Aurelia Butler

FRANKFURT (Reuters) – Bundesbank President Joachim Nagel objected to the European Central Bank’s promise of fresh support for the bloc’s indebted south at an emergency meeting last month, reviving a divide between the ECB and its biggest shareholder, sources familiar with the matter told Reuters.ECB policymakers pledged to buy more bonds from debt-laden countries at an unscheduled meeting on June 15 to contain a widening spread between their borrowing costs and Germany’s as the central bank prepares to raise interest rates.But Nagel disagreed with that decision, arguing that the ECB’s focus should instead be on fighting high inflation, said three sources, who asked not to be identified because Governing Council deliberations are private.Spokespersons for the ECB and the Bundesbank declined to comment for this story.The virtual meeting was called with only a few hours’ notice, meaning governors had little time to review preparatory documents and not all of them could attend, the sources said.ECB policymakers who have spoken since the meeting, including Belgium’s Pierre Wunsch and the Netherlands’ Klaas Knot, two key policy hawks, have backed President Christine Lagarde’s pledge to fight fragmentation.This meant that Nagel’s opposition was unlikely to prove an insurmountable hurdle. But it was the first visible disagreement between Nagel and Lagarde since the former took office in January.The Bundesbank was for years the biggest critic of the ECB’s easy-money policy under Nagel’s and Lagarde’s respective predecessors – Jens Weidmann and Mario Draghi.Lagarde and Nagel have since tried to patch up those differences, with the former giving national central bank chiefs a bigger say in policy meetings and the latter refraining from publicly criticising decisions.But Nagel has come under pressure at home over the highest inflation-rate since the 1970s and the perception that ECB policy was designed to support indebted states such as Italy and Greece rather than keep prices in check.The ECB is trying to bring down yield spreads by using proceeds from maturing bonds in Germany, and other north European nations, to buy more Italian, Greek, Spanish and Portuguese debt. It is also working on a new tool to buy even more southern European bonds with fresh money.This will likely leave Germany falling below its quota of the ECB’s bond holdings, as the purchases of peripheral bonds are unlikely to be matched by larger buying of core paper in the future, the sources said. In addition the Bundesbank would suffer losses if it was forced to sell German bonds to offset purchases of debt from elsewhere – although such sales are unlikely for now.Sources have told Reuters the ECB would sooner drain cash via “liquidity-absorbing” auctions for banks, rather than outright bond sales. The new instrument to buy more southern European bonds is likely to come with conditions, such as that a country’s debt is deemed sustainable by the ECB or that it complies with the European Commission’s fiscal rules and economic recommendations. More

The anonymous internet user, identified as “ChinaDan”, posted on hacker forum Breach Forums last week offering to sell the more than 23 terabytes (TB) of data for 10 bitcoin, equivalent to about $200,000. “In 2022, the Shanghai National Police (SHGA) database was leaked. This database contains many TB of data and information on Billions of Chinese citizen,” the post said. “Databases contain information on 1 Billion Chinese national residents and several billion case records, including: name, address, birthplace, national ID number, mobile number, all crime/case details.”Reuters was unable to verify the authenticity of the post.The Shanghai government and police department did not respond to requests for comment on Monday. Reuters was also unable to reach the self-proclaimed hacker, ChinaDan, but the post was widely discussed on China’s Weibo (NASDAQ:WB) and WeChat social media platforms over the weekend with many users worried it could be real.The hashtag “data leak” was blocked on Weibo by Sunday afternoon. Kendra Schaefer, head of tech policy research at Beijing-based consultancy Trivium China, said in a post on Twitter (NYSE:TWTR) it was “hard to parse truth from rumour mill”.If the material the hacker claimed to have came from the Ministry of Public Security, it would be bad for “a number of reasons”, Schaefer said.”Most obviously it would be among biggest and worst breaches in history,” she said.Zhao Changpeng, CEO of Binance, said on Monday the cryptocurrency exchange had stepped up user verification processes after the exchange’s threat intelligence detected the sale of records belonging to 1 billion residents of an Asian country on the dark web. He said on Twitter that a leak could have happened due to “a bug in an Elastic (NYSE:ESTC) Search deployment by a (government) agency”, without saying if he was referring to the Shanghai police case. He did not immediately respond to a request for further comment. The claim of a hack comes as China has vowed to improve protection of online user data privacy, instructing its tech giants to ensure safer storage after public complaints about mismanagement and misuse. Last year, China passed new laws governing how personal information and data generated within its borders should be handled. More

AustralianSuper, Australia’s biggest pension fund, said it would cut its exposure to stocks and warned of a prolonged economic downturn after it reported a loss for the first time since the 2008 financial crisis.The A$260bn (US$178bn) fund reported negative annual investment returns of 2.73 per cent in the 12 months to June 30, ending a decade of growth during which the fund returned on average 10 per cent a year.“After more than 10 years of economic growth our outlook suggests a possible shift from economic expansion to slowdown in the coming years,” chief investment officer Mark Delaney said on Monday.“In response, we have started to readjust to a more defensive strategy, as conditions become less supportive of growth asset classes such as shares.”Delaney joins a growing number of economists and financial experts predicting a global recession. Last month, a Financial Times poll of leading academic economists found 70 per cent expected the US to go into recession next year.Other Australian superannuation funds were likely to follow AustralianSuper, said research group Rainmaker Information, which predicted an average return of minus 2.8 per cent for the year. Australia’s financial year runs from July 1 to June 30.The last time AustralianSuper lost money for its members was in the 2008-2009 financial year, when the collapse of US investment bank Lehman Brothers precipitated a global financial crash. That year, the average AustralianSuper balance fell 13.3 per cent.This year’s losses followed a confluence factors — including pandemic supply chain bottlenecks, Russia’s invasion of Ukraine, a global energy crisis and soaring inflation — that have sent equity markets plummeting.Australia’s S&P/ASX 200 share index was down around 10 per cent on Monday compared with a year ago.Its superannuation sector is the fifth-biggest pension system in the world, with assets under management of A$3.5tn as the end of 2021, according to Moody’s.Unlike other pensions systems, the majority of Australian funds are “defined contribution” schemes, meaning they do not provide members with a set income in retirement, as in final salary or defined benefit schemes. That frees them up to invest in riskier assets such as equities, but leaves them more exposed to market movements. Alex Dunnin, director of research at Rainmaker, said AustralianSuper was “one of the small number of funds that have an uncanny knack of doing well year after year”. But he said recent market falls were too widespread for the fund to avoid losses. Measured from January rather than last July, he said AustralianSuper’s main investment option was down 7 per cent.

He added that AustralianSuper’s fixed income funds had lost even more value than its default investment option, showing bonds were not a “safe haven” in current economic conditions.“For retirees, who tend to have high weightings to bonds and cash, this is not good news at all,” Dunnin said.AustralianSuper’s Delaney said the fund’s average balance was still up 9.32 per cent per annum when averaged over 10 years, and warned members against reacting to the poor results. Under the fund’s rules, members are able to determine their own investment options, though the majority opt to remain in the default option.“In our experience, reacting to short-term market volatility may see members worse off in the long run, and members in or close to retirement should remember they may still be invested for many years to come,” Delaney said. More

Turkish inflation reached almost 80 per cent as analysts warned that the country risks getting trapped in a spiral of rising prices and wages.Consumer prices rose 78.6 per cent year on year in June as President Recep Tayyip Erdoğan’s unconventional monetary policy and the war in Ukraine’s disruption to food and energy imports took a heavy toll. It was the biggest annual increase since 1998, though the rate was slightly below analysts’ consensus forecast of 80 per cent. Erdoğan, who rejects the widely accepted view among economists that raising interest rates curbs inflation, has ordered the central bank to keep its benchmark borrowing rate far below the level of inflation. As a result, the lira has lost 48 per cent of its value against the dollar during the past 12 months. The plunge in the currency has been a major driver of price rises in a country that is reliant on imports, especially energy. The effects have been compounded by a surge in the price of energy and other commodities in the wake of Russian president Vladimir Putin’s invasion of Ukraine.Monday’s latest inflation data, up from 73.5 per cent in May, come after Turkish authorities last week announced a 30 per cent increase in the minimum wage — just six months after raising the basic rate of pay by 50 per cent.Opposition parties and trade unions, which accuse the government of manipulating the inflation figures, said the increase was sorely needed to stave off poverty for millions of households that are struggling with soaring food prices. Erdoğan, whose ruling party has seen