Aurelia Butler

FRANKFURT (Reuters) – The euro’s tumble towards parity against the dollar has pushed the European Central Bank back against a wall, leaving its policymakers with only painful and economically costly choices.Letting the currency fall would push up already record high inflation, raising the risk of price growth becoming entrenched at a rate well above the ECB’s target of 2%.But fighting back against 20-year lows for the euro would require more rapid interest rate hikes, which could add to the misery for an economy already facing a possible recession, looming gas shortages and sky-high energy costs that are depleting purchasing power.The bank has so far played down the issue, arguing that it has no exchange rate target, even if the currency does matter. Even the accounts of its June policy meeting published on Thursday indicated no particular concern. But the market moves are now too big to play down.”The euro’s weakness reinforces the notion that the ECB is behind the curve,” Dirk Schumacher, head of European macro research at Natixis CIB, said. “Given how high inflation is, a stronger euro would be quite helpful because it lowers inflation.”The euro is now down 10% against the dollar this year, even if the trade-weighted currency has only dropped 3.3% so far.This raises the cost of imports, especially for energy and other dollar-denominated commodities, making everything more expensive. Studies frequently cited by the ECB suggest that a 1% depreciation of the exchange rate raises inflation by 0.1% over one year and by up to 0.25% over three years.MORE WEAKNESS?The problem is that economic fundamentals point to even more euro weakness.Firstly, the ECB and the U.S. Federal Reserve are moving at vastly different speeds.While Fed Chair Jerome Powell has made clear he was willing to risk a recession with oversized rate hikes to bring down inflation, the ECB continues to take baby steps in unwinding the exceptionally easy policy of the past decade, when inflation was too low.It will raise rates for the first time this month but expects to lift the deposit rate out of negative territory only in September, with any further move clouded by recession risks. The euro zone’s outlook has soured so much since mid-June that one rate hike has been priced out and markets now see just 135 basis points of tightening from the ECB. The Fed, which has already raised rates several times, including by 75 basis points last month, is expected to increase them by another 180 basis points.That gives investors higher profits on the other side of the Atlantic, so they are moving cash out of Europe and weakening the euro in the process.Secondly, the euro zone’s huge energy dependence, primarily on Russian gas, also makes the economy more vulnerable to the fallout of the war in Ukraine, a natural drag on the currency.”Faced with the looming risk of recession – and the euro being a pro-cyclical currency – the ECB’s hands may be tied in its ability to threaten more aggressive rate hikes in defence of the euro,” ING said in a note to clients.Finally, the bloc’s energy bill has pushed up import costs, leaving it with a rare current account deficit. Such outflows also weaken the currency over time.Since each of 19 euro zone countries are impacted differently, consensus on any push back is also likely to be difficult to achieve.To prop up the euro, the ECB could signal more aggressive policy tightening, including a 50 basis-point hike in September, and further moves in October and December.But since markets already expect these steps, the ECB must also at least in part match the Fed’s message that getting inflation down trumps all other priorities, even if that means reinforcing a recession.Such a message, even if euro-positive, would likely fuel a selloff on the currency bloc’s periphery, setting off debt sustainability concerns.So the ECB must also roll out its already flagged bond-buying scheme aimed at limiting the rise in borrowing costs for Italy, Spain, Portugal and Greece. “Spoiler: yes, parity is in play,” Deutsche Bank (ETR:DBKGn)’s Jim Reid said. More

Investing.com — European Central Bank policymakers were worried that inflation would remain “persistent” for some time as they laid out a path for upcoming interest rate hikes, according to minutes from their June policy meeting in Amsterdam.Most officials agreed to raise borrowing costs by 25 basis points at its next meeting this month, arguing that this moderate increase would lead to a more orderly market reaction in an environment of high economic uncertainty. However, a number of policymakers still argued for “keeping the door open” for a larger initial uptick in rates in July, saying the central bank should not make an “unconditional commitment” to a 25 basis point hike.But it was “broadly agreed” that the ECB would instead hint at a larger hike at its September meeting, the minutes said.”