Aurelia Butler

JACKSON HOLE, Wyo./SEOUL (Reuters) – Bank of Korea Gov. Rhee Chang-yong said Saturday interest rates would need to continue increasing until inflation is in decline, but the country likely could not call a halt to its tightening cycle before the U.S. Federal Reserve.Dollar appreciation driven by Fed rate increases has added to inflation in many open economies around the world, including Korea, as the local currency falls in value.”We are now independent from government, but we are not independent from the Fed. So if the Fed continues to increase the interest rate it will have a depreciation pressure for our currency,” Rhee said in an interview with Reuters. Although the Bank of Korea began raising interest rates before the Fed, with its first hike coming a year ago, “whether we can end earlier – I don’t think so.”Inflation in Korea is largely the result of outside issues like energy prices, Rhee said, and, “if you ask me, whether I’m going to stop … what happens if the oil price increases again? … It’s very hard for us to know the exact timing, given the importance of the external shock.”Even though he expects domestic inflation to cool in August compared with the 6.3% rate seen in July, it is “too premature” to say it has peaked, especially since, as winter approaches, gas prices could again rise.The Bank of Korea raised interest rates by a quarter point at its last meeting to 2.5%, and said further increases of a quarter point “will be appropriate for some time as long as inflation paths remain as currently presumed.”The stopping point, Rhee said, would hinge on how inflation behaves. At this point, “I cannot say we are ahead of the curve,” Rhee said. “As long as inflation remains high, meaning 4-5% … then we will definitely continue to emphasize the normalization” of interest rates.Inflation in Korea is expected to run at around 5% by the end of 2022, and fall through 2023. Its central bank, like many others, targets 2% inflation.Rhee spoke on the sidelines of a Fed research conference where global central bankers used largely the same language to describe their common battle against rising prices. Though the headline problem is the same — inflation far beyond their established targets — the sources of price pressure and therefore the policy responses differ among countries.For smaller open economies like Korea the situation is particularly complex because of the spillover effects from policies set elsewhere.Even the fallout from Fed Chair Jerome Powell’s speech here on Friday, which sparked a sell-off in U.S. equity markets, would be watched, Rhee said, with an eye on how the won opens during Monday trading. The Fed chair promised U.S. interest rates would move to “restrictive” levels and remain there as long as needed to lower U.S. inflation.The won has dropped about 11% against the dollar this year, and local officials have stepped up surveillance of the currency’s movements.Rhee said so far he did not see the depreciation as driven by speculation or Korea’s economic fundamentals, but as part of the dollar’s rising global strength.”There are a few days we see movement that’s too excessive – but so far I think our exchange rate movement is very much in line with major currencies,” Rhee said. “This depreciation pressure due to the dollar strength actually is a bad factor for our inflation, because our imported prices increase a lot,” he said, but “the current depreciation pressure does not mean any liquidity problems or solvency problems, or credit problem for Korea.”Rhee said he risks from new geopolitical issues, with the Ukraine war sparking higher energy costs and tension between the U.S. and China.”It’s is a huge downside risk for us – geopolitics and the US-China tension is I think a very important factor,” he said. But he also said there was opportunity for Korea as the global economy reorganizes in the aftermath of the pandemic.The chief priority now though is to defeat inflation, a problem shared across the globe even though the causes may differ.“I can really see that the situation and challenges that the U.S. is facing are quite different from the headache and challenges that I am facing, and probably my European colleagues are facing,” Rhee said. But for each “it’s important for us to continue to prioritize inflation.” More

Truss’s leadership campaign is considering the plan as a “nuclear” option, the Telegraph quoted an unnamed source as saying, with other options including a 2.5% cut in VAT, from the current standard rate of 20%.A 5% cut on VAT would save the average household more than 1,300 pounds ($1,527) a year, and would cost taxpayers 3.2 billion pounds a month, according to analysis by the Institute for Fiscal Studies think tank, the Telegraph said.Separately, the Times newspaper reported Truss was also considering an emergency cut to income taxes and VAT. Some of her allies believe that the personal allowance, the rate above which people start to pay income tax, should be lifted, the paper said.The British government has been facing growing calls to provide immediate financial support to households, with energy bills set to jump 80% to an average of 3,549 pounds a year from October.Soaring energy bills, exacerbated by Russia’s invasion of Ukraine, have driven British inflation to 40-year-highs but the government’s response has been hampered by the race to replace Johnson that runs until Sept. 5.The government has said it is preparing options on a cost-of-living support package for the next prime minister to consider.Truss’s campaign is also considering extending a 5-pence cut in fuel duty, the Telegraph said.”Liz will consider options to help people but it would not be right for her to announce her plans before she has even been elected Prime Minister or seen all the facts,” a Truss campaign source said.Truss has said she favours tax cuts to expand the economy. Her leadership contender and former finance minister Rishi Sunak has pledged more direct support to help households struggling with surging energy bills.”Next month – whoever takes over from me – the Government will announce another huge package of financial support,” Johnson, writing in an article for the Mail on Sunday, said. ($1 = 0.8513 pounds) More

A larger “sacrifice” will be needed to tame inflation than in previous bouts of monetary policy tightening, according to European Central Bank officials who warned that price growth risks spinning out of control if forceful action is not taken.Isabel Schnabel, an ECB executive board member, and François Villeroy de Galhau, governor of the Banque de France, said on Saturday that European monetary policy would have to remain tight for an extended period of time.Their remarks at the Jackson Hole gathering of central bankers from around the world in Wyoming, US, echoed those of Federal Reserve chair Jay Powell, who on Friday vowed to “keep at it” to quash inflation. The pace of price growth is running at a level not seen for decades in many advanced economies.“Central banks are likely to face a higher sacrifice ratio compared with the 1980s, even if prices were to respond more strongly to changes in domestic economic conditions, as the globalisation of inflation makes it more difficult for central banks to control price pressures,” Schnabel said. The sacrifice ratio measures how much pain central banks will need to inflict in terms of weaker growth and lower job creation in order to bring inflation back under control.Villeroy said there should be “no doubt” about the bank’s willingness to raise rates beyond the so-called neutral rate, a level that neither aids nor constrains growth. He estimated this rate to be between 1 and 2 per cent. Villeroy said it could reach this level “before the end of the year”, adding: “Our will and our capacity to deliver on our mandate are unconditional.” Eurozone inflation is expected to set a new record of 9 per cent in the year to August when the latest data is released on Wednesday.Schnabel called for “strong determination to bring inflation back to target quickly”. She added that if a central bank “underestimates the persistence of inflation — as most of us have done over the past one and a half years — and if it is slow to adapt its policies as a result, the costs may be substantial”.The ECB ended eight years of negative interest rates last month by raising its deposit rate by a half percentage point to zero, surpassing its earlier guidance. Some members of its 25-person governing council are calling for it to consider going further with a 0.75 percentage point rate rise at its meeting on September 8.Schnabel, a former German economics professor who joined the ECB board at the start of 2020, is one of the central bank’s most influential voices on policy as its head of market operations. She warned that “unprecedented pipeline pressures, tight labour markets and the remaining restrictions on aggregate supply threaten to feed an inflationary process that is becoming harder to control the more hesitantly we act on it”.Inflation expectations are rising among the public and professional forecasters, many of whom expect prices to keep rising by more than the ECB’s 2 per cent target for several years, Schnabel said, adding that the institution’s credibility was at stake.“Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high,” said Schnabel. “In this environment, central banks need to act forcefully.”Villeroy — usually a centrist on the ECB governing council — echoed the hawkish tone. But the French central bank governor signalled that he still thought a 0.5 percentage point rate rise would be enough next month, saying he favoured “another significant step in September”.

The comments come a day after Powell reset expectations about how high interest rates in the US might need to rise and for how long, as the Fed grapples with excessive price pressures driven in part by supply-related factors but also excessive demand.The US central bank chair warned that efforts to cool the economy were likely to require a “sustained period” of low growth, a weaker labour market and “some pain” for households and businesses.Like his counterparts at the ECB, Powell said a failure to successfully tame inflation now would lead to higher costs later on, suggesting the Fed is unlikely to pause its tightening cycle anytime soon.In contrast, speaking from the audience during the Q&A section of the Jackson Hole panel, Haruhiko Kuroda, governor of the Bank of Japan, set out why his country was not aggressively tightening monetary policy. “We have no choice other than continue monetary easing until wages and prices rise in a stable and sustainable manner,” he said. Kuroda projected that Japanese inflation would approach 3 per cent by the end of this year and then decelerate towards 1.5 per cent next year. More