceed 20 per cent by the start of 2023 if gas costs remain highly elevated.The wagers against UK government debt have already sent short-term borrowing costs in the gilt market soaring. The two-year gilt yield, which reflects market expectations for BoE policy, touched 3 per cent on Tuesday for the first time in 14 years. It has jumped 1.2 percentage points this month in the biggest rise since at least 1992, according to Bloomberg data. Bond yields rise when prices fall. Sterling has also taken a hit, falling on Tuesday to as low as $1.1623, the weakest level in more than two years. “The UK is in a particularly fragile position,” said one hedge fund manager shorting gilts. The country is “asking foreigners to basically fund” plans for unfunded tax cuts and spending increases “at super low interest rates”, the person added. Odey Asset Management, BlueBay Asset Management and Transtrend are among the hedge funds betting that yields on gilts will continue rising as investors shun UK government debt. Foreign investors ditched £16.6bn worth of gilts in July, the biggest sell-off in the market in four years, according to BoE data released on Tuesday.“This is only the start,” said Crispin Odey, the founder of the eponymous group. “You’ve got to remember that the [market] consensus is that we’re going to be at less than 3 per cent inflation by the last quarter of next year,” he said, adding that such a forecast was “rubbish”.Other global bond markets, including US Treasuries and German Bunds, have also sold off sharply in recent weeks as central banks battle inflation.With inflation running at a 40-year high, the next UK prime minister — due to be announced next week — will inherit an economy under intense pressure, with economists now expecting the UK to slide into recession as the cost of living crisis bites. Goldman this week forecast that the UK could not escape recession even if Liz Truss, frontrunner to succeed Boris Johnson, reverses national insurance contribution increases and spends a further £30bn on supporting households. The bank now expects UK economic output to contract by 1 per cent from the final three months of this year and the second quarter of 2022. Goldman economist Ibrahim Quadri forecast that inflation will peak at 14.8 per cent early next year from 10.1 per cent in July 2022. But he warned that if gas prices remain at the levels hit last week, inflation could reach 22.4 per cent. UK gas futures hit a high of almost £6.50 a therm last week, but have since eased to about £4.70. They started the year at about £1.70. Markets are now betting the BoE will raise rates to 4.2 per cent next May, up from 1.75 per cent at present, and 0.1 per cent in November 2021. Central bank rate rises tend to lead debt investors to sell off bonds maturing in the next few years. Mark Dowding, chief investment officer at BlueBay who is shorting gilts, said inflation could peak at 15 per cent. But he compared the BoE to “a rabbit in the headlights” wary of aggressive rate rises for fear of “cratering the UK economy”.The central bank warned this month that inflation would hit 13 per cent by the end of the year as it forecast the economy faced a 15-month-long recession.Funds have been emboldened in their bets because, after buying gilts for more than a decade as part of its quantitative easing programme, the central bank has now switched to selling government debt — a further downward risk to prices. The central bank bought 57 per cent of the net £1.5tn of gilts sold between March 2009 and June 2022, according to research by Bank of America. Kamal Sharma, analyst at BofA, noted this month that a combination of a large current account deficit and a reliance on overseas investors buying gilts was “significant negative” for the market.

Computer-driven hedge funds that latch on to trends in global futures markets have also seized on the turbulence in the gilt market.Rotterdam-based Transtrend, which manages $6.1bn in assets, is shorting gilts and other UK fixed income instruments. Many of these bets are that UK bonds will underperform debt sold by other governments. While the hedge funds are pessimistic on the overall outlook for the gilt market, some say that longer-dated bonds are particularly vulnerable because their level of yield assumes a fairly rapid return to lower inflation.Dowding at BlueBay, which manages $106bn in assets, said he was “perplexed” by the low yields on 10-year bonds, since they imply that inflation will be a relatively shortlived phenomenon. As a result, BlueBay is betting that longer-term yields will rise relative to shorter-term ones.“The yield curve needs to steepen quite dramatically,” he said. Yields on the 10-year gilt “are not compensating me much”.That view was echoed by Odey, who has been betting against very long-dated gilts such as the 30-year, where he says the market consensus is “most entrenched”. The yield on 30-year bonds jumped from 2.4 per cent to almost 3 per cent this month alone. Are we heading towards a global recession? Our economics editor Chris Giles and US economics editor Colby Smith discussed this and how different countries are likely to react in our latest IG Live. Watch it here. More

