Aurelia Butler

Governments should use their fiscal firepower to protect the poorest citizens from devastating rises in food and energy prices, the OECD said on Thursday in the first estimate by an international organisation of the economic costs of Russia’s invasion of Ukraine. Targeted support for the poor would almost halve the expected average 1 per cent hit to rich economies’ gross domestic product from the war but cause only a small rise in inflation, the OECD said, making it by far the most effective means of intervention. Such support was most urgent in eastern Europe and the Baltic states, where spending on food and energy accounted for more than 40 per cent of the total among the poorest 20 per cent of households, it added. Laurence Boone, chief economist of the OECD, told the Financial Times that she understood that governments, including in France, Germany and Sweden, were considering broad-based tax cuts on fuel, since it was “an emergency situation”. But she said that there would be a much larger and more positive impact by providing “cost-efficient, targeted and ideally temporary help” in the form of temporary increases to social security payments to poorer households to help them cope with higher energy prices. This would not fuel inflation, Boone added. “If [the support] is just helping people pay for energy and food, it is not going to push demand ahead of effective supply,” she said. Instead, it might reduce people’s demands for higher wages, limiting inflationary impacts that are caused by additional spending. “If we manage to help lower-income and lower-middle class households through this period, it will also help to prevent a wage price spiral. That is super important,” Boone said. She added that the support was especially important in the Baltic states and eastern Europe.

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The OECD’s forecasts were backed on Thursday by François Villeroy de Galhau, governor of the Banque de France, who said France’s economy was likely to lose 1 per cent of national income but there was little recession risk. He said the damage did not require a “whatever it takes” monetary policy response. Christine Lagarde, president of the European Central Bank, on Thursday warned the war in Ukraine could unleash “new inflationary trends” as consumers face rapid price rises, companies relocate supply chains and countries change their sources of energy.She said Russia’s invasion of Ukraine also “posed significant risks to growth”, adding that lower consumer confidence and demand could “depress medium-term inflation if it means the economy returns to full capacity more slowly”. The recent surge in energy prices represented a “terms of trade ‘tax’ that transfers purchasing power to the rest of the world”, she added. The OECD used a simulation model to estimate the economic effects of Russia’s invasion on the global economy. It included the recent rise in commodity prices, a 50 per cent depreciation of the Russian rouble against the dollar, declines in eastern European currencies, large drops in the economic output of Russia and Ukraine and higher Russian interest rates. This scenario led to a 1 percentage point drop in global GDP, but with larger damage to the eurozone economy and smaller in the US. Compared with the pre-invasion outlook, inflation was 2 percentage points higher in 2022 in the scenario, with bigger effects in poorer countries where people spend more of their incomes on food and energy.

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For the US, which has the most serious inflation problem among advanced economies, the OECD did not suggest “a general [fiscal] stimulus”, according to Boone, but a delay in its deficit reduction plan. These policies, alongside collective financial support in Europe to help countries most affected by the arrival of millions of refugees, would have the most effective impact in lessening the domestic economic damage of the war in Ukraine, the OECD added. In the longer term, the priority for advanced countries should be to promote renewable energy sources and diversify energy demand from Russia. This was also more difficult in many eastern European countries because they had a higher dependence on imported fossil fuels than most other advanced economies. More

LONDON (Reuters) -The Bank of England raised interest rates on Thursday in a bid to stop fast-rising inflation becoming embedded, but with households facing a huge hit from soaring energy bills, it softened its language on the need for more increases.Eight of the nine Monetary Policy Committee (MPC) members voted to raise Bank Rate to 0.75% from 0.5%, their third hike in as many meetings and taking rates back to their pre-pandemic level.On Wednesday, the U.S. Federal Reserve also raised borrowing costs, the first time it had done so since the COVID-19 pandemic.BoE Deputy Governor Jon Cunliffe was the sole advocate of keeping rates on hold, warning of a big hit to demand from higher commodity prices. Economists polled by Reuters had expected a unanimous vote. The BoE said inflation was set to reach around 8% in April — almost a percentage point more than it forecast last month and four times its 2% target — and warned it could peak even higher later in the year.Soaring energy bills, driven even higher by the conflict in Ukraine, meant the squeeze on British household budgets was likely to be much bigger than the BoE had predicted last month — which itself was set to be the biggest in 30 years.Reflecting these worries about the outlook for growth, policymakers on Thursday pushed back against investors’ bets that Bank Rate will rise sharply to around 2% by the end of this year, toning down its language on the need for more hikes.”The Committee judged that some further modest tightening might be appropriate in the coming months, but there were risks on both sides of that judgement depending on how medium-term prospects evolved,” the BoE said.Last month the MPC said further modest tightening “is likely to be appropriate”.The pound slumped almost a cent against the dollar and British government bond prices jumped as investors trimmed their bets that the BoE would raise rates rapidly this year.”The MPC are clearly making moves to counter growing inflation. But they will be walking a tightrope in the months ahead,” Confederation of British Industry economist Alpesh Paleja said.Samuel Tombs, an economist at Pantheon Macroeconomics, said an end to BoE rate hikes was in sight.”Today’s minutes leave us more confident in our view that the rate hiking cycle will stall after the Committee increases Bank Rate to 1.00%, most likely at the next meeting in May,” he said. While judging inflation expectations to be well-anchored right now, the majority of the committee said they raised rates to reduce the risk that recent trends in pay growth and prices will become embedded in expectations. Businesses surveyed by the BoE expect to raise pay by 4%-6% this year, compared with 2.5%-3.5% in 2021.The BoE said Russia’s invasion of Ukraine was likely to cause global inflation pressures to strengthen considerably in the coming months and add to supply chain disruptions. More

MUMBAI (Reuters) – India’s macroeconomic fundamentals remain strong but the unfolding global developments pose downside risks in terms of spillover, the Reserve Bank of India said in its monthly bulletin on Thursday.”The ongoing geopolitical crisis has heightened the uncertainty clouding the global macroeconomic and financial landscape even as the world economy struggles to recover from the pandemic,” the RBI wrote, adding that the uncertain economic outlook has increased risks to emerging economies.Even though India is making steady progress on the domestic front, the spiralling oil and gas prices and unsettled financial market conditions also pose fresh headwinds to the still incomplete global recovery, it observed.The RBI also said that a rapid and large withdrawal of fiscal support risks pushing the economy over the cliff into a sharp downturn.”Exiting policy makers have to contend with the razor’s edge trade-off between cliffs and ramps,” RBI added.It has continued with the accommodative stance even as inflation has inched up and had left the key lending rate unchanged, keeping it at record lows in the last central bank policy announcement held in February.RBI once again highlighted the risks emanating from virtual currencies and noted that crypto technology is underpinned by a philosophy to evade government controls and threaten the financial sovereignty of a country and make it susceptible to strategic manipulation.”They can (and if allowed most likely will) wreck the currency system, the monetary authority, the banking system, and in general government’s ability to control the economy,” RBI wrote.Last month, the central bank had delivered a stark warning against investing in cryptocurrencies and had compared it to Ponzi schemes, adding that they should be banned. More

LONDON (Reuters) -Russia said on Thursday it had made debt payments that were due this week but the announcement did not end a wait for what could be Moscow’s first default on external borrowing in more than a century as creditors said they had yet to receive the funds.Russia was due to pay $117 million in coupon payments on Wednesday on two dollar-denominated sovereign bonds, widely seen as the first test of whether Moscow will meet its obligations after Western sanctions were imposed.It has a 30-day grace period from Wednesday’s deadline.Sanctions imposed over Moscow’s invasion of Ukraine have cut Russia off from the global financial system and blocked the bulk of its gold and foreign exchange reserves, while Moscow has in turn imposed countermeasures – all of which complicate payments.Russia’s finance ministry said on Thursday its order to pay the $117 million had been fulfilled and said it would update the market separately on whether the payment was deposited into the account of payment agent Citibank.Citi’s branch in London declined to comment. But a number of creditors and sources familiar with the situation in Asia and Europe said the funds had yet to be received by holders of the bonds. The finance ministry had planned to send the equivalent interest payment amount in roubles if dollar payments did not reach foreign bondholders, something credit rating agency Fitch said would constitute a sovereign default, if not corrected within a 30-day grace period. Generally, a country would pay creditors abroad by sending money to a correspondent bank, which transfers the funds to the paying agent of the security, in this case Citi, before it goes to individual holders’ deposit accounts through settlement steps to confirm ownership of assets.NAVIGATING SANCTIONSThe raft of international sanctions have raised questions about whether such complex and multi-step transactions would run into difficulties, not least because Russia’s central bank is among those institutions targeted in Western sanctions.”The fact is that from the very beginning we have said that Russia has all the necessary funds and potential to prevent a default – there can be no defaults,” Kremlin spokesman Dmitry Peskov said in a daily briefing on Thursday. “Any default that could arise would have an entirely artificial character,” Peskov said.Russia has 15 international bonds with a face value of about $40 billion outstanding, roughly half held by foreign investors.The coupon payments due on March 16 are the first of several, with another $615 million due over the rest of the month. The first principal payment is due on April 4 when a $2 billion bond matures.The bonds have a mix of terms and indentures. Bonds sold after Russia faced sanctions for its 2014 annexation of Crimea contain a provision for alternative currency payments. Those listed after 2018 have roubles as an alternative currency option.A so-called non-payment event could trigger Russian debt default insurance policies known as Credit Default Swaps (CDS) that investors take out for this kind of situation. Investment bank JPMorgan (NYSE:JPM) estimates there are roughly $6 billion worth of outstanding CDS that would need to be paid out.A committee that examines whether or not CDS payouts are due is scheduled to meet later on Thursday. It was not immediately clear what was precisely on the agenda for the committee, which is made up of top banks and funds involved in the CDS market.The U.S. Office of Foreign Assets Control (OFAC) said on March 2 it had authorised transactions for U.S. persons for “the receipt of interest, dividend, or maturity payments in connection with debt or equity” issued by Russia’s finance ministry, central bank or wealth fund, but the exemption runs out on May 25.Russia is due to pay nearly $2 billion on its external sovereign bonds after that May 25 deadline and until year-end. More