Aurelia Butler

NEW YORK (Reuters) – Investors are betting that newly renominated Federal Reserve Chairman Jerome Powell will need to step up the pace at which the central bank is normalizing monetary policy to better grapple with surging consumer prices.For months, Powell has insisted the current bout of inflation is likely to be transitory, and said the central bank will be “patient” in deciding when to begin raising its benchmark rate from near-zero. The Fed kicked off the taper of its $120 billion per month bond buying program in November, with a plan to end purchases altogether in mid-2022.Some investors, however, believe the Fed will need to taper faster and raise rates sooner than expected to tame rising consumer prices, which grew at the quickest pace in more than three decades in October. Their view has been reinforced by recent public debate among some Fed officials on whether to withdraw support for the economy more quickly to help tame inflation.One barometer of investors’ monetary policy expectations, futures on the federal funds rate, on Monday afternoon had priced in a 100% chance that the central bank will raise rates by July, from 92% last week. Rates market responds to Powell staying as Fed chair, https://graphics.reuters.com/USA-FED/movanlrwbpa/chart.png News of Powell’s nomination on Monday also sent yields on shorter-dated Treasuries, which are more sensitive to rate views, to their highest level since early 2020. Powell is widely seen as more hawkish than Fed Governor Lael Brainard, who was also vying for the top job.Investors are “challenging the Fed to some extent and becoming more concerned about the Fed falling behind the curve on inflation,” said Mike Sewell, a portfolio manager at T. Rowe Price. Sewell is buying shorter-dated Treasuries and the U.S. dollar, betting that the Fed will need to raise rates three times next year to tame inflation. The central bank’s dot-plot, released in September, showed half of policymakers penciling in one rate increase next year. Analysts at Jefferies (NYSE:JEF) wrote Monday’s rise in Treasury yields, which move inversely to prices, “is predicated on the idea that the prospects for a June 2022 rate hike have increased significantly on the back of Powell’s renomination,” though the bank believes a June rate increase is unlikely. Bets on shorter-dated Treasuries have also drawn Gary Cloud, a portfolio manager of the Hennessy Equity and Income Fund.”We’re in an era that investors haven’t seen before because you have a significant uncertainty as to whether the Fed will act in time” to prevent inflation from spiraling higher, he said. Diverging views on how aggressively the Fed will move have helped stir volatility in Treasury markets. The ICE (NYSE:ICE) Bank of America (NYSE:BAC) MOVE Index, which shows expectations of volatility in the bond market, stands near its highest levels since April 2020.Inflation expectations edged lower on Monday, with 5- and 10-year breakeven inflation rates dipping to their lowest in about two weeks.Meanwhile, calls for the Fed to normalize monetary policy more aggressively are now coming from some of the central bank’s own policymakers, reinforcing many investors’ views. Vice Chair Richard Clarida said earlier this month that “a discussion about increasing the pace at which we are reducing our balance sheet” would be something to consider for the Fed’s next meeting, while Fed Governor Christopher Waller called for the Fed to double up on its wind-down of bond purchases, finishing by April 2022 to make way for a possible interest-rate hike in the second quarter.Powell, for his part, has said inflation will likely abate as supply chain bottlenecks that have contributed to higher prices eventually ease. There have been some indications that the worst of those disruptions are clearing up, with cargo shipping costs down by a third over the last month and prices for commodities such as iron ore and lumber tumbling. Others, however, insist inflation is headed higher. Adam Abbas, a portfolio manager and co-head of fixed income at Harris Associates, is buying the bonds of companies such as hotels, which may be able to better deflect the effects of higher inflation by raising prices. Donald Ellenberger, a senior portfolio manager at Federated Hermes (NYSE:FHI), expects bond market volatility to persist as inflation proves “stickier” than the Fed expected. He plans to focus on shorter-duration Treasuries until the 10-year note rises to 2.5% or higher, a level he sees as appropriate given inflation. “For many years the Treasury market was pretty sleepy and rates didn’t move very much,” he said. “Now the market doesn’t know what to do when faced with the fact that inflation is persisting for longer than expected.” More

Unhedged has nothing to say about Jay Powell’s renomination as Federal Reserve chair that hasn’t been said already. It was a good idea, and good politics, because continuity was needed and a new Fed chief was not a hill President Joe Biden needed to die on. If you think there is more to say than that, email it to us at [email protected] or [email protected] Growthflation, real rates and debt trapsWell, would you look at this:

Fourth-quarter economic growth is tracking towards an 8 per cent annualised rate, according to the Atlanta Fed’s purely data-driven real time estimate. That’s a heck of an acceleration from the 2 per cent for the third quarter, and ahead of high inflation. Hat tip to Chris Verrone of Strategas, who pointed this out in a recent note, on the grounds that no one was paying attention — which was true, at least of Unhedged, which was fully asleep at the wheel on this development. The Atlanta reading is not anomalous, either. Verrone points out that, for example, Citi’s economic surprise index, which had been on a long slide downwards since mid-2020, has been rising since September, and is now well into positive territory, meaning that the majority of reports are now coming in ahead of expectations.Jim Reid of Deutsche bank called this environment “growthflationary” yesterday, and I like the term, as a contrast to stagflation. But the signs of emerging growthflation make the refusal of real interest rates to rise all the more mysterious. Here are the standard proxy for real rates, the yield on 10-year inflation-indexed Treasury securities, or Tips:

This chart makes me embarrassed to be an American. I mean, real rates of minus 1 per cent, after a kazillion dollars in stimulus, and despite consumers and companies that are flush and free-spending? Come on, people. It makes me embarrassed as an analyst too, because I’ve always thought that spikes in inflation, like the ones we are having now, should force real rates up. The argument for this idea is that because high inflation is always volatile, bond investors respond to high inflation by demanding compensation for the possibility that inflation will get higher still, dragging real rates (nominal rates minus inflation) up. This is not happening at all now.A look at the long-term relationship between real rates and inflation only makes me feel a little bit better. Tips have only existed for a few decades so in this chart I have used 10-year yields less three-year rolling average core consumer price index inflation as a real rates proxy. Here is the result, compared to average core CPI inflation by itself:

It is interesting that real rates hit or came close to zero when inflation peaked in 1970, ’74 and ’80. It took time for volatile inflation to drag real rates up to their early-80s peak, by which time inflation had begun its long-term decline. Maybe we are seeing a repeat of this pattern now, and we can expect real rates to play catch-up. Decades of low and stable inflation has taken the inflation risk premium out of the bond market. It’s not going to come back in a period of a few months. People may need to lose more money before the message gets through. But there is another explanation for why real rates remain on their backs: we’re in a debt trap. The always-interesting Ruchir Sharma argued this line in the FT yesterday. The idea is that debt has so piled high that any increase in rates will make it terribly expensive to service, wounding the economy and leading rates back down again: “In past tightening cycles, major central banks typically increased rates by about 400 to 700 basis points. “Now, much milder tightening could tip many countries into economic trouble. The number of countries in which total debt amounts to more than 300 per cent of GDP has risen over the past two decades from a half dozen to two dozen, including the US. An aggressive rate rise could also deflate elevated asset prices, which is usually deflationary for the economy as well.”I’m not sure the debt trap hypothesis is right, but it is not to be dismissed. Note that, as Sharma indicates, it comes in two flavours. Following Robert Frost, we might call them fire and ice. In the fire scenario, higher rates cause an asset price crash that stalls the economy and ends inflation all at once. In the ice scenario, rates high enough to end inflation cool economic growth over time. Like Frost, I favour fire: the last two cycles ended in asset price crashes. Why should this time be different? Fixing the Treasury marketThe US Treasury market almost broke down in March 2020, which scared everybody to death. When things get rough, it is important that people can raise cash by selling Treasuries, because if they can’t, pretty much everyone will default on everything. We recently spoke to Yesha Yadav, a Vanderbilt University law professor who last year wrote a blueprint for reforming the Treasury market. Yadav thinks that a couple of dozen primary dealers — mostly big banks — underpin Treasury market liquidity. But they disappear when they are needed most. In last year’s crisis: “We saw price dislocations, liquidity disappeared, bid-ask spreads widened, Treasury prices became out of sync with the futures market. This was a catastrophe as far as the reputation and credibility of the Treasury market is concerned.“[Primary dealers] do not have any constraint binding them to liquidity provision in US Treasury markets. Which means it’s [rational] for them to do as they have done in March 2020, in February 2021, in October 2021 — to simply exit the market.”The world’s most important market is liable to fall apart whenever a few firms decide that the risks of participation are too great. Something ought to be done about this, and proposals vary.Gary Gensler, chair of the US Securities and Exchange Commission, wants a centralised Treasuries clearing house, eliminating the counterparty risks of bilateral clearing. JPMorgan thinks the supplemental leverage ratio, which requires capital to be held against risk-free assets, should be nixed, as it discourages banks from holding Treasury inventory. Yadav likes both ideas, and also thinks regulators could secure agreements from primary dealers that they would trade “against the wind” during market turmoil. She writes:“Such a commitment would not be open-ended. But it could prevent a rapid deterioration of trading conditions during difficult conditions. This affirmative market making was once prevalent in the equity markets where, for example, New York Stock Exchange specialists provided this kind of service.”Neither primary dealers, nor any other buyer, will enter panicked markets unless it is profitable for them to do so. A central clearing house, ending the SLR, and liquidity provision agreements would all increase risk-adjusted profits at the margin. But it may not be enough, given the size of leveraged positions in the modern Treasury market, and the huge messes they can create. Unhedged thinks that either the Fed will remain the buyer of last resort, as it was in 2020, or markets will have to learn to live without guaranteed Treasury market liquidity (Ethan Wu). One good readJonathan Chait thinks that Biden’s unpopularity comes not from Rooseveltian aspiration but the stain of the hard left, “a privatised shadow party, financed by naive donors and staffed by fervent foot soldiers, carrying out a strategy of anti-politics”. A good rendition of an increasingly popular view. More

If Lael Brainard was disappointed as she stepped in front of a White House podium on Monday to accept US president Joe Biden’s nomination to become vice-chair of the Federal Reserve, she did not show it.For weeks, the Fed governor, considered one of the most talented Democratic economic policymakers of her generation, had been in the mix to lead the US central bank.But ultimately not even an eleventh-hour campaign from progressive senators could secure her the top job, and on Monday Biden confirmed the reappointment of Fed chair Jay Powell.If confirmed by the Senate, Brainard’s elevation to the most important deputy position within the Fed will give her a more prominent perch to shape policy, and possibly a springboard to become Treasury secretary or Fed chair in the future.The role of Fed vice-chair — at present held by Richard Clarida, and in the past by officials including Donald Kohn, Stanley Fischer and Janet Yellen — is an influential one at the central bank, with the occupant expected to provide intellectual underpinning for policy moves and help signal any shifts to financial markets. Biden on Monday presented his pair of picks very much as a team, and Brainard, who was already considered part of the inner circle on the Fed board, said she had felt “privileged” to work with Powell on the central bank’s response to the pandemic. But there have been some areas of divergence between Brainard and Powell that could provide an early test of their new working relationship.In the seven years that Brainard has served as a Fed governor, she set herself apart on the issue of banking regulation, dissenting more than 20 times on board votes surrounding rule changes that would loosen restrictions on the largest and most important financial institutions.Her efforts to safeguard the post-global financial crisis regulatory apparatus won her plaudits from progressives, and made her their preferred candidate for chair over Powell, a former financier who has been criticised for a perceived weakness in his role as one of Wall Street’s main watchdogs. “What is clear is that Lael Brainard has been a strong opponent of deregulation,” said Jeremy Kress, a former lawyer in the banking regulation and policy group at the Fed.

Jay Powell, left, with Daniel Tarullo and Lael Brainard at a Fed governors meeting in 2016 © AP

Brainard garnered further acclaim among Democrats for her commitment to strengthening rules around how banks service disadvantaged communities and for pushing the Fed to more seriously consider climate-related financial risks. In the days leading up to Biden’s decision, Democratic senators singled out Powell’s less forceful approach to tackling such issues as the main argument for denying him a second term.Meanwhile, some worry that Brainard — who is considered dovish on inflation and has advocated a patient approach to monetary tightening — could prove more hesitant than Powell to move forward with interest rate increases as persistently high prices become a dominant preoccupation for the central bank.But others stress that she remains closely aligned with the chair’s thinking, and very much a known quantity when it comes to crafting policy. “She is not like a stranger dropping in from Mars,” said Alan Blinder, the former Fed vice-chair and Princeton University professor.Brainard has also already shown signs of adapting her views as the economic conditions shift. “She has been at the Fed in challenging times and she has had policy positions where she has had to make tough decisions,” said Randy Kroszner, the former Fed governor who overlapped with Brainard at Harvard University. “She is battle-ready.”On Monday Brainard appeared to put the fight against inflation at the very top of her agenda, suggesting it was by no means a secondary concern to achieving full employment. “I am committed to putting working Americans at the centre of my efforts at the Federal Reserve,” she said. “This means getting inflation down at a time when people are focused on their jobs and how far their pay cheques will go.”

Brainard’s policy experience dates back to serving in the administrations of Bill Clinton and Barack Obama, in addition to a long period working on global development at the Brookings Institution, a Washington think-tank.Under Obama, she served at the Treasury as undersecretary for international affairs, as the US emerged from the financial crisis and had to contend with the fallout from a eurozone sovereign debt meltdown that threatened the US recovery. She also helped to manage economic relations with China as Washington’s stance towards Beijing started to become more confrontational.Brainard was intimately involved in the establishment of the central bank’s new framework for setting monetary policy in 2020. The upshot was that the Fed would not raise interest rates at the first hint of price pressures, as it has traditionally done, but rather run the economy “hot” to try to foster a stronger recovery that benefited a broader group of Americans. In practice, this has meant keeping rates at today’s near-zero levels until inflation averages 2 per cent and the Fed achieves maximum employment. Brainard had a hand in ensuring that latter goal was met in a “broad-based and inclusive” manner, effectively promising that, this time, fewer Americans would be left behind as the economy recovered. Claudia Sahm, a former Fed economist, said this shift marked a “sea change” in monetary policy.Just over a year since its inception, however, the new mantra has come under pressure due to soaring inflation. That leaves Brainard, if confirmed, to help adapt the new framework to a very different economic reality than when it was unveiled.It is an issue that will make for a “trying” 2022, said Stephen Cecchetti, an economist at Brandeis University who previously led the monetary and economic department at the Bank for International Settlements.Bill English, a Yale professor and former director of the Fed’s division of monetary affairs, said: “When the inflation and employment goals are out of alignment, how do you choose? That issue may come up fairly soon in the next six months to a year, and the Fed may have to respond to that.” More

This is the second part of an FT series analysing how the Covid-19 pandemic has transformed the labour market and changed the way millions of people think about workLindsay Coleman has quit two jobs this year. The first, in January, was in sales at the software company where she had worked for almost six years, ever since she graduated from college. She loved her colleagues there but felt that she could not turn down an offer from a competitor for a role she thought might be more enjoyable.But by October Coleman realised that she would rather sell apartments instead of software and after earning her real estate licence, she resigned again to join The Corcoran Group.“Software sales is a very lucrative career, but I always deep down knew it wasn’t what I loved and didn’t ever know if I would do something about it,” said Coleman, 29.“When you are, like, sitting alone in an apartment all the time doing a job, every day, all day, you really realise if you’re happy or not,” she added.Coleman is part of an unprecedented wave of US workers quitting their jobs in 2021. About 4.4m Americans quit their jobs in September alone, the labour department reported this month, breaking a record for the most resignations in a single month since the survey began in 2001. The previous record was set in August.Across the US, workers are in high demand as businesses expand to take advantage of an economy rebounding from the coronavirus pandemic. While some are attempting to wield their newfound leverage to gain better pay and benefits from their existing employers through organised action, far more are abandoning their old gigs for better ones.Job openings, too, have soared. Economists believe that most quitters likely had other roles lined up before turning in their notice, because labour force participation has held steady since its 2020 slump despite record rates of resignation.“In 2021 we’ve really seen the quit rate for workers pick up as demand for workers picks up as well,” said Nick Bunker, an economist at the jobs site Indeed. “So this is really the story of many workers seeing opportunities in the labour market going out and seizing them.”“The Great Resignation”, as it is already being dubbed, initially came as a surprise to many economists who argue that workers have typically been unwilling to disturb the status quo even when they are unhappy in their jobs.But the Covid-19 crisis muddled both economic and social norms, leading workers to re-evaluate what they want out of their working lives. The result was that many who had previously been on the fence about quitting decided to finally bite the bullet. “It’s ‘Covid clarity’,” said Alexander Alonso, chief knowledge officer of the Society for Human Resource Management, who has been studying the phenomenon for six months.Most pandemic-era quitters leave in search of better pay, a better work-life balance or better benefits in the workplace, Alonso said. “It’s not the return to the [office] that people are fighting,” he added.Industries that have been most disrupted by the pandemic have also had the greatest number of resignations, Bunker said, pointing to manufacturing, leisure and hospitality.For Danit Sibovits, a New York-based lawyer, it was a dearth of workplace benefits that led her to quit her job at an insurance defence company in June. Her old company did not provide associates with basic work-from-home equipment such as laptops or wellness resources during last year’s lockdowns.“I was stagnant,” said Sibovits, 38. “Pre-Covid I was OK. I could deal with it. And then I couldn’t.”

Danit Sibovits, a New York-based lawyer, quit her job in June

In Houston, another lawyer came to the same realisation. Aparna Shewakramani, 36, had been practising law for 10 years, most recently as the general counsel at an insurance brokerage. She never really enjoyed her job, and the pandemic gave her the opportunity to star in an unscripted Netflix series called Indian Matchmaking.Shewakramani took a leave of absence from work to pursue other opportunities, including writing a book after the show became an overnight sensation, but never returned. She resigned in April.“I had to trim the fat, and for me, that was my stable career,” Shewakramani said.The need for greater financial stability pushed Jenna Coluccio, a 27-year-old doctor’s assistant, to quit her job in June. She knew the downtown Manhattan intensive care unit she had worked for just over two years was underpaying her and was not the right cultural fit for her long-term.Though she had planned to stay in the job for three years, the stress of the Covid crisis pushed her to start looking for a new role at her preferred hospital sooner. She received an offer a few weeks later and immediately handed in her notice.“People keep talking about how this is a generation that keeps switching jobs,” Coluccio said. “It’s because no one allows themselves to be bullied or be undervalued. And you know what? That’s absolutely right. Our parents taught us that you should stick with it, stay at a job, but why?” More

A clutch of bond bulls is betting that the world’s biggest fixed income market will shrug off the surge in US inflation to a 30-year high as long-term shifts in the American economy keep yields depressed. Data showing that consumer prices rose 6.2 per cent in the year to October briefly jolted the US Treasury market earlier this month. However, yields on debt maturing decades in the future remain well below their 2021 peaks despite expectations for a protracted period of elevated price growth. For some longtime bond bulls, the market’s nonchalance in the face of surging prices — typically kryptonite for debt investors — is a vindication of the view that inflation will not leave a lasting dent on the market and, when the dust settles on the economic recovery, the pre-pandemic landscape of low interest rates will be largely unