Aurelia Butler

Stocks and bonds came under pressure on Wednesday as investors parsed disappointing earnings from US retailer Target, worse than expected UK inflation data, and minutes from the Federal Reserve’s most recent meeting in which the central bank signalled that restrictive rates may be needed “for some time”.Wall Street’s S&P 500 share index ended the day down 0.7 per cent, while the technology-heavy Nasdaq Composite gauge fell 1.3 per cent.Target’s shares fell 2.7 per cent on Wednesday after the US retailer missed earnings expectations for the three months to July 30 and its chief executive spoke of a “very challenging environment”. The figures were posted just a day after earnings reports from retail bellwether Walmart and do-it-yourself chain Home Depot indicated some resilience in consumer spending despite inflationary pressures affecting customers. Target’s shares had fallen by as much as 5 per cent earlier in the day.Those market moves came as investors assessed another burst of economic data, starting with higher-than-feared inflation figures for the UK. The country’s consumer price index registered a 10.1 per cent year-on-year increase for July, greater than June’s figure of 9.4 per cent and above economists’ consensus forecast of a 9.8 per cent rise.The UK figures sparked a rout in the country’s short-dated debt, which is sensitive to changes in interest rate expectations, as investors raised their estimates of how high the Bank of England would lift borrowing costs to curb rapid price growth. The two-year gilt yield surged as much as 0.3 percentage points to 2.45 per cent, its highest level since the global financial crisis in 2008. The 10-year gilt yield added as much as 0.19 percentage points to 2.32 per cent. Low summer trading volumes exacerbated the moves in gilts, said Lyn Graham-Taylor, rates strategist at Rabobank. “Gilts have sold off more than I’d expected given the news. The size of that move has dragged Bunds and Treasuries with it.”That selling ricocheted across other countries’ debt markets and pushed up the two-year Treasury to a two-month high in early trade. The move was not sustained, however, as the two-year dipped after the release of minutes from the Federal Reserve’s latest policy meeting in July at which the US central bank raised interest rates by 0.75 percentage points. The market reaction suggested investors viewed the minutes as dovish despite the fact that they showed that Fed officials had discussed the need to keep interest rates at levels that restrict the US economy “for some time” in a bid to contain the highest inflation in roughly 40 years.The two-year Treasury yield ended the day up 0.02 percentage points at 3.28 per cent. Elsewhere in equity markets, Europe’s regional Stoxx 600 closed down 0.9 per cent, while Germany’s Dax slipped 2 per cent. In Asia, Japan’s Topix index closed up 1.3 per cent, while Hong Kong’s Hang Seng rose 0.5 per cent. More

Federal Reserve officials discussed the need to keep interest rates at levels that restrict the US economy “for some time” in a bid to contain the highest inflation in roughly 40 years, according to an account of their most recent meeting.Minutes from the meeting, at which the US central bank raised its benchmark policy rate by 0.75 percentage points for the second month in a row, signalled policymakers were intent on pressing ahead with tightening monetary policy, but aware of the risks of overdoing it.Given the enormity of the inflation problem and “upside risks” to the outlook for price growth, officials backed raising interest rates to the point where they act as a drag on economic growth.Raising rates to such a level would allow the Fed to increase them even “further, to appropriately restrictive levels, if inflation were to run higher than expected”, the minutes noted.Some officials signalled that once rates had been raised to the point where they were cooling down the economy “sufficiently” it would probably “be appropriate to maintain that level to ensure that inflation was firmly on a path back” to the Fed’s target of 2 per cent.Officials emphasised that the “bulk” of the effect of rate rises had not yet been significantly felt, according to the minutes, with price pressures showing little sign of improvement. That is likely to mean inflation stays “uncomfortably high for some time”, but also that the Fed may change tack in the next phase of its rate-rising cycle.“The story of lags was the story of the minutes,” said Andy Schneider, US economist at BNP Paribas. “The upshot is that they are going to assess more and be more cautious going forward as they do.”After July’s rate rise, the Fed is in the throes of its most aggressive cycle of monetary tightening since 1981. The rate increase was implemented just a day before data showed the US economy contracting for a second consecutive quarter, a common marker of a recession.In just four months, it has raised its benchmark policy rate from near zero to a target range of 2.25 per cent to 2.5 per cent.At this level, the federal funds rate is in line with most officials’ estimates of a “neutral” policy setting for when inflation is running at 2 per cent, meaning that it neither stimulates nor restrains economic activity.Top officials are actively debating whether a third successive 0.75 percentage point rate rise at the next policy meeting in September is needed or if the Fed can start implementing smaller increases at future meetings.The minutes echoed the point raised by Fed chair Jay Powell at the press conference following July’s announcement, when he said that as the central bank continues to tighten monetary policy, “it likely will become appropriate to slow the pace of increases”.Financial markets seized on the comment at the time — even though Powell did not rule out “another unusually large increase” in September — and US stocks and other risky assets rallied sharply.The market rally has gathered steam in recent weeks, easing financial conditions for consumers and companies and counteracting some of the effects of the tightening implemented by the Fed.Following the release of the minutes on Wednesday, Treasury yields dipped and stocks rose as investors interpreted the minutes as dovish. Expectations of where the Fed’s key interest rate would stand at the end of the year dipped slightly from 3.6 per cent to roughly 3.5 per cent.Some members of the Federal Open Market Committee and other Fed presidents have pushed back on the notion that the central bank will rein in its aggressive approach, instead emphasising their commitment to push rates well into restrictive territory. But the emphasis in the minutes on the risks posed by overly aggressive tightening countered that rhetoric.The varied tone of the minutes also suggested a “lack of commitment to restoring price stability”, said Tim Duy, chief US economist at SGH Macro Advisors. “It raises the risk that they will not see the fight for price stability all the way through.”

Still, the minutes suggested Fed officials are increasingly of the view that there might need to be job losses and an economic downturn if the central bank is to stamp out inflation, with a “moderate” increase in unemployment from the current level of 3.5 per cent, which is historically low.In an interview with the Financial Times last week, San Francisco Fed president Mary Daly said the central bank is “not near done yet” in its fight against inflation. She added that it will need to see clear evidence that consumer price growth is slowing substantially before considering any let-up in the rate-rising cycle.According to the latest inflation data, there was no increase in consumer price growth between June and July and a slower annual rate of 8.5 per cent. That followed a surprisingly strong jobs report the previous week, which showed that the US economy added 528,000 positions in July.Daly said she is inclined to support a half-point rate rise next month but is “open-minded” about another 0.75 percentage point adjustment. More

With UK inflation hitting double digits, the most in over 40 years and the highest in the G7 group of large economies, the Bank of England is in the line of fire from politicians and economists. The UK’s central bank was granted independence 25 years ago with the brief of maintaining inflation at 2 per cent. But now there are questions around whether the officials in Threadneedle Street have lost control.The team surrounding Conservative leadership hopeful Liz Truss is pointing the finger of blame at Andrew Bailey, the BoE governor, and his monetary policy colleagues. In the words of Kwasi Kwarteng, favourite to be the next chancellor: “If your target for inflation is 2 per cent and you’re predicting 13.3 per cent, something’s gone wrong.” Suella Braverman, attorney-general and a key Truss ally, went further, telling Sky News earlier this month that in a coming review of the BoE, Truss would look at whether it was “fit for purpose in terms of its entire exclusionary independence over interest rates”.The main case against the BoE is that it was asleep at the wheel as the economy emerged from the coronavirus crisis. This allowed spending to rise too quickly as officials failed to spot impediments to growth left by the pandemic. The result was excess demand and inflation. Every quarter since May 2021, the BoE has been surprised by the strength and persistence of high inflation, this month raising its estimate of peak inflation from 2.5 per cent to 13.3 per cent. Double-digit inflation is expected to last for a year, well in excess of inflation forecasts for other similar economies. Andrew Sentance, an outspoken former member of the BoE’s Monetary Policy Committee, said the central bank had “acclimatised” people to extremely low interest rates. This, he said, was compounded after the pandemic by the BoE being “so slow in noticing some of the supply side and inflation problems that were building up”. Sentance is sometimes dismissed inside the bank as a hawk who has always wanted tighter monetary policy, but his views are shared by other former officials who do not want to publicly criticise the BoE. One former senior official and MPC member was amazed that the committee had continued with its quantitative easing programme and had printed money and bought assets throughout 2021, even though the recovery was much stronger than it had expected. Jagjit Chadha, director of the National Institute of Economic and Social Research, said the BoE ought to have moved quicker. “They seemed reluctant to say [interest rates] needed to be normalised from such an extraordinarily low level,” he said. His point was echoed in the regular meetings of a shadow MPC run by the rightwing think-tank the Institute of Economic Affairs. A majority of its members called for QE to be stopped in April 2021 and for interest rates to rise in July last year, half a year before the BoE acted. But Bailey dismisses these criticisms. There is growing irritation inside the BoE that it is taking the blame for what it sees as largely a global problem beyond its control.“I don’t know anybody who reasonably can say they could have forecast a Ukrainian war a year ago,” the governor complained in the press conference after the BoE told the public earlier this month that a recession was necessary to bring down inflation.The war, along with impediments to global supply chains after Covid-19, were all beyond the BoE’s control, he added, and blamed these factors for both the UK’s high inflation and its difficult economic outlook. Bailey likes to note that the BoE was among the first of the leading central banks to tighten monetary policy when it first raised interest rates in December last year. MPC members are keen also to highlight what they see as the benefits of an independent central bank controlling inflation. Jonathan Haskel, an external member of the interest rate setting committee, took to Twitter with a chart showing that despite the current problems, average UK inflation over the past 25 years had almost exactly hit the BoE’s 2 per cent target on average — and this performance was better than any previous quarter century stretching back for 800 years. There were periods when inflation was lower and also when it was close to 2 per cent, notwithstanding the difficulties of measurement, but there was no period when it was as close to the target with as much stability as the period since 1997, when the bank was granted independence. Haskel’s chart was a modified version of one used by professor Ricardo Reis of the London School of Economics to show the benefits of central bank independence and inflation targeting. But Haskel did not mention that Reis’s latest academic paper, which includes the chart, sets out the errors he thinks all central banks have made since the start of the pandemic, exacerbating inflation. For now, according to Reis, the challenge is to bring down inflation. As it is very high, reducing it will involve nasty medicine. This includes “accepting lower levels of real activity”, “acting vigorously and sharply in the near future with raising interest rates” and “restating as loudly and convincingly as possible the primacy of price stability as the goal that guides policy”.Once inflation is much too high, it is costly to bring down, regardless of who was to blame. More

Good eveningUK inflation has hit double digits for the first time in more than 40 years, raising the possibility of interest rates rising further and faster, and coming hot on the heels of labour market data showing real levels of wages falling rapidly.The leap in July’s CPI to 10.1 per cent, the highest in the G7, was up from 9.4 per cent in June and fuelled by a 12.7 per cent increase in food prices, the biggest increase in more than 20 years. Excluding volatile food and energy, the core rate was also more than expected, hitting 6.2 per cent.Short-term UK government bonds sold off sharply on the news as traders lifted their expectations for Bank of England rate rises to more than two percentage points by May next year. Economics editor Chris Giles argues the BoE needs to acknowledge the mistakes in its approach to containing inflation and that Boris Johnson’s replacement as prime minister should look afresh at its mandate. (You can read what the two Tory contenders think about the economy and other key issues in our explainer). As Giles points out, BoE policymakers are keen to highlight what they see as the benefits of an independent central bank controlling inflation. One even deployed data going back some 800 years (!) to make his point. Today’s news follows yesterday’s report that real levels of UK wages fell at the fastest rate for at least 20 years in the second quarter, highlighting the difficulties facing households even before energy bills rise sharply in October. Separate ONS analysis showed poorer households were facing greater rates of inflation because they spend a bigger proportion of their budgets on energy and food, the two fastest rising components. Economists said the hit to households would feed through to lower economic growth. Jamie O’Halloran at Pro Bono Economics, an organisation that advises the charitable sector, said the rapid rise in prices was “driving a punishing cost of living crisis, with the threat of recession looming ever nearer”.Compare trends across the globe with our global inflation tracker.Choose up to five countries for comparisonLatest newsGermany’s Uniper, Europe’s biggest importer of Russian gas, on ‘brink of insolvency’Egypt’s central bank governor resignsUS retail sales hold steady in July as spending on petrol drops For up-to-the-minute news updates, visit our live blogNeed to know: the economyA further rise in natural gas prices in Europe and the US threatens to tip some of the world’s biggest economies into recession. The latest European price is equivalent in energy terms to $400 a barrel of oil, as Russia restricts supplies and traders race to secure supplies ahead of the winter.The US Federal Reserve publishes the minutes of its July 26-27 policy meeting at 2pm ET/ 7pm London time today. Check back on FT.com for the details.Latest for the UK and EuropeExperts are calling for a revamp of the 25-year old Northern Ireland peace agreement. The region has been without a fully functioning executive for six months because of a row about post-Brexit trade arrangements. Michelle O’Neill, the leader of Sinn Féin, the party that won the most votes in May’s elections, told the FT she would not allow the agreement to unravel.Fears of a German recession have deepened, according to the closely watched ZEW survey, which hit its lowest level since 2011.A 46 per cent rise in the value of Turkish exports to Russia has raised fears the countries are working together to get round international sanctions. The first grain-carrying ship to leave Ukraine since the Russian invasion appears to have docked in Syria, a strong ally of Moscow. Brussels is trying to boost output of homegrown raw materials needed for green energy by lowering regulatory barriers to mining and production of materials such as lithium, cobalt and graphite, used in wind farms, solar panels and electric vehicles. Denmark’s Vestas, the world’s largest maker of wind turbines, and Ørsted, the world’s biggest offshore wind farm developer, said governments needed to simplify their planning processes. Global latestKenyan presidential contender Raila Odinga is challenging the narrow victory of William Ruto in the election to succeed Uhuru Kenyatta. The uncertainty has sparked fears of a return of the deadly post-election violence of 2007 and 2017.Former Salomon Brothers economist Henry Kaufman — Wall Street’s original Dr Doom — says the US Federal Reserve needs to “toughen up” its fight against inflation. “If you want to change someone’s action, you can’t slap them on the hand, you have to hit them in the face,” he argues.Markets editor Katie Martin discusses the impact on investors as central banks move from quantitative easing to quantitative tightening in their struggle to contain inflation in the new Behind the Money podcast.Are we heading towards a global recession? Our economics editor Chris Giles and US economics editor Colby Smith are in discussion in an Instagram live on August 18 at 4pm BST/11am ET. Need to know: businessMultinational companies are drawing up contingency plans in case tensions around Taiwan explode into armed conflict. “This little island that was always sort of simmering . . . all of a sudden is perceived in many headquarters like it’s going to be the next Ukraine,” said the head of the EU Chamber of Commerce in China. Norway’s oil fund, the world’s largest sovereign wealth fund and owner of the equivalent of 1.5 per cent of every listed company in the world, has swung to a big loss, weighed down by a sell-off across all sectors except energy.Toyota and Apple supplier Foxconn are among companies suffering electricity problems due to hydropower shortages in south-west China caused by droughts and heatwaves. The Lex column says the problems could push China back towards coal and an increase in carbon emissions.Tencent, China’s most valuable company, reported its first ever fall in quarterly profit. The tech business is also being affected by changing consumer behaviour: “The international games market is experiencing a post-pandemic digestion period as players resume offline activities,” it said.Walmart, the world’s biggest retailer, and DIY chain Home Depot both reported better than expected results, lessening fears of a looming US recession. Walmart shrugged off recent profit warnings while Home Depot reported its highest quarterly sales and earnings on record. Rival Target, however, reported a larger than forecast drop in profits after offering discounts to shift stock.The US semiconductor industry is facing a sudden downturn after the boom during the pandemic, forcing some of the biggest chipmakers to drastically slash capital spending, just as Washington passes a new law to subsidise an increase in domestic capacity.UK hospitality businesses have lost nearly 200,000 overseas workers since the end of 2019 thanks to Brexit and the pandemic, according to an industry survey. A London restaurateur said his wage bill had increased almost 20 per cent in the past year in attempts to attract staff. “The growth in hospitality in the last 30 years has been fuelled almost entirely by a non-British workforce,” he said.The World of WorkApple chief Tim Cook has told his staff to return to the office three days a week from September to preserve the “in-person collaboration that is so essential to our culture”.August is the traditional time for making yourself scarce at the office. So why are so many still working this month, asks Pilita Clark. Is the phenomenon caused by the rise of hybrid working as bosses clock on while also being at the coast with their families?Economists are starting to use real-world data to study everyday sexual harassment in the workplace, writes Sarah O’Connor, with results showing that male perpetrators tend to suffer fewer career consequences than women.O’Connor also detects an end to the “anti-work” trend that sprang up during the pandemic as inflation, falling real wages and chaotic financial markets push many back into the labour force.Get the latest worldwide picture with our vaccine trackerSome good news…New technology involving miniature human organs built in a lab means animal testing could finally be on the way out. Our Big Read has the details.© FT montage: Ian Bott/Dreamstime More

Russia’s war in Ukraine looks set to trigger a recession in eastern Europe later this year, as energy price increases, disruptions in supply chains, low consumer confidence and austerity measures weigh on output. The region’s largest economy, Poland, surprised analysts by contracting in the second quarter, falling by 2.3 per cent, according to preliminary data from its statistics office. “We see it as a first step into recession,” said Katarzyna Rzentarzewska, chief analyst for central and eastern Europe at Erste Group. “The economic growth in Poland is a massive surprise to the downside . . . [it] wiped out expansion from the beginning of the year.” The economy grew 5.3 per cent between the second quarter of 2021 and the same three months of 2022 — also a smaller rise than anticipated. Consumer confidence in Poland is at its lowest level since the first weeks of the coronavirus pandemic, while inflation is at a 25-year high of 15.6 per cent, driven by soaring food and energy prices. That has prompted the central bank to raise its benchmark interest rate for six consecutive months, to 6.5 per cent from near zero in the autumn. While Poles are struggling with the higher cost of living, they are also facing problems with their housing costs. Last month, the government introduced a moratorium on mortgage payments to help ease the pain. Poland’s economy was likely to contract year on year by late 2022 or early 2023, according to Marcin Kujawski, an economist at the Polish subsidiary of BNP Paribas. Inflation and slowing industrial activity put “policymakers in a difficult spot” but the Polish central bank could still raise the benchmark interest rate by another 50 basis points this year, Kujawski said.Manufacturers in the Czech Republic are also reporting a downturn, according to surveys in July, signs of trouble even as domestic demand helped Czech growth stay positive in the second quarter.Other economies in the region, such as Hungary and Romania, benefited from the economic momentum that built up before Russia’s full-scale invasion of Ukraine. Analysts warned, however, that there was little doubt that the realities of an economic downturn would soon set in. “The region’s exposure to the German economy, which struggles with its own problems, will dent growth,” said David Nemeth, a Budapest-based economist with banking and insurance group KBC. “Inflation and rising interest rates at the same time will eat into domestic demand. A marked slowdown is definitely coming, and recession is likely as well.”Hungary’s annual growth slowed from 8 per cent in the first quarter to 6.5 per cent, while quarterly growth halved to 1 per cent in the three months to June, the statistics office said.That was before prime minister Viktor Orbán’s government, facing a gaping fiscal shortfall, soaring inflation and financial market pressures, hit the brakes in July, removing generous energy price caps for much of the population and eliminating low taxes for hundreds of thousands of entrepreneurs.

Hungary is the only EU country that requested but has not yet been granted an EU post-pandemic recovery subsidy because of rule of law concerns. The lack of EU funds has also made a drag on growth prospects. Budapest and Brussels are expected to come to an agreement and release the funds later this year.The tensions have undermined investor confidence in Hungarian assets, prompting a big sell-off of the country’s stocks and bonds and pushing the forint to record lows — although an eventual deal might offer Hungary a degree of relief, say analysts. More

After weeks of scorching heat, it was possible to take a stroll on the parched bed of the Loire river. Low water levels in the Danube have forced countries in eastern Europe to start dredging to keep barges moving along the critical waterway. The Rhine, at a key choke point, has fallen below levels that make it uneconomical for many vessels to operate. In terms of the looming challenges, this may simply be the warm up.The Intergovernmental Panel on Climate Change is clear that extreme weather events, like drought, flooding or powerful storms, will become more common and more severe as the climate changes. The implications for the production, manufacture and distribution of food and goods around the world are almost bafflingly wide-ranging and complex.Companies’ first concern might be which of their plants, or their suppliers’, are exposed to the rising risks. Governments are focused on the threats to food supply. But this year’s drought highlights the danger that the waterborne infrastructure of global trade itself will dry out or shut down as climate change intensifies. Examples abound: most of Argentina’s crop exports pass along the Parana river, where water levels have dwindled over several years, disrupting the handling of soyabeans, of which the country is the world’s third largest exporter. Flooding in Malaysia last year damaged the Port Klang, upending supplies of Taiwan-made advanced semiconductors, many of which are packaged there before being shipped globally. Trade on the Rhine, last year also threatened by too much water, is suffering from the second serious drought in five years. In 2018, cargo stopped, knocking 0.4 percentage points off Germany’s fourth-quarter economic growth.Despite this, says Mark van Koningsveld, professor of ports and waterways at Delft University of Technology, “There has been a lot more attention on the impact of shipping on the climate than on the impact of the climate on shipping.” About 80 per cent of global trade is carried at some point by ships, with seaborne trade up nearly threefold in the 30 years to 2020. Changes, climate aside, have made the system more susceptible to disruption. Vessels have become progressively larger, and more difficult and costly to rescue when things go wrong. There is also no easy alternative when drought strikes. One inland shipping vessel is the equivalent of about 100 to 150 trucks, so road or rail simply can’t take up the strain. The typical response is partial loading of vessels, or running more journeys with smaller ships.Not only does this mean a vicious emissions cycle, especially as low water levels mean more resistance and more fuel — it also has effects in cost and congestion terms around the waterways and port system. Plus, it doesn’t always work well: despite best efforts, total cargo volumes dropped about 60 per cent at the peak of the 2018 drought, according to van Koningveld.The trouble is that “the risk from climate is so distributed across all aspects of the system, it’s hard for specific entities to have the incentive to try to address it,” says Austin Becker, at Rhode Island university, who studies the impact of climate change on the world’s 3,800 coastal ports. Most immediately, a third are in locations prone to tropical storms, where small changes in average storm intensity can translate into large increases in port downtime.Individual adaptation, such as German chemicals group BASF’s work to develop barges that can handle lower water levels, is likely to hit limits of technical or cost feasibility, say experts, given the scale of the problem. More generally, these weather events tend to be treated as discrete emergencies, rather than as part of a worsening systemic problem. That creates what the UN’s office for disaster risk reduction calls a cycle of disaster-response-recovery-repeat. The same may be true in the corporate world, already under pressure to insulate supply chains from pandemic-style disruption and overhaul them in the face of rising geopolitical risk. But calls for simpler supply chains could concentrate climate risk. Resilience may come at the expense of efficiency through dual-sourcing, geographic diversity and higher inventory, and require investment in disaster-proofed assets. That beats “delay and pay”, says Patrick Verkooijen, head of the Global Center on Adaptation, who argues that spending on climate resilience stacks up financially at the national and corporate level.For governments and companies, climate is another supply chain risk that must now be factored [email protected] More

Egypt’s central bank governor has resigned as the Arab state struggles with a foreign currency shortage and the economic repercussions of Russia’s invasion of Ukraine, according to state-run media. President Abdel Fattah al-Sisi had accepted Tarek Amer’s resignation and appointed him as a presidential adviser, Egyptian state media reported. There was no announcement on who would replace him, with the bank due to hold a monetary policy committee meeting on Thursday. Amer had held the post since 2015 and was appointed for a second term four years later. But he had come under increasing pressure after foreign investors withdrew $20bn from local debt markets and global food and energy prices soared after Russia invaded Ukraine. In March, Egypt turned to the IMF for additional financial support and those negotiations are continuing. It is already one of the fund’s biggest borrowers, securing a $12bn loan in 2016 and about $8bn in loans during the coronavirus pandemic.The government was credited for making tough fiscal reforms to secure the IMF loan in 2016, including allowing the Egyptian pound to devalue, with the currency losing half its value. But Sisi’s regime has been criticised for expanding the role of the military across all spheres of the economy, putting off foreign investors and crowding out the private sector.Economists have also expressed concern about its dependence on foreign investor inflows to help finance its current account, and the central bank’s determination to keep the pound stable to attract portfolio investors.“Amer has maintained a stable currency to make sure foreign investors don’t make any losses, which has created a massive moral hazard trade where investors can just go in and know they aren’t going to make any FX losses,” said a banker. “And when things get tough they just withdraw their money. It happened in 2018 and in 2020 during coronavirus and again this year.”Greater exchange rate flexibility is believed to be one of the IMF conditions for a new loan package. The banker added that the central bank had also imposed new regulations that meant importers have had to use letters of credit. But banks have lacked the capacity to process all the letters of credit, causing a backlog that has created a shortage of some imported raw materials and luxury goods, the banker said. Jason Tuvey, an economist at Capital Economics, said that Amer’s resignation “points to a growing tension within policymaking circles on the best way to address the country’s external imbalances”.

“The fact that talks with the IMF have dragged is probably a sign that some officials are reluctant to follow through on the fund’s demands and would prefer to rely on support from the oil-flush Gulf economies,” Tuvey said. Gulf states, including Saudi Arabia and the United Arab Emirates, have pledged billions of dollars of investment and financial support to their traditional ally.Farouk Soussa, economist at Goldman Sachs, said that overall Egypt, the Arab world’s most populous nation and the planet’s biggest importer of wheat, had weathered the global downturn “much better than many other countries”.He added that it had benefited from high gas prices as an exporter, and that tourism, another important source of foreign currency earnings, had held up well. “But where Egypt has fallen down is on the financial side. It’s a victim of financial contagion, it’s a victim of a loss of confidence by the investor community and outflows from the financial system,” Soussa said. “What the foreign currency shortage has resulted in is the inability of the economy to finance imports and investment and that’s a real problem for them.”In a note, Amer said he resigned “to leave room for new blood to take responsibility and push forward Egypt’s successful development process under the leadership of the president”. according to state-run Al-Ahram media group. More