[T]he Governing Council should at this point be more specific about its expectations for the September meeting and, in particular, open the door to an increase in the key ECB interest rates by more than 25 basis points. A larger increment would be appropriate at the September meeting if the outlook for medium-term inflation had not improved by that time,” the ECB said.Meanwhile, the minutes said, “a call” was made at the June meeting for work to begin on a new “anti-fragmentation” instrument. This plan, which was later unveiled by the ECB, aims to create a tool to prevent a blow-out in bond yields between the eurozone’s peripheral and northern member states – a phenomenon dubbed “fragmentation”.This instrument is expected to be discussed in more detail when officials meet again this month.The minutes come as the eurozone – and other economies around the world – face a surge in inflation fuelled by rising food and energy costs, supply shortages, and the war in Ukraine. June’s headline reading of consumer prices in the currency bloc reached an all-time high of 8.6%, adding on to a previous record of 8.1% in the previous month.On Wednesday, the Federal Reserve also released minutes from its latest policy meeting, where the world’s most influential central bank chose to raise interest rates by 75 basis points – its biggest hike since 1994. According to the Fed’s minutes, policymakers said they believed price growth represents a “significant risk”, warning that inflation may become entrenched if it does not act “as warranted”.However, a string of disappointing U.S. economic data has dampened some investor expectations of further aggressive Fed rate hikes, as the central bank looks to avoid sparking a wider economic downturn.These fears have, in turn, led investors to seek the relative safety of the dollar and shy away from riskier assets, including the euro. EUR/USD is currently trading near its lowest mark in two decades. More

SHANGHAI/BEIJING (Reuters) – Millions of people in Shanghai queued for a third day of mass COVID-19 testing on Thursday as authorities in several Chinese cities scrambled to stamp out new outbreaks that have rekindled worries about growth in the world’s second-largest economy.Unless local officials succeed in preventing the virus from spreading, they could be compelled to invoke prolonged, major restrictions on residents’ movement, under China’s “dynamic zero COVID” strategy.Having just emerged from a painful two-month lockdown, Shanghai was again on high alert as it raced to isolate infections linked to karaoke services that had been taking place illegally.Urging karaoke joints to abide by COVID rules and make sure customers had undergone tests, Shanghai resident Qiu Shijia had a message for their owners: “Don’t push your luck.”Qiu was among a number residents Reuters spoke with in China’s most populous city that were wary of a return to restrictions that had caused mental stress, and financial hardship for many people, and disrupted global supply chains and overseas trade.The latest outbreaks in China have weighed on global asset prices this week.”A resurgence of Omicron is not an issue in most other countries, but it remains a predominant issue for the Chinese economy,” Nomura analysts wrote in a note, referring to the highly transmissible COVID variant.As China is “by far the largest manufacturing centre in the world, any new waves of Omicron are likely to have a non-negligible impact”, they added.Residents in many of Shanghai’s 16 districts were ordered to take two compulsory COVID-tests between Tuesday and Thursday.They frequently take self-administered tests in order to enter shopping malls or travel on public transport, and they also have to take part in city-wide testing every weekend till end-July.Shanghai reported 54 new locally transmitted COVID cases for Wednesday, versus 24 the previous day. Only two of those 54 cases were found in the community, with the rest in quarantine. Another 50 compounds and venues were locked down on Thursday in the commercial hub, taking the total to 81.PLAYING WHACK-A-MOLE WITH OUTBREAKSOverall, mainland China reported 338 new local COVID cases for Wednesday, down from 353, with no new deaths, numbers which most countries would now consider insignificant.Most cases, 167 of them, were in the eastern Anhui province where more than 1 million people in small towns are locked down.In the capital Beijing, four new infections were reported, down from six the previous day.From July 11, most people entering crowded venues, such as libraries, cinemas and gyms, will have to have been vaccinated.After finding one COVID case involving someone who had arrived from Shanghai, the town of Xinjiang in the northern Shanxi province tested almost its entire 280,000 population, suspended taxis, ride hailing and bus services, and closed various entertainment venues.In a different province, Shaanxi, which reported 4 new cases, the cultural and tourism authority requested travel agencies to cancel group tours in its capital Xian, famed for its Terracota Army.The eastern Jiangsu province, which has cancelled a major sporting event scheduled for November, reported 61 infections.China has said its uncompromising COVID policy, as opposed to a global trend of co-existing with the virus, was saving lives and the “temporary” economic costs were worth bearing. Justifying the strategy, officials have contrasted the millions of COVID-linked deaths around the world, compared with China’s reported the death toll of 5,226.Analysts warn, however, that some costs may become permanent if China’s debt burden increases and if curbs lead to investors and talent reconsidering their presence in the country.China is planning to set up a 500 billion yuan ($75 billion)state infrastructure fund to revive the economy, two people with knowledge of the matter have told Reuters.($1 = 6.7000 Chinese yuan) More