its support fall to historic lows partly due to the economic turmoil, also backed the rise while insisting that inflation would reach “reasonable levels” at the start of next year.But economists have warned that the rise in the minimum rate of pay, which affects an estimated 40 per cent of the official workforce and has a knock-on effect on other sectors, would itself contribute to continued high inflation in the months ahead.Goldman Sachs recently lifted its year-end inflation forecast from 65 per cent to 75 per cent, warning that the latest rise in the minimum wage risked leading to “a price-wage spiral”. That increase, combined with other factors including the likelihood of further depreciation of the Turkish lira, meant that “underlying inflation pressures in Turkey remain highly elevated,” it said. More

The ECB has long said that the fight against climate change is crucial in maintaining financial stability and its bank supervision arm has been pushing the bloc’s biggest lenders to improve risk management and disclosure. In one of its biggest moves yet, the ECB said that starting from October, it will tilt reinvestments of cash maturing from corporate debt towards firms with lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate related disclosures. “The eurosystem will gradually decarbonise its corporate bond holdings and this will be done by tilting the sizeable redemptions, which are expected to average over 30 billion euros annually in the coming years,” ECB board member Isabel Schnabel said. The ECB bought corporate debt for much of the past decade as part of its ultra easy monetary policy and while new purchases have already ended, cash from maturing bonds will be reinvested back into the market indefinitely. The ECB will, however not exclude any company from its investment portfolio, hoping to give the big polluters an incentive.”Those companies that are the least green today will have to do the bulk of the transition, therefore we said that excluding them altogether is not the right approach,” Schnabel, the head of the ECB’s market operations said. “We want to give all those companies an incentive to become greener.”In making actual investment decisions, the ECB will look at firms’ past performance, their planned carbon reduction targets and data publicly disclosed. The ECB will only rely on publicly available information and will not disclose which holdings it cut or increased. “This market is heavily biased towards emission intensive firms therefore then we will then have a new benchmark that is tilted over time more towards less emission intensive firms and purchases will be following this new benchmark,” Schnabel said.Further out, the ECB also plans to limit the share of assets issued by high polluters that can be pledged as collateral by banks when borrowing funds from the central bank. ($1 = 0.9592 euros) More

In the summer of 1998, the Japanese currency slid to its lowest level against the dollar since the calamitous burst of the economic bubble seven years earlier. A senior finance ministry official, Haruhiko Kuroda, cautioned that an excessive fall in the yen was negative for the Japanese economy.Nearly one-quarter of a century later, Kuroda is the governor of the Bank of Japan and sounding a familiar refrain as the yen continues its descent through a 24-year low, again breaking the level of ¥137 against the dollar and leaving traders uncertain when the slide will stop. “The recent rapid acceleration of the yen’s decline is not desirable,” Kuroda said last month, following discussions with Prime Minister Fumio Kishida. It was a change of tune for the central banker, who had until then suggested a weaker yen could have benefits for the economy.The debate within Japan on the depreciating currency has become increasingly fierce. Dust-jackets in bookstores set out clashing theories on the yen in bold type: one apocalyptic title of a business book reads The Weak Yen Will Destroy Japan while another bullishly predicts that “a cheap Japan” would revive the nation. At the heart of the debate around the yen is the question of whether Kuroda’s decade-long ultra-loose monetary policy can withstand the pressure of global inflation. As the interest rate differential between Japan and the US has widened, investors have dumped the currency and sent it to historic lows.Analysts say the yen — and Japan’s economy — stands at a critical juncture with two starkly different outcomes, depending on the next steps that will be taken by the central bank. If the BoJ sticks to its guns while the US Federal Reserve continues to raise interest rates, the yield divergence could spell a further collapse in the yen beyond the 24-year low. But if the BoJ moves to tweak its monetary policy, or if a global recession prompts a U-turn in US interest rates and a flight to safe havens, it could trigger an abrupt reversal. “As the risk of a US recession increases, the risk of a reversal to a strong yen over the medium to long term is also increasing,” says Yujiro Goto, FX strategist at Nomura. “Past price action shows that during a stagflationary period, the yen tends to depreciate against the dollar, while during a