Aurelia Butler

When Przemysław Gacek founded his recruitment business, he would watch huge lines form outside Warsaw’s main office for jobless benefits. Two decades on, unemployment has fallen from 20 per cent to just 3 per cent and Polish workers are queueing up at his office to demand a pay rise. “We see more Poles going to see their bosses, asking for a salary increase and if they don’t get it, they start looking around,” said Gacek, chief executive of Grupa Pracuj, which runs the biggest Polish online platform for classified job ads. Poland is among the most extreme examples of a post-pandemic rise in workers’ bargaining power. In the US, employees have quit in record numbers to take up better offers elsewhere. In the UK, employers are granting cost of living bonuses. In the eurozone, slower-burning negotiations with unions are likely to lead to a delayed pick-up in pay. For monetary policymakers, however, this labour market strength complicates efforts to control inflation, which has soared on the back of a surge in global food and energy prices. They worry that price pressures — now at their highest level in decades — will become entrenched if workers demand pay rises to match rising living costs, prompting employers to raise prices to reflect rising wage bills.In Warsaw, fears of such a wage-price spiral have already become a reality. With companies in all sectors struggling to hire, average wages rose 13.5 per cent in the year to May, almost matching the galloping inflation rate of 15.6 per cent in the year to June — its highest level in a quarter of a century. The central bank has been raising rates rapidly in response, and on Thursday lifted its benchmark reference rate by 50 basis points to 6.5 per cent — up from almost zero in the autumn. The central bank expects inflation to remain in double digits into 2023.Rafal Benecki, economist at ING, flagged “the risk of persistent and self-reinforcing price growth, which may be difficult to stop.”

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Liam Peach, an economist at consultancy Capital Economics, believes countries in central and eastern Europe are acutely exposed to the risk of a wage-price spiral. Even before the pandemic, strong economic growth and a long-running decline in the working-age population had driven unemployment to ultra-low levels. Hungary and the Czech Republic face similar pressures, Peach said, but Poland’s labour market was now “in a league of its own”.With consumer spending remaining strong, companies have leeway to saddle their customers with higher costs. Softylabs, a Polish software company, recently raised salaries by 20 per cent — twice the rate of previous years — and is passing on more than half the cost of its ballooning wage bill to clients. “I see salary expectations moving up really, really fast,” said Rafal Kijonka, Softylabs chief executive. “If we don’t accept a higher salary demand, unfortunately a software developer will just leave for another company.”The twin shocks of Russia’s invasion of Ukraine and monetary tightening look set to wipe out economic growth in the coming quarters. The central bank on Thursday predicted the economy would soon fall into a recession. Yet economists expect the labour market to remain buoyant. “Indicators are not cooling, even with energy prices hitting production and interest rates hitting the housing market,” said Agnieszka Zielińska, director of the Polish HR Forum. Economic uncertainty was also making companies less willing to invest in automation, she added. Morgan Stanley also predicts “minimal impact on the labour market and unemployment,” should Poland’s economy tip into a technical recession.Competition for staff has been fiercest in technology, where demand soared during the pandemic. While Brexit initially helped companies by pushing Poles to leave Britain, the pandemic has enabled IT workers not only to stay home, but also to work directly for companies in countries like Germany and Sweden, which pay more than their eastern European neighbours. Salaries for some IT roles have jumped more than 40 per cent, according to Manuel Segador Arrebola, who heads the Polish operations of the recruitment agency GI Group. Staff shortages could mean that, sometimes to fill a single job, “we would be approaching 800 people.”In blue collar sectors, employers are not only raising wages, he added, but also offering overtime and switching from temporary to permanent contracts. Some are also asking workers to stay beyond retirement age. Since Russia’s full-scale attack in February forced a mass exodus of Ukrainians, Polish employers have sought to hire Ukrainian refugees. Andrzej Kubisiak, deputy director of the Polish Economic Institute, estimates of 1.1mn registered refugees, around 600,000 are of working age and 200,000 have found jobs. Recruitment agencies are working with companies to help Ukrainian women — matching job offers with housing and on-site childcare, as well as training some women to operate forklift trucks. But many prefer to work informally in cleaning, childcare or hospitality, in the hope that they can soon return home, according to Kubisiak. Meanwhile, employers in manufacturing, transport and construction accustomed to hiring Ukrainian men say it is difficult to offer the same jobs to women, because of health and safety rules and the physical demands of their production lines. “Historically, the Poles went west and got people from the east,” said Gacek. “But there is now no supply (of men) from Ukraine, and neither from Belarus and Russia.” More

The writer is chief market strategist for Europe, Middle East and Africa at JPMorgan Asset ManagementA fellow panellist at a recent conference proclaimed: “The low inflation decades were a golden era for investors.” The audience nodded furiously and then became increasingly glum as all panellists agreed this era was behind us.In a similar vein, I often hear the argument that low or negative interest rates, and the other monetary tactics which central banks deployed to combat low inflation, boosted all asset prices. And so higher interest rates should naturally depress the valuation of all risk assets.Both arguments sound compelling. But neither are necessarily right. Or perhaps I should say the ‘low-rates-boosts-returns argument’ isn’t right for all assets.Some asset classes did benefit. Companies that produced decent earnings growth when their peers were languishing were able to command ever higher premiums. The global tech giants are the most obvious example. In the 2010s decade, when the US 10-year Treasury yield fell from nearly 4 per cent to about 2 per cent, the global tech sector produced an average annual return of 17 per cent. This was partly due to strong earnings growth and also to investors’ willingness to pay higher valuation multiples. Low interest rates also made potential pay-offs in the distant future more attractive. However, there were many segments of global asset markets that had a much more dismal time in the era of low inflation. These were the assets struggling with chronically weak demand and dismal pricing power.Take the global energy and materials sector, for example, which suffered a decade of lacklustre or non-existent earnings growth and stock returns. This malaise served as a drag on entire benchmark indices for some regions. Europe is the prime example, where low nominal growth was at least part of the reason why the MSCI Europe index companies had average earnings growth of just 3 per cent and the average return of just 9 per cent in the 2010s. This is roughly half the growth of earnings and returns experienced in the 1990s when inflation was not so desperately low.When one considers a multi-asset portfolio, it’s even more obvious that the low-inflation era was far from golden.Persistently low inflation led to ever declining and, in some cases, even negative short and long-term bond yields. Bonds increasingly failed in the two functions they were supposed to play in a portfolio — to provide a nice steady source of income and to diversify risk exposure by going up in price when stocks are falling. At such low interest rates, they were fulfilling neither function and investors had to suffer lower total returns and more portfolio volatility. In other words, less comfortable days, and potentially more sleepless nights.To demonstrate, let’s take a simple balanced portfolio comprised of 40 per cent UK gilts and 60 per cent FTSE 100 stocks. In the 1990s, a period in which inflation averaged 3.3 per cent, this portfolio gave you an average return of 14.5 per cent per annum in nominal terms and 11.2 per cent in real terms. In the 2010s that was just 7.2 per cent in nominal terms, and 4.9 per cent in real terms.Many reading this will rightly point out that inflation isn’t doing investors much good this year with both stocks and bonds experiencing double-digit declines in most sectors, regions and asset classes. This is where I need to clarify the type of inflation I’m alluding to, because inflation comes in good and bad forms. “Good inflation” is a reflection of healthy demand, enough for companies to have a degree of pricing power and confidence to invest for expansion. Then there is “bad inflation” — a cost shock which serves as a tax on growth.While we are experiencing “bad inflation” now, I believe this cost shock should pass within a year. Moreover, inflation will probably settle at a modestly higher rate of good inflation since the cost shock will serve as a catalyst for more robust demand and healthier nominal growth in the future as it encourages households, governments and businesses to invest in labour and energy-saving technologies.Contrary to popular opinion, the new inflation regime should eventually prove to be a good thing for investors. Stronger nominal demand will mean stronger earnings and sustainably higher interest rates. Multi-asset investors will benefit from stronger returns — but only if they are brave enough to consider reorientating their portfolio towards those sectors of the economy that have languished for much of the last decade and away from those that needed economic stagnation to thrive. More

June was not a great month to be a fund manager.Global stocks fell 8.8 per cent, the second-biggest drop in a decade. Bonds, meanwhile, are on track for the worst year since 1865.The bludgeoning came from several directions — first the rapid ascent of interest rates and then rising fears of a recession in the US. But some investors say another factor was also at play: the world’s most powerful central bank has yanked away its safety net.Since 2008, fund managers in stocks, bonds and everything in between have known that by their side, the US Federal Reserve has been buying debt as part of its programme of economic support that kicked in after the financial crisis. When Covid struck, the Fed souped up this so-called quantitative easing scheme to rescue markets from the brink of disaster, helping to fuel a huge rally in everything from government bonds to crypto tokens.Now, though, soaring inflation has cornered policymakers into aggressively raising interest rates. In turn, this has bumped them into cutting back their vast stashes of assets — a process that the Fed kicked off early last month. The Bank of England, which along with the ECB and the Fed plans to stop reinvesting maturing assets © Hollie Adams/BloombergAlong with the Bank of England and the European Central Bank, the Fed plans first to stop reinvesting maturing assets, and some economists think they may eventually outright sell some of what they have on their books. All told, the balance sheets of the heaviest-hitting central banks will shrink by roughly $4tn by the end of next year, according to estimates from Morgan Stanley. The reversal is now well under way: just last week, its balance sheet shrank by roughly $20bn. And investors say it is already starting to hurt. “Liquidity is driven by central banks,” says Guilhem Savry, who works in cross-asset solutions at Swiss asset manager Unigestion. “Over the past 10 years there has been large liquidity in the US and everywhere else, and now investors know it’s finished. It’s over.”As a result, getting transactions done is becoming harder, Savry says, and speculative trading strategies have suffered “an end to the music”. But the added spice to this process is that like most other investors, Savry says he has no clear notion of how quantitative tightening — the tongue-twisting name for the process of balance sheet reduction — will affect markets. “We haven’t seen the full impact yet. We don’t know the full detail,” he says. “But we do know the direction and it’s negative.” The best and worst of times The era of central bank asset-buying began in 2001, when the Bank of Japan instituted the policy in a bid to stimulate the country’s languishing economy while benchmark rates were already close to zero. From the fringes of the monetary policy toolkit, the practice moved to the mainstream in 2008, when the Fed, BoE and later the ECB established their own bond-buying programmes in response to the crisis that engulfed the global financial system.Through large-scale purchases of government securities, the central banks helped to push up the amount of reserves sloshing around the financial system. The aim was to encourage banks to increase their lending to households and businesses to a degree that would encourage spending, investments and other activities to help ignite growth.Some economists have always been uneasy with QE for a variety of reasons, including a concern that it leads to central banks having too large a footprint in financial markets, potentially distorting the process of how assets are priced. But the severity of the economic impact from the outbreak of the Covid pandemic in 2020 outweighed any concerns. The Fed began unlimited purchases of Treasuries and agency mortgage-backed securities, and ventured into facilities that enabled purchases of corporate bonds and municipal debt for the first time. The ramp-up in scale and range of QE in 2020 compared to 2008 was “completely insane”, says Tatjana Puhan, deputy chief investment officer at French asset management group Tobam.Over the course of two years, the Fed snapped up some $3.3tn in US government bonds and $1.3tn in agency mortgage-backed securities. As of March, that left the US central bank owning a quarter of all outstanding Treasury debt and a third of agency MBS.The ECB and BoE each own just shy of 40 per cent of their government bonds, while the Bank of Japan, which is unique in having no intention of stopping its purchases, already owns nearly half of Tokyo’s outstanding government debt.As well as expanding the monetary base, official asset purchases also crowd commercial investors out of the world’s safest assets, and force them to support riskier parts of the economy that might otherwise struggle. The ECB headquarters in Frankfurt, Germany. The ECB and BoE each own just shy of 40 per cent of their government bonds © Wolfgang Rattay/ReutersBut more than a decade of global QE has rewritten the rules for investors of all types. While central banks helped to bolster bond prices and crush their yields down to zero, or even below, fund managers were effectively pushed into taking ever greater risks to deliver the returns that their end investors expected.“It has been the best of times and the worst of times for fund managers,” says David Riley, chief investment strategist at BlueBay Asset Management in London. “It was hard to blow up. A few did, but you had to work hard at it. In credit, you had just a relentless search for yield. You could look at a [corporate bond] and buy it because the ECB was going to buy it, even if your credit analysts were saying they didn’t like the fundamental story.”This has dulled many investors’ capacity for assessing what shares and bonds are really worth, says Rob Almeda, global investment strategist at MFS Investment Management. “One of the purposes of financial markets is to price risk. We allocate resources accordingly,” he says. “But we’re not pricing risk any more.”Uncharted territoryInvestors have known the unwind has been coming for months, and a grim first half to the year for most areas of financial markets suggests at least some of the impact has already been baked in to asset prices. But a rundown process by several key central banks at the same time has never been seriously tested before. The Fed staged a dress rehearsal for QT beginning in 2017, gradually shrinking its balance sheets in a process then Fed chair Janet Yellen said would be so predictable it would be like “watching paint dry”. In fact it ended up having to be abandoned after September 2019 when the plumbing of the financial system gummed up and overnight borrowing costs skyrocketed. This time, no one, not even the Fed