Central banks are determined to bring inflation back under control. This was the message from Jay Powell, chair of the Federal Reserve, and Isabel Schnabel, an influential member of the board of the European Central Bank at the Jackson Hole symposium last week. So, why were the central banks so insistent on this message? Are they right? Above all, what might it imply for future policy and the economy?“Reducing inflation is likely to require a sustained period of below-trend growth . . . While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” These were the words of Powell. Again, Schnabel argued that central banks must act decisively, since expectations risk being de-anchored, inflation has been persistently too high, and the costs of bringing it under control will rise the longer action is delayed. There are risks of doing too much and of doing too little. Yet “determination” to act is a better choice than “caution”.

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It is not difficult to understand why central bankers say what they are saying. They have a clear mandate to control inflation on which they have failed to deliver. Not just headline inflation, but core inflation (excluding energy and food) has been above target for a prolonged period. Of course, this unhappy outcome has much to do with a series of unexpected supply shocks, in the context of the post-pandemic shift towards consumption of goods, the constraints on energy supply and now the war in Ukraine. But the scissors have two blades: demand, as well as supply. Central banks, notably the Fed, persisted with the pandemic’s ultra-loose policies for too long, though US fiscal policy was also too expansionary.

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In an important analysis, Ricardo Reis of the London School of Economics points to four reasons why this happened. First, central banks repeatedly interpreted supply shocks as temporary interruptions, not quasi-permanent hits to potential output. Second, they misread short-term expectations, focusing too much on the mean rather than the shift towards higher expectations at the upper edges of the distribution. Third, they tended to view credibility as an infinitely deep well, instead of a shallow one that needs to be refilled promptly. Thus, they failed to note that the distributions of long-term inflation expectations were also shifting against them. Finally, their belief in a low neutral rate of interest led them to worry too much about deflation and too little about the return of inflation. A central point is that these were intellectual mistakes. So, in my view, has been the lack of attention paid to monetary data.In essence, central banks are playing catch-up because they fear that they risk losing credibility and, if they did, the costs of regaining it would be far higher than of acting now. This fear is reinforced by the risks to wage inflation from the combination of high price inflation with strong labour markets. The fact that higher energy prices raise the prices of essentially everything makes this risk bigger. This could then start a second-round wage-price spiral.They are right to take this judgment. A shift into a 1970s-style era of high and unstable inflation would be a calamity. Yet there is indeed a risk that the slowdown in economies caused by a combination of falling real incomes, and tightening financial conditions will cause an unnecessarily deep slowdown. One part of the problem is that calibrating monetary tightening is particularly difficult today, because it involves raising short-term rates and shrinking balance sheets at the same time. A bigger one is that policymakers have not confronted anything like this for four decades.In the US, there is a particularly optimistic view of “immaculate disinflation”, promulgated by the Federal Reserve. This debate focuses on whether it is possible to reduce labour market pressure by lowering vacancies without raising unemployment. An important paper by Olivier Blanchard, Alex Domash and Lawrence Summers argues that this would be unprecedented. The Fed has responded by saying that everything now is unprecedented, so why not this, too? In reply, the authors of the original paper insist that there is no good reason to believe things are that unprecedented. Think about it: how can one expect a general monetary tightening only to hit firms with vacancies? It is sure to hit firms that would then have to lay off workers, as well.

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If the planned tightening of monetary policy is likely to generate a recession in the US, what might happen in Europe? The answer is that the recessions there are likely to be deep, given that the energy price shock is so large. Here too, the balance between the impact on supply and demand is unclear. If the impact of higher energy prices on the former is larger than on the latter, demand will need to be curbed, too.Monetary policy will play a part in the European story. But the core of its current crisis is the energy shock. Central banks cannot do anything directly about such real economic disturbances. They must stick to their mandate of price stability. But a huge effort must be made to shield the most vulnerable from the crisis. Moreover, those most vulnerable will include not just people, but countries. A high level of fiscal co-operation will be needed in the eurozone. A political understanding of the need for solidarity within countries and among them is a precondition.A storm has come from Europe’s east. It must be weathered. How best to do so will be the subject of future [email protected] Martin Wolf with myFT and on TwitterAre we heading towards a global recession? Our economics editor Chris Giles and US economics editor Colby Smith discussed this and how different countries are likely to react in our latest IG Live. Watch it here. More

Local councils and voluntary groups across the UK are organising “warmth banks” to provide shelter to people unable to pay soaring energy bills this winter, as concerns mount over the impact of the cost of living crisis.Charity groups and local government networks contacted by the Financial Times reported that they were actively planning the so-called heat-hubs after last week’s announcement by the energy regulator Ofgem that average household bills will top £3,500 from October.The cap far exceeded earlier forecasts, with industry consultants now predicting bills could exceed £6,600 by spring, dwarfing the government’s current offer of around £1,200 in support for the poorest families. Allison Riddell, the clerk of the parish council in Brampton, a small market town in North Cumbria, said she was aware of elderly residents already eating sandwiches and other cold food because they were too worried about the cost of using their stoves.“It breaks my heart,” she said, explaining that the council plans to use the local Moot Hall as a sanctuary in the winter. “Our building isn’t huge, but could hold 30-40 people comfortably. We will provide books and games et cetera, and are looking into whether we can provide warm drinks,” she added.Other local government groups, from tiny parish councils to larger urban authorities, including Bristol, Gateshead, Cheltenham and Sheffield, said they were making plans to use public buildings, including libraries and leisure centres, to provide warmth.Local government budgets have faced real-terms cuts of 30 per cent in the past decade and with the value of grants being eroded by inflation, now running above 10 per cent, many community groups are reactivating old Covid-19 volunteer networks to operate the schemes.Alison Dunn, co-ordinator of Gateshead council’s warm spaces network, said the scheme involving more than 50 local groups had been devised after support groups like the Citizens Advice Bureau had realised that traditional tips on energy saving were not sufficient in the face of the current crisis.“There’s no [government] money to run these hubs, so we’ve asked for expressions of interest so that we can use community activism to support the programme which offers a warm space, a hot drink to anyone, and with no questions asked,” she said.Mazher Iqbal, a Sheffield city councillor, said his council was scouring budgets, including NHS winter emergency funds, to provide additional support for their own warm spaces network.Bristol City Council said it was also working with community organisations to open a network of “welcoming spaces” for residents, offering warmth, company and practical services like phone recharging and free WiFi. Cheltenham Borough Council said it was discussing similar plans.

Sue Collins, bottom left, chair of the Bungay Community Support group © Paul Grover/Telegraph 2022

Horden parish council in County Durham, which has a high percentage of residents on low incomes, said its hub would enable anyone to get a hot drink, engage in hobby activities and board games, and would also provide webinars on health and energy management. Many of the parish council schemes are modelled on the pioneering efforts of Bungay, a small town in Suffolk that last year ran warmth hubs, which proved popular with residents struggling to pay bills. Sue Collins, chair of the Bungay Community Support group, said it was improving its offer this year. “Last year it was mostly older people, but we’re anticipating that there could be families this time as parents look to cope with children at home,” she said.The fact that so much of the provision is coming from the voluntary sector highlights the increased role of charities in the UK’s social safety net, according to campaign groups, which urged the government to offer more support. 

Peter Smith, director of policy at advocacy group National Energy Action, said that government intervention was needed to create a more systemic offering. “Government needs to support local communities to host these warm, safe spaces,” he said. “Among the immediate steps could be VAT and business rate relief for those offering these places.”Adam Lent, chief executive of the think-tank and local government network New Local, said that while councils and communities were stepping up, it was no alternative to a response from central government.“We need to accept that in an increasingly volatile world, local public services and community groups are a crucial source of support and rapid action. Westminster should urgently give them adequate funding to allow this community-powered approach to flourish,” he added.Are you facing difficulties managing your finances as the cost of living rises? Our consumer editor Claer Barrett and finance educator Tiffany ‘The Budgetnista’ Aliche discussed tips on the best ways to save and budget as prices across the globe increase in our latest IG Live. Watch it here. More