ACCRA (Reuters) – Hundreds took to the streets of Ghana’s capital Accra last week to protest over its deteriorating economy. Days later, the government of one of West Africa’s most prosperous nations announced it would begin formal talks with the International Monetary Fund (IMF) for support. It was a decision many analysts long thought inevitable, despite repeated pledges from finance minister Ken Ofori-Atta to never again seek IMF assistance. Why did the country reverse course, and what could the IMF demand in return?WHY NOW?Inflation hit an 18-year high of 27.6% in May, capping off a year of accelerating prices. Growth slowed to 3.3% in the first quarter, and the value of the cedi currency has declined 23.5% against the dollar since the year began.[L1N2YG1CH]In a statement outlining its plan for approaching the Fund, the government blamed its woes on a combination of recent external forces, including COVID-19, the Ukraine crisis, and American and Chinese economic slumps.Finance minister Ken Ofori-Atta told lawmakers last month that pandemic-related expenditure amounted to 18.19 billion cedis ($2.26 billion) as of May 2022. The country received $1.23 billion in COVID-19 relief funding from the IMF and World Bank over that period, he said. Prices of imported goods rose more than domestically produced ones for the second month in a row in May, with cereals — 20% of which Ghana imports from Russia — having repeatedly seen some of the largest price hikes. Petroleum prices have nearly doubled year-on-year. Authorities were still unsure about seeking IMF support only two weeks ago, but found their hands tied after lawmakers stalled a $1 billion loan, and an unpopular electronic payments tax meant to generate revenues, underperformed, Eurasia Group Africa head Amaka Anku said in a note.DEBT AND DEFICITAuthorities hope an IMF programme would relieve Ghana’s nearly $1 billion balance-of-payments deficit, which central bank governor Ernest Addison said in May results from a capital exodus caused by global factors. But experts say the root of Ghana’s problem is likely fiscal, as it utilizes continuously greater loans to plug its double-digit fiscal deficit. “Our biggest problem is that around 60% of our expenditure continuously goes towards paying public sector workers or interest payments,” said William Duncan, founder of the Ghana-based Spear Capital & Advisory. “It’s been a cycle through the last three governments.” Ghana’s debt stock has more than doubled since 2015, steadily climbing from 54.2% of GDP that year to 76.6% at the end of 2021, according to government data.The finance ministry’s plan for amortizing that debt rests squarely with the IMF, which it said would help the country regain access to international capital markets and roll over existing debt after recent credit rating downgrades cooled lender interest. Many have questioned the sustainability of that strategy. Interest payments have been the government’s largest annual expense since 2019 and were its second largest expense for five straight years prior to that, finance ministry figures show. While Ghana’s Eurobonds rallied on the news the government would seek IMF help, yields for all but the issue maturing this year still remain above 10%, the level seen as cutting a country off from issuing new debt as it becomes too expensive.PROGRAMME PROPOSALWhen Ghana last sought IMF assistance in 2015, it received $918 million through an Extended Credit Facility Arrangement, equal to 180% of its quota. This time, Ghana has proposed it’s own “Enhanced Domestic Programme” to the IMF, which would last a minimum of three years. It insists there be no cuts to the administration’s flagship programmes, such as campaign pledges to build hospitals and factories in each of the country’s 216 districts and a free secondary school scheme. And though debt servicing cost just under 48% of government revenue in 2021, the finance ministry’s proposal doesn’t require debt restructuring. Experts think such conditions may prove complicated.”A program would support creditors’ confidence, tempering the rise in government’s borrowing costs, but equally come with conditionality on fiscal consolidation that could prove challenging to meet,” said Aiste Makareviciute at Moody’s (NYSE:MCO). More