recessionary period, the yen tends to appreciate.” Japan has suffered the same shocks that have affected the global economy amid a surge in oil and gas prices caused by Russia’s invasion of Ukraine. But while consumer price inflation has soared above 8 per cent in the US and the UK, Japan’s headline inflation remained at 2.5 per cent in May — only slightly above the central bank’s 2 per cent target.The reason for that differential is wages. While the post-pandemic recovery has brought significant wage pressure in the US and Europe, in Japan there has been almost no pass-through from higher commodity prices to employee earnings.In a video recording of a seminar released this week, Kuroda said persistent deflation between 1998 and 2013 had made companies cautious about raising wages. “The economy recovered and companies recorded high profits,” he said. “The labour market became quite tight. But wages didn’t increase much and prices didn’t increase much.”Traders are uncertain when the slide will stop as the yen continues through a 24-year low, again breaking the level of ¥137 against the dollar © Kazuhiro Nogi/AFP/Getty ImagesIn the nine months Kuroda has remaining in his term before he steps down in March, he must perform a delicate balancing act. His unwavering resolve to maintain negative rates and cap bond yields at zero reflects his judgment that Japan’s underlying economy is weak and would struggle to grow if rates were higher. At the same time, he wants to shift the mentality of Japanese consumers and get them used to rising prices: a vital step to sustain inflation at 2 per cent. In early June, Kuroda was forced to apologise for suggesting the Japanese public was growing more tolerant of inflation, amid a furious backlash from politicians and the public. The combination of rising prices and a collapsing currency has squeezed consumers’ wallets, with everything from petrol and electricity to chocolate and instant noodles more expensive. Meanwhile, workers — beaten down by decades of stagnant pay — have largely given up the fight for higher wages that would better insulate them against higher prices in the shops.Analysts are wondering just how much longer the BoJ can hold its course, as political winds shift and public unhappiness grows. But no path presents an easy way out. “Deflation has continued for three decades and price stagnation has become the social norm. The society as a whole does not tolerate rising prices,” says Kazuo Momma, the former head of monetary policy at the BoJ who is now executive economist at Mizuho Research Institute. “There is fundamentally no exit for the BoJ”. Controlling the yieldsThe pace of the yen’s decline is not only angering the public, it is also leading to speculative attempts to dislodge the BoJ’s grip on the market for long-term government bonds. In 2016, the bank expanded its toolkit for monetary easing and introduced a cap on 10-year bond yields at “around 0 per cent”, a policy called yield curve control. If yields threatened to rise above the target, the bank would buy government bonds to push them back down. Already in recent years, the BoJ has widened its permissible band to let yields trade up to 0.25 per cent, saying it needs to transition to a “sustainable” policy. But some investors are now taking short positions on Japanese government bonds, betting the bank will be forced to give up its target and let yields rise and the bond price fall.To defend its yield target, the central bank has so far in June been forced to buy government bonds at a monthly rate of ¥20tn, double the pace seen at the previous peak of bond-buying in 2016, according to analysis by Deutsche Bank.Eiji Maeda, former assistant governor of the BoJ who is now president of think-tank Chiba-Bank Research Institute, says that if the central bank is to continue with its monetary easing programme, it should adjust its policy on negative rates and yield curve control.“Are negative rates really boosting Japan’s economy and is it really necessary to keep 10-year bonds at 0 per cent?” Maeda says. “The 10-year peg is OK in a global environment of low interest rates and inflation, but otherwise, it creates various distortions in the market and that’s now being reflected in the foreign exchange rate.” Economists are divided on whether Kuroda will tweak the framework of yield curve control before his tenure ends. Barclays predicts the BoJ will shorten the target from the 10-year to the 5-year sector in September, while others are betting that it will extend the tolerance band around the 10-year to greater than 0.25 per cent. Goldman Sachs says neither move is likely and that the BoJ’s credibility would be hurt if it was forced into changing its policy due to market pressure.If the BoJ were to make any tweaks, the timing would be critical. Analysts say the worst-case scenario would be if its move coincided with a recession in the US, which Fed chair Jay Powell has acknowledged is “certainly a possibility” as the central bank pledges to do whatever it takes to rein in surging inflation. If a slowdown forces the Fed to halt its plan to raise interest rates, the steep depreciation of the yen could quickly reverse.

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Analysts at Goldman Sachs say hedge funds in the US have been using the yen derivatives market — mostly options — to play what many now see as a rising risk of US slowdown or recession. Benjamin Shatil, FX strategist at JPMorgan in Tokyo, says the market is going to confront a big divergence in views over the summer as to whether the US economy will slow down or not. If investors think US rates have already peaked, he says, then they would assume the dollar/yen has also peaked. If not, they may continue to bet on the yen going lower. The uncertainty augurs a period of volatility, Shatil says. “The risks for the yen are less linear than they were.”Beyond AbenomicsThe pressures faced by the BoJ are also playing out on the political scene. Since Kishida was appointed prime minister last October, investor attention has focused on whether his economic programme would mark a break from the “Abenomics” of his predecessor who left office in 2020. Shinzo Abe, Japan’s longest-serving prime minister, pursued the three “arrows” of increased government spending, looser monetary policy and structural reforms that sustained a weaker yen in order to boost Japanese exports. When Kishida came to office last October, he spooked markets by promising a “new form of capitalism”, signalling his focus on redistributing income and indicating that he might push for a capital gains tax increase. Public concerns about rising prices have already started to erode Prime Minister Fumio Kishida’s solid popularity © Kazuhiro Nogi/AFP/Getty ImagesKen Shibusawa, a former Goldman Sachs banker who was a core member of the panel behind drafting Kishida’s economic policy, says the prime minister wants to create a more inclusive capitalism that is less focused on maximising short-term economic gains. “You just print all this money and basically where does it go? It goes to the people who already have the money,” says Shibusawa, whose Meiji-era ancestor Eiichi Shibusawa is often referred to as the father of Japanese capitalism. Of Abe’s system, he says, “I didn’t see three arrows. I saw one big bazooka.” In recent months, however, people close to the prime minister say Kishida and his aides have become increasingly concerned about the negative reaction from foreign investors, causing them to back away from the capital gains tax plan. The strong influence wielded by Abe, who still heads the biggest faction within the ruling Liberal Democratic Party, may also be a factor.When the draft of Kishida’s economic agenda finally came out this month, it stressed that the new form of capitalism was not about redistribution but “using redistribution as a means to raise growth”. Critically, the 35-page document ended with a line saying the government “would firmly maintain the three arrows of bold monetary policy, flexible fiscal policy and growth strategy to stimulate private investment” — although the use of the phrase “Abenomics” was deliberately avoided. Higher living costs and the weak yen have become a major issue during the campaign for the upper house election on July 10 © Kiyoshi Ota/BloombergStill, some analysts have not ruled out the possibility that Kishida would apply pressure on the BoJ to revise its monetary policies in the future to soften the yen’s fall. That is because of the weight the Kishida administration places on public opinion. Public concerns about rising prices have already started to erode Kishida’s solid popularity and both higher living costs and the weak yen have become a major issue during the campaign for the upper house election on July 10. The result will be crucial for the future of Kishida’s economic agenda. If the LDP manages to win a single-party majority, Tetsufumi Yamakawa, head of Japan economic research at Barclays, says there will be less pressure for Kishida to maintain Abenomics and its weak yen policy. “There will be more flexibility in monetary policy,” he says, suggesting that the path away from the extreme measures adopted over recent years might now open up.Holding out for a heroThe tensions over monetary policy are likely to come to the fore when Kishida chooses the next BoJ governor to replace Kuroda in April. A prelude to the post-Kuroda contest was the closely watched replacement of board member Goushi Kataoka, an aggressive reflationist who has pushed for the BoJ to ease policy further to achieve its 2 per cent inflation objective more rapidly. For the first time since the start of Abenomics, the government in March chose a successor who is not a reflationist, reducing the presence of dovish members on the BoJ’s nine-member board.So far, BoJ watchers believe there are only two candidates to succeed Kuroda, who has been governor since 2013: Masayoshi Amamiya, the BoJ’s deputy governor who is regarded as its chief monetary strategist, and Hiroshi Nakaso, also a former BoJ deputy governor with close ties to the international central banking community. Both represent traditional, safe choices from within the bank, who have closely supported Kuroda’s governorship. But the two BoJ insiders would also be less dovish than Kuroda and will be tasked with the formidable challenge of addressing the growing negative impact on financial markets and finding an acceptable exit from its decade-old monetary easing. “One job I do not want ever is to be the next BoJ governor. It’s going to be a horrendous job. And the person that is named should be crowned as a hero for picking up that job,” Shibusawa says. Analysts expect both candidates to consider an end to the yield curve control policy and negative interest rates during their term, but very few expect the BoJ to move towards significant tightening any time soon. The central bank is keen to avoid the mistakes it made in August 2000 and in July 2006, when it raised interest rates only to cut them again as the economy slid into recession. In a book released in May, titled The Last Line of Defence: Crisis and the Bank of Japan, Nakaso did not make clear whether he believed the central bank should maintain its 2 per cent inflation target — a vagueness that suggests he would at least consider a break with the current era. “At the end of the day,” he wrote, “I believe the monetary policy under Governor Kuroda showed both the effectiveness and the limits of how much can be done by monetary policy and what can’t be achieved by monetary policy alone.” More

The writer is chair of Rockefeller InternationalThese days major emerging market leaders must be feeling the chagrin of Roger Moore, often criticised as the worst James Bond ever. The British actor is said once to have quipped that long after he stopped playing the iconic secret agent, he still got a bad review each time a new 007 movie came out. Now every time dire news breaks on the global economy, from rising interest rates to increasing commodity prices, pundits say “emerging markets” are in the worst spot. Read closer, however, and the countries these critics cite are generally small ones like Zambia and Sri Lanka. Among the roughly 150 developing economies there will always be distress somewhere. But by most measures — from current account deficits to currency valuations — the 25 largest developing nations, from India to Brazil, are in strong financial shape. Together these markets account for 70 per cent of the population and nearly 90 per cent of gross domestic product in the developing world. They are less vulnerable to capital flight now than they were the last time global investors fled en masse in response to tightening monetary policy, during the taper tantrum of 2013. Compared to 2013, their current accounts have shifted from deficit into surplus, and only one in ten has a worrisome deficit — above 3 per cent of GDP — down from three in ten. Foreign exchange reserves have grown from 19 per cent of GDP to nearly 26 per cent; currencies are on average 40 per cent cheaper against the dollar than they were during the taper tantrum. The dour commentary also misses where the big emerging markets stand in the reform cycle. The crises of the 1990s forced these countries to put their financial houses in order, setting the stage for booms in the 2000s. The excesses of the 2000s led to the lacklustre 2010s. Now, forced again to reform by the pandemic, they have set themselves up for another solid run. Pessimism around emerging economies intensified over the past decade as the growth lead they normally enjoy over developed economies kept narrowing. But that gap is on track to widen again — from half a point to nearly 3 percentage points in coming years, with a leavening effect on markets. Also overlooked is the fact that in dollar terms all the world’s ten top-performing stock markets of 2022 are in emerging economies. When the US market falls, emerging markets are generally expected to fall even more. So why are they outperforming now? One reason may be that the foreign capital which would normally exit these nations in troubled times had already fled before the start of 2022. And in many emerging markets, from Mexico to Thailand, domestic investors have been net buyers of stocks in recent quarters. Historically, locals have a record of anticipating shifts, for better or worse, in their domestic market well before foreigners do. Emerging markets are also ahead of the policy curve. Usually, they follow the lead of the Federal Reserve. This time, under pressure from weaker currencies, their central banks started tightening in early 2021, a year ahead of the Fed. As a result, they now have less work left to do in the fight against inflation. For the first time in at least two decades, the share of countries suffering rapid inflation (above 5 per cent) is higher in developed markets than in emerging markets. Pessimists point to rising government debt in emerging markets, which has indeed increased from 55 to 65 per cent of GDP during the pandemic. But government debt in the United States and other developed markets has risen faster, by nearly 20 points to 120 per cent of GDP. Meanwhile as current account surpluses grow in emerging markets, the US deficit is approaching 4 per cent of GDP — its largest in more than a decade. Today the world capital of hot money is in the US, not in the emerging markets. Over the course of a decade-long tear in the 2010s, the US share of global stock market capitalisation surged from a low around 40 per cent to near 60 per cent, a level far above its roughly 25 per cent share of global GDP. In an economic environment that many analysts now compare to the stagflationary 1970s, some of that money will be looking for new homes. Against that backdrop, it is worth noting that, at least relative to the rest of the world, the 1970s was a strong decade for growth in the emerging world. Commodity prices surged then, as they are doing now, and many emerging nations are big exporters of commodities. Like Roger Moore’s films, which now grab spots near the top of Best-of-Bond lists, emerging markets deserve a fresh review. More

