Aurelia Butler

KOENIGSWINTER, Germany (Reuters) – U.S. Treasury Secretary Janet Yellen said the G7 finance leaders on Thursday agreed to provide Ukraine the financial resources it needs in its struggle against Russia’s invasion, and that policymakers are determined to meet their inflation targets.Yellen, speaking to reporters after the first day of a G7 finance ministers and central bank governors’ meeting here, declined to confirm an $18.4 billion figure pledged in the group’s draft communique seen by Reuters.The meeting wraps up on Friday.Yellen said that funding pledges to Ukraine during the meeting exceeded the $15 billion that Kiev has estimated it needs over the next three months to make up for lost revenues as the war devastates its economy.A $40 billion U.S. aid package under expected to be approved by the U.S. Senate this week would include $7.5 billion in new economic aid, while the European Commission pledged 9 billion euros for Ukraine, Yellen said. Other countries, including Canada and Germany, pledged additional amounts.”The message was, ‘We stand behind Ukraine. We’re going to pull together with the resources that they need to get through this,'” Yellen said.She said that high global inflation was a significant topic, but none of the policymakers had said they were considering raising their targeted inflation rates.”What was discussed was the critical importance of central banks taking the actions that are needed to show they are committed to the inflation targets that they’ve set,” Yellen said.Yellen said the officials felt that economic conditions had not changed ” so fundamentally, that it would be worth dislodging what we felt it become a stable anchored set of inflation expectations.”She said that she still believed that the U.S. Federal Reserve could achieve a “soft landing” of the economy without causing a recession, but how Fed officials achieve this is up to them though it “requires both skill and luck.”Discussions about mechanisms to reduce Russia’s revenues from oil exports to Europe were limited on Thursday, Yellen said, adding that there is a lot of interest in the concept.U.S. officials have floated the idea of imposing tariffs on Russian oil to limit the amount of revenue that Moscow can collect while keeping Russian crude supplies on the market as EU officials pursue a phased embargo by year end.Yellen said that a buyers’ cartel that would not buy oil above certain prices could be successful if it is large enough.”Nothing is really crystallized as an obvious strategy,” she added. More

For many Europeans, the nearer they are to Russia, the faster their cost of living is rising. The extent of a country’s dependence on Russia for its energy needs is a key factor, but not the only one, deciding how fast inflation has risen since Moscow’s full invasion of Ukraine in February sent fossil fuel prices soaring.The Baltic states and the EU’s other eastern countries have been hit hard, as has Ukraine itself. Many of these nations have close ties to Russia and its energy supplies. But their higher inflation also reflects stronger recent economic growth and tighter job markets. “As growth and labour markets recover from the Covid crisis and energy prices soar, European inflation has hit new records,” said Anna Titareva, European economist at UBS. “The key drag on household incomes in the eurozone has been a sharp rise in energy prices.”A third of the EU’s 27 members have experienced double-digit inflation, notably Estonia, where consumer prices are rising at an annual rate of almost 19 per cent. Poland’s prime minister Mateusz Morawiecki has started referring to “Putinflation” as he looks to pin the blame for sharply higher prices on Russian president Vladimir Putin’s invasion.

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The most extreme inflation, however, is in Turkey, where a collapse in the value of the lira and the fallout from the Ukraine war has sent prices up 70 per cent in the year to April. Other countries faced with surging inflation are also heavily reliant on Russia for their energy. Almost all of Lithuania’s energy imports come from Russia, while in Slovakia and Greece it is close to half.Energy accounted for more than half the overall rise in eurozone inflation to record levels of 7.4 per cent in the past year, according to Eurostat. But other products are also becoming more costly, notably food, alcohol and tobacco, which made up almost a fifth of annual price growth.In the US, inflation has been higher than in the eurozone, hitting 8.3 per cent in April. But much less of this is because of energy, which only accounts for a third of US price growth over the past year. This illustrates how the US is more energy self-sufficient that Europe but also that its economy has overheated more, leading to sharp rises in the price of non-energy goods, services and wages.While the latest bout of inflation is spread across Europe, it is more muted in some countries, notably Switzerland and France. The recent strength of the Swiss currency, considered a safe haven in times of crisis, has been a big factor limiting inflation in the country to 2.5 per cent. “It’s clear a strong franc reduces the price of imports,” Swiss central bank board member Andréa Maechler told a conference this month.

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Switzerland’s energy mix is another factor, as it generates much of its electricity from renewable sources such as hydropower or nuclear energy rather than fossil fuels.Swiss consumer prices were “extremely high” before this global bout of inflation, so the country was “starting from a different point” with less capacity for companies to raise them further, noted Nadia Gharbi, an economist at Pictet Wealth Management in Geneva.In France, consumer price growth is a third lower than in Germany and half the rate in the Netherlands.“Government policy is a major part of the explanation of why French inflation is lower,” said Holger Schmieding, chief economist at Berenberg in London, pointing to the cap on household electricity bills.This effect was mirrored in Spain, where a cap on gas prices lowered the amount households paid for energy and water last month, helping overall inflation drop back from a 37-year high the previous month.Measures to shield households from surging electricity and fuel costs led overall eurozone energy inflation to slow in April, but it remained elevated at 37.5 per cent, far above earlier levels in the eurozone’s 23-year history.

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The pressure was even higher in the Netherlands, where consumer energy prices increased 83 per cent in the year to April, posing a challenge for a country that imports about half its energy from Russia. Prime minister Mark Rutte said recently that the Dutch must accept being “a little poorer”.In the UK, energy has been a smaller proportion of overall inflation. But the lifting of an energy price cap played a big role in sending price growth in the country to a 40-year high of 9 per cent in April. Food prices in Britain are also rising sharply, up 6.7 per cent, prompting Bank of England governor Andrew Bailey to apologise this week for being “apocalyptic” when discussing the impact of Ukraine, a big producer of wheat, being unable to export.Prices of food and non-alcoholic beverages rose even faster in the eurozone. Schmieding said this could continue to accelerate as “pipeline pressures on food producer prices have not fully hit the consumer yet”.Food inflation hits households in poorer regions hardest as they spend a bigger share of their income on essentials. Spain, Portugal, Greece, Poland and the Baltic countries were among the nations exposed to double-digit increases in the year to April.The EU is pushing to reduce its reliance on Russian energy, phasing in a ban on coal imports from the country and working on a similar move for oil. Even though alternative sources of fossil fuels are likely to be more expensive, and a severing of Russian gas supplies could cause a full-blown energy crisis in Europe, most economists expect inflation to peak this summer and to fall steadily over the rest of the year. “Providing we don’t have an escalation of the conflict in Ukraine and another surge in energy prices, I think we’ll soon see a peak and then a decline in inflation,” said Pictet’s Gharbi. “Each country’s own policy response and energy mix will be quite important in deciding how fast it falls.” More

The UK chancellor Rishi Sunak is under mounting Conservative pressure to radically cut taxes in the coming months. The question facing him is whether he can do it without pouring fuel on the inflationary fire.Cabinet ministers including Liz Truss and Jacob Rees-Mogg have led calls for Sunak to reduce the highest tax burden seen in Britain for 70 years, to help households cope with inflation that has hit a 40-year high of 9 per cent.Conservative MPs in recent days have piled pressure on Sunak. Sir Bernard Jenkin, a senior Tory MP, told the Financial Times he wanted to see value added tax abolished on domestic energy bills. Sir Edward Leigh, another Tory grandee, said Sunak had to move “in a far more radical direction on the overall tax burden”. According to one former cabinet minister, the chancellor should “cut taxes and reduce VAT across the board”.To the dismay of some Tory rightwingers, Sunak has left open the idea of actually increasing taxes on one sector, in the form of a windfall tax on UK oil and gas companies.David Canzini, Prime Minister Boris Johnson’s influential deputy chief of staff, is opposed, according to Conservative party insiders. “Canzini is always telling us we need to go back to Tory fundamentals,” said one.

However, Johnson’s allies insist a windfall tax is still “on the table”. Meanwhile, polling suggests the policy is very popular. Some Tory MPs admit to having no idea what Sunak’s strategy is on tax or financial support for families generally. “During turbulent times it’s especially important to lay out a plan so people can recognise the course being taken,” said Greg Clark, former cabinet minister. “I hope the chancellor will set this out clearly in the near future.”Sunak wants to be remembered as a tax-cutter. Most Tory MPs expect him to start cutting income tax, or VAT, as part of a broad package of measures later this year, but the chancellor is treading cautiously.In particular, he fears that unfunded tax cuts now could fuel inflation, forcing the Bank of England to raise interest rates further, worsening the cost of living crisis and pushing up the government’s debt servicing costs.One Treasury figure said that rightwingers calling simultaneously for tax cuts and for the BoE to take a tougher line on inflation were “intellectually incoherent”.Sunak argued in his Mais economics lecture this year that tax cuts had to be paid for through higher economic growth or lower spending, adding the idea that tax cuts could be self-funding was “neither serious nor credible”.The problem for Sunak is that getting the sluggish British economy to grow faster is a long-term project. His plan to cut taxes on business investment will not yield instant results.As for cutting spending, Johnson came to office in 2019 refusing to contemplate any return to austerity, a word he hates so much that he once claimed he had banished it from his lexicon.Rees-Mogg, minister for efficiencies, has set out some ideas for saving money, but none is politically cost free. His plan to axe around 90,000 civil servant jobs is unlikely to win many Tory votes in the public sector.“How do you explain to your staff that their jobs are superfluous?” asked one mandarin. “You can imagine what morale is like.” Public spending cuts carry big political risks in the “red wall”, traditional Labour strongholds won by Johnson in the last general election.Sunak has already committed to cutting income tax by one percentage point in 2024 and could bring that forward. He has vowed that every “marginal pound” would be used for tax cuts.

But Anthony Wells, political director at YouGov, said the politics of tax cuts were complicated. “People like tax cuts, but only if they think it is sensible and not part of an attempt to bribe voters. It’s the smell test.”The economics of cutting taxes in the midst of soaring inflation, when the BoE is raising interest rates to control rising prices, are, however, the main preoccupation of the Treasury. David Davis, former Tory cabinet minister, rejected the idea that tax cuts could drive up inflation. “It’s how you drive up productivity and growth,” he told the FT. BoE governor Andrew Bailey was tight lipped on how the central bank will respond to tax cuts, when giving evidence to MPs on Monday. “We do not speculate on what government policy might be in the future; we only use announced fiscal policy as the conditioning assumption [in our forecasts],” he said. What he left unsaid was that if tax cuts raised the BoE’s inflation forecast, it would be duty bound to tighten policy further, adding to the financial pain of corporate and household borrowers. While the economics suggest that tax cuts could bring further interest rate rises, there is an exception if the economy is already sliding into recession. This is what Rupert Harrison, portfolio manager at BlackRock and the economic adviser to former chancellor George Osborne, fears. He said on Thursday the government should cut VAT by 2.5 percentage points. More

LONDON (Reuters) – El Salvador lacks credibility in managing its finances and would benefit from a program with the International Monetary Fund, an official at ratings agency Moody’s (NYSE:MCO) said on Thursday.Ariane Ortiz-Bollin, vice president and senior credit officer at Moody’s, told Reuters the Salvadoran economy is doing relatively well and revenues have climbed, but “it’s more about the certainty on the policy predictability that comes with an IMF agreement, which is something that the country is significantly lacking right now.”Salvadoran foreign debt yield spreads to U.S. Treasuries hit a record high above 2,600 basis points on Thursday, as the Central American nation of 6.5 million continues to be shut out of international financing markets.Moody’s earlier this month cut its key rating on El Salvador by two notches to Caa3, its third-lowest rating, citing “an increased probability of a credit event.” Graphic: El Salvador sovereign bond spreads to U.S. Treasuries – https://graphics.reuters.com/ELSALVADOR-DEBT/SPREADS/lgvdwgrbrpo/chart.png The IMF said on Thursday it has been in talks with the Salvadoran government on issues including the pace and composition of fiscal consolidation, anti-money laundering issues, fiscal transparency and accountability on the use of public funds.They have also discussed the use of bitcoin, which was given legal tender status in El Salvador in September in a move criticized by the IMF, but the Fund did not mention any resumption of talks leading to a new program.”It is a surprise to us that they’re not willing to go this path,” said Ortiz-Bollin, adding a new IMF program “would unlock other multilateral financing and potentially market financing that is badly needed.”El Salvador’s bet on bitcoin has failed so far, with the cryptocurrency down more than 40% of its value since Salvadoran adoption. The increased risk has closed down other avenues of financing. More

The once-booming island country has suspended debt payments as it grapples with its worst economic crisis since it won independence in 1948, facing shortages of essential goods that have triggered social unrest. G7 countries said in their statement they were committed to finding long-term solutions for the Indian Ocean nation and urged it to “negotiate constructively” with the International Monetary Fund on a potential loan programme.”The G7 stands ready to support the Paris Club’s efforts, in line with its principles, to address the need for a debt treatment for Sri Lanka,” they said, referring to the group of mostly rich creditor nations.The draft statement, which is to be finalised before the end the G7 finance ministers’ meeting on Friday, also called on other big creditor nations not in the Paris Club to coordinate with the group and urged them to provide debt relief on comparable terms.G7 finance chiefs also singled out China, which has become a major creditor to low-income countries, to actively contribute to debt relief for such countries.Chad, Ethiopia and Zambia have so far sought debt relief under a new G20 common framework, but progress has so far been slow with some officials accusing China of dragging its feet. More

“I don’t immediately see that as a reason to change,” the inflation target, Yellen told reporters Thursday in Bonn, Germany, referring to the potential for deglobalization to boost the trend rate of price increases. “The challenge is to meet the inflation targets that have been established.”US consumer prices have surged by more than an 8% annual rate the past two months, and some economists have questioned whether the Fed will be able to bring gains down to the 2% target for years. That’s in turn spurred speculation the Fed may need to boost its target.Yellen is in Bonn attending meetings of finance ministers and central bank governors from Group of Seven advanced economies. She said at Thursday’s gathering, a key message among the group was that it will “stand by” Ukraine, with a fresh commitment of support coming.©2022 Bloomberg L.P. More