itself, really knows how it will work. “I’ve spent time with people way smarter than me on this,” says Kate El-Hillow, chief investment officer at Russell Investments, in an effort to determine whether the flow of asset purchases matters most, or the total on the Fed’s balance sheet, and what it might all mean for the rate at which new government bonds hit the market. She is no closer to certainty. “I don’t have a good read on how it will all play out,” she says.Efforts to quantify exactly how QT will affect financial markets are complicated by several factors. First, the Fed’s plans to shrink its balance sheet are much more aggressive than the 2017 attempt. By September, the Fed is aiming to ramp up the pace at which it is scaling back its portfolio to a maximum speed of $95bn per month, split between $60bn of Treasuries and $35bn of agency MBS. The Bank of Japan is unique in having no intention of stopping its purchases © Kim Kyung-Hoon/ReutersThat is double the pace the Fed targeted in its two-year experiment that began in 2017, after the global financial crisis, and the central bank will reach its maximum rate much faster than last time.Treasury bills, which mature in one year or less, will also serve as a filler, meaning the Fed will cull its holdings of the short-dated debt whenever the amount of maturing longer-dated bonds falls short of the monthly cap. The biggest wildcard is what the Fed will do about its holdings of agency MBS and whether the central bank will become an outright seller, as a number of top officials have hinted may be necessary. This would be an unprecedented move, and would spark fear about the markets’ ability to absorb the new debt launched into the market.Another unknown is just how potent a monetary policy tool quantitative tightening actually is. Jay Powell, the Fed chair, emphasised that point recently, stressing the uncertainty that belies any estimate about its potential effect.Still, Fed officials and researchers have offered up rough estimates. According to a June study published by the Fed, a $2.5tn drawdown in the balance sheet over the next few years would be roughly in line with just over a half-point increase in the benchmark US policy rate — a range in keeping with Fed vice-chair Lael Brainard’s assessment that the central bank’s plans amount to “two or three additional rate hikes”.Fed chair Jay Powell has stressed the uncertainty that belies any estimate about QT’s potential effect © Brendan Smialowski/BloombergThese forecasts underestimate the potential impact, says Solomon Tadesse, head of North American quant research at Société Générale. Instead, he projects $100bn in run-off would tighten policy by 0.12 percentage points, with the effects amplifying as the balance sheet shrinks further.In separate research, strategists at Morgan Stanley counter-intuitively found that US bond yields tended to fall during the previous episode of quantitative tightening as prices rose — a conclusion they said was “not a typo” and attributed in part to economic growth patterns. “This is clearly a complicated story, where balance sheet change is just one of many factors which impact cross-asset performance,” they said, adding that analysis is “hamstrung by a severe shortage of data”.‘It makes us nervous’ It is possible that the process will not be as ferocious as many fund managers fear. “Most market participants are not betting on aggressive QT,” says Alex Veroude, chief investment officer (US) for global asset manager Insight Investment. “Nobody thinks central banks will start dumping hundreds of billions back into the market.”But either way, most still fret that they have a weak understanding of where any stresses might appear. “It’s not a given that it’s easily absorbable,” says Peter Rutter, head of equities at Royal London Asset Management. “It feels like we’re embarking on this in a rather casual way. ‘Yeah well let’s start it and see’. We’re watching very carefully. It makes us nervous.”Bill Nelson, a former Fed official and now chief economist at the Bank Policy Institute, says the central bank does not intend to use asset wind-downs as a direct tool for influencing the economy. “They don’t want anybody really thinking or talking about the balance sheet . . . In order to achieve the tightening objectives that they’re seeking, I don’t think they would ever do that with the balance sheet.”But he shares a widespread view that the exercise risks destabilising the US government bond market, the foundation upon which global markets are built. “There is a lot of uncertainty about how things are going to play out on the Fed’s balance sheet and within Treasury markets over the next six months,” he says. “Part of the reason why they engaged in QE was to provide some support for the Treasury market at a time with very heavy borrowing, and that borrowing continues. Ultimately, everybody’s going to need to discover the capacity of the market to handle that.”Episodes of dysfunction or misfiring transactions in the Treasury market seem like an inevitable outcome, even despite new facilities the Fed erected last year to alleviate pressure on the bond market.“We are worried about what I think of as the eventual collateral accumulation on the street, just the increased amount of debt that needs to be held by the private market, as opposed to with the Fed,” says Mark Cabana, head of US rates strategy at Bank of America. “We do worry that that can have deleterious impacts on market functioning over time. It can likely worsen market liquidity.”Exacerbating fears is the fact that Treasury liquidity is already significantly impaired, cratering this summer to its worst levels since March 2020, when the pandemic sparked a dash for cash and trading conditions for the world’s safest asset seized up.Memories of the Fed’s last attempt at reducing liquidity are also still fresh. In the closing weeks of 2018, stock markets took a sharp dive after the Fed indicated balance sheet run-off was on “autopilot”.“Remember that had a huge impact, and that was just on QT,” says one senior bond trader in London. “There was no inflation scare, no growth scare like we have now.”Optimists in the fund management industry point out that without central banks keeping a lid on volatility and snapping up assets almost indiscriminately, the performance of asset prices will vary more widely, throwing up opportunities for money managers. “That’s healthy,” says Andrea DiCenso, a portfolio manager at Loomis Sayles. “I’m not sure it’s necessarily fun.”But the habit of making bets with the Fed’s safety net below will be hard to break, she says. “People are thinking ‘I want to get back to QE. How do we get back to the QE?’” More

Investors have pulled $50bn from emerging market bond funds this year in the latest sign of how a sharp tightening of monetary policy in developed economies and the war in Ukraine has sparked a flight from the asset class.The net outflows from EM fixed income funds are the most severe in at least 17 years, far worse than were recorded during a bout of acute concern about China’s economy in 2015, data collated by JPMorgan show. “It has been pretty dramatic,” said Marco Ruijer, emerging markets portfolio manager at William Blair, adding that the combination of soaring global inflation, tightening central bank monetary policy and Russia’s invasion of Ukraine has culminated in “a perfect storm” for emerging market debt.The strong shift away from emerging market bonds, which are typically considered to be riskier than their developed market counterparts, has pulled prices sharply lower this year. The benchmark index of dollar-denominated emerging market sovereign bonds, the JPMorgan EMBI Global Diversified, has delivered total returns of minus 18.6 per cent in 2022, leaving it on track for its worst annual run on record. Emerging markets had already been suffering disproportionately from strained finances amid the coronavirus pandemic even before this year’s headwinds struck. The Federal Reserve’s rate rises this year, and plans for more in the offing, are particularly toxic to emerging markets, because they have increased the fixed returns investors can earn from holding ultra-safe US debt, eroding some of the appeal of bonds sold by issuers with weaker credit profiles. Some investors are also worried that tighter US monetary policy and growing economic pressure in other big markets such as Germany and Italy have heightened the risks of a broad economic downturn. “Before the Fed started hiking the asset class was not doing great [and then] the market started turning a bit to fear a recession, which caused another sell-off,” added Ruijer.The global shock to commodity prices triggered by Russia’s war in Ukraine has been a boon to some raw material-exporting developing countries. “A large part of our universe are commodity exporters so a lot of those countries are having a windfall,” said Ruijer. However, big energy importers such as Turkey are facing a severe blow from the rising cost of raw materials such as oil. Since most commodities are priced in dollars, a weakening of emerging market countries’ currencies against the greenback amplifies these cost pressures.

Ruijer added that while opportunities exist, the gloomy global economic outlook and expectation that commodity prices will sink due to a recession means investors have been “push[ing] the sell button”. “These assets tend to be quite positively correlated with the economic cycle,” said Cristian Maggio, head of emerging markets strategy at TD Securities. He added that investors have been “deterred from having large exposure to emerging markets by the fact that growth prospects are deteriorating by the day”. More

Sri Lanka’s President Gotabaya Rajapaksa will resign on Wednesday after thousands of protesters stormed his official residence and secretariat on Saturday, an official said. Protesters also set fire to Prime Minister Ranil Wickremesinghe’s private residence.”We hope for a resolution of the current situation that will allow for resumption of our dialogue on an IMF-supported program,” the IMF said in a statement. More

BUENOS AIRES (Reuters) – Argentine President Alberto Fernandez called for unity on Saturday as protesters marched in the capital to the gates of the presidential palace, lambasting his government over soaring inflation and a crushing national debt.The center-left president is facing a rising challenge from a militant left-wing of the ruling coalition that wants more state spending to ease high poverty levels and inflation. Two key moderate allies have left his Cabinet in the last month.The South American country, a major producer of soy and corn, is grappling with inflation running at over 60%, huge pressure on the peso currency and spiking gas import costs that are draining already weak foreign currency reserves.In a speech to mark the anniversary of Argentina’s declaration of independence, Fernandez called for “unity” and asked different factions to work towards it.”History teaches us that it’s a value we must preserve in the toughest moments,” he said, adding the country needed economic responsibility with low foreign currency reserves and soaring global inflation “seriously damaging” the local economy.”We must walk the path towards fiscal balance and stabilize the currency.”Argentina, which has cycled through economic crises for decades, struck a $44 billion debt deal with the International Monetary Fund earlier this year to replace a failed 2018 program. Many blame the IMF for tighter economic policies.In the streets of Buenos Aires thousands of protesters marched on Saturday afternoon with banners saying “breakaway from the IMF” and “Out, Fund, out”. Marchers criticized the government and called for debt payments not to be made.Parts of the government, including powerful Vice President Cristina Fernandez de Kirchner, have called for more spending to alleviate the impact of COVID-19 and of the war in Ukraine, which have lit protests in countries globally such as Sri Lanka.”There is a monumental crisis within our country,” said Juan Carlos Giordano, a socialist lawmaker who joined the march.”Argentina is a capitalist semi-colony in the chains of the IMF. Today we are here to say we need a second independence. Argentina must break its ties with the IMF which is the Spanish Empire of the 21st century.”Fernandez’s government was thrown into turmoil a week ago with the abrupt resignation of moderate Economy Minister Martin Guzman, a close ally to the president who had spearheaded talks with the IMF. He was replaced by economist Silvina Batakis.Batakis, seen as closer to the left-wing of the ruling coalition than Guzman, spoke with the IMF on Friday and has pledged economic stability despite concerns over a populist policy shift that have dragged down bonds and rattled the peso.”The resignation of the economy minister showed there is an economic and financial collapse that is affecting the lives of workers, of the whole the population,” said Workers’ Party member Marcelo Ramal.”We must consider that this year we’ll have around 80%-90% inflation with wages that aren’t rising as fast.” More

With the price of everything from beans to medicines soaring, retiree Philomena Amara has little doubt about who is to blame: the ruling Bharatiya Janata party of India’s prime minister Narendra Modi.“They are minting money, only thinking of themselves,” the 70-year-old fumed as she scoured a Mumbai market for the cheapest options. India’s poor were already the worst affected by the country’s stringent coronavirus pandemic lockdowns. Now, they are bearing the brunt of rising food costs, as Russia’s war on Ukraine triggers steep gains in commodity prices around the world. For the Modi government, the stakes could not be higher. Controlling inflation is crucial in a country in which the price of onions can reputedly decide elections, as it did in 1980 when former prime minister Indira Gandhi was victorious after her rival oversaw a steep increase in the cost of the vegetable. India’s headline inflation hit an eight-year high in April of 7.79 per cent against a year earlier, before moderating slightly in May to 7.04 per cent. But it remains above the upper end of the central bank’s target range of 6 per cent and vegetable costs continued to soar in May, rising 18.26 per cent year on year.“We see upside risks from food inflation,” Goldman Sachs said in a research note.

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In response, Modi’s government has cut fuel taxes while the Reserve Bank of India has begun raising interest rates for the first time in nearly four years. But those efforts have come too late to prevent further price rises, analysts said. “I think the RBI was a little complacent and the government, too. The focus had just been on [economic] growth,” said Shumita Deveshwar, senior director for India research at TS Lombard. The rise in inflation has coincided with the withdrawal of pandemic-era central bank relief measures and a heatwave that has battered India’s wheat crop. The RBI has trimmed its growth forecast for gross domestic product for the year ending March 2023 to 7.2 per cent, down from 7.8 per cent in February.In response to the rising food prices and crop damage, New Delhi has limited wheat exports and announced a cap on sugar shipments as well as cooking gas subsidies for low-income households.The government’s excise duty cuts for petrol and diesel should directly ease inflation by 0.2 percentage points and indirectly by 0.5 percentage points, according to HSBC.

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But the fiscal cost of the fuel tax cuts is steep — HSBC estimates Rs1tn ($13bn) in lost government revenues. New Delhi also said it would help farmers by doubling fertiliser subsidies, adding to the burden on government finances.Altogether, economists estimate that the new fiscal measures will cost the state Rs2tn — equivalent to at least 0.5 per cent of GDP. For the government, “it’s definitely a tough balancing act now”, said Sonal Varma, Nomura chief economist for Asia except Japan. That comes on top of finance minister Nirmala Sitharaman’s budget in February, which aimed to increase capital expenditure by a third to about $100bn through spending on infrastructure.

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Sanjiv Bajaj, president of the Confederation of Indian Industry, one of the country’s biggest business associations, said the government and the RBI were approaching inflation in a “practical” way. “You don’t want to kill the golden goose that lays the eggs, so they have to balance growth with inflation,” Bajaj said.But half of the respondents to a recent CII survey cited growing import costs as a concern after the rupee hit a series of record lows against the dollar this year.The biggest problems facing Indian industry were “inflation and international uncertainties”, Bajaj said.But support for the BJP has held up despite the history of extreme price sensitivity among voters, said Neerja Chowdhury, a political commentator in New Delhi.

The ruling party’s combination of Hindu nationalist rhetoric and a strong emphasis on welfare benefits had helped to buttress its popularity despite the economic shock of the pandemic. The BJP swept a series of state elections this year.But she added: “There’s a limit to people’s tolerance. That’s why [the government] cut down on petrol duties. Much depends on how they handle the situation.”There are signs that some voters, such as Amara, who is already cutting back on vegetable purchases, have had enough. They feel they have been abandoned by the government, a sentiment that is threatening to grow with the onset of the monsoon season, which even during times of low inflation typically leads to higher food prices. “This is all because of the politicians,” Amara said. “[They are not even] looking at the price hike.” More

WASHINGTON (Reuters) – Zambia’s official creditors are expected to offer it financial assurances by the end of July, paving the way for the first debt restructuring under a G20 framework set up during the height of the COVID-19 pandemic, two sources briefed on the matter said.Zambia would be the first of three countries that have requested debt relief under the Common Framework agreed by the Group of 20 major economies and the Paris Club of official creditors to move forward in what has been a very slow process.The creditor committees of Zambia, Chad and Ethiopia are all due to meet this month amid growing pressure to accelerate the debt restructuring process.No firm date has been set for a meeting of Zambia’s creditor committee, but sources briefed on the matter said they expected the African country to secure financial assurances by the end of the month, and said private sector creditors were cooperating.Russia’s war in Ukraine has sent food and energy prices surging higher, exacerbating debt problems already plaguing 60% of low-income countries and now threatening a growing number of middle-income countries.The Common Framework was set up in October 2020 to head off another major debt crisis, but progress has been slowed by the reluctance of China – now the world’s biggest sovereign creditor – and private sector creditors to participate, which has dissuaded other countries from seeking debt relief.Experts say movement on Zambia could help spur more interest among heavily indebted countries, especially given the growing risk of a global recession, higher interest rates and continued outflows of capital from emerging market economies.Improvements to the Common Framework will be a key topic at next week’s meeting of G20 finance officials in Indonesia, but Zambia’s case is unlikely to be resolved before that meeting, the sources said.IMF and World Bank officials have been blunt about the failings of the Common Framework. They are pushing for finance officials of the G20 major economies to apply more pressure on China and private sector creditors to participate.Zambian Finance Minister Situmbeko Musokotwane said last week the country’s economy would be highly compromised without external support.A Paris Club source said earlier this week that the group of wealthy creditor nations was working on providing financing assurances to the IMF that could unlock funds for Zambia.”We hope that that can be done before the end of July,” the source added. More