The writer is head of the BlackRock Investment Institute and former deputy governor of the Bank of CanadaRising prices hurt everyone. This makes inflation a political hot button. After downplaying the threat initially, central banks are now in a tough spot.There is a loud chorus of critics with ex-post claims that the inflation threat was there for everyone to see: if only central banks had raised interest rates earlier, we wouldn’t be in this mess. This is unfair. But rather than pushing back on this simplistic narrative, central banks have resorted to sounding ever tougher on inflation.There is absolutely an urgent need to raise rates back to a neutral level that neither stimulates nor decreases economic activity. The problem: many central banks are now going further and are pledging to stamp out inflation, “whatever it takes”. That appears to be addressing the current politics of inflation. The actual economics of inflation are not that simple — and call for a more nuanced solution.Inflation today is the manifestation of a deeper regime shift: the end of the “Great Moderation”, the four-decade-long period of reduced growth and inflation volatility. People have long thought this remarkable feat was the result of good policy. Think of the adoption of effective inflation-targeting frameworks and the unprecedented policy moves to avert a second depression in 2008.There’s an alternative hypothesis. Perhaps it was just good luck. This is the case academics Jim Stock and Mark Watson made to a policymaker audience in Jackson Hole in 2003. Their work suggested the Great Moderation resulted from an economic environment that yielded a more favourable trade-off between fighting inflation and stabilising output. This was met with scepticism then. It now has become clear good luck was a big factor.From the 1980s until 2020, we were in a demand-driven economy with steadily growing supply. Exuberance and borrowing binges drove overheating, while souring sentiment and collapsing spending drove recessions. Central banks could mitigate both by either raising or cutting rates.The last two years have been very different. Production constraints have been hampering the economy in ways they never did during the Great Moderation. The pandemic triggered the largest — and still unresolved — spending shift recorded in the US, from services to goods. The most important bottleneck to ramping up production has been labour supply: many people are hesitant to re-enter the labour market or are taking longer to find a job in a new sector. And these production constraints have been exacerbated by large energy and food price shocks resulting from the Ukraine war.Even when the constraints do resolve, structural trends such as geopolitical fragmentation, the rewiring of globalisation and the climate transition will affect production and push costs up for years to come.It is possible to bring inflation back to 2 per cent quickly. But this will come at a great cost. Raising interest rates will do nothing to relax these production constraints, reduce energy prices or address the root cause of this inflation. The only way to bring inflation down is to crush the interest-rate sensitive parts of the economy that are not responsible for today’s inflation. This is a far cry from the demand-driven episodes of the last 40 years, when raising interest rates was the remedy for debt-driven spending.That trade-off is even more complicated given the real risk that inflation becomes entrenched via higher inflation expectations. The only way to deal with that risk? Explain the situation as it is: clearly articulate the very unusual nature of today’s inflation and the stark trade-off it entails. This would help keep inflation expectations anchored. The alternative is damaged credibility for central banks and even more rate hikes.The bottom line is that the inflation blame-game misses the intricacy of the challenge. An absolutist, “whatever it takes” approach was the right call to stem the financial crisis. It won’t work to rein in today’s inflation.We are facing the starkest trade-off between inflation and growth since the early 1980s. Central banks will have to crush the economy to kill inflation. Or we might be forced to live with more inflation. This is not a trivial choice. Either way, we are on course for a less favourable combination of inflation and growth. Blindly pursuing the politics of inflation is almost certain to lead to even worse outcomes. A clear and nuanced framing of the issue is difficult to achieve in today’s hyper-politicised environment, but it’s what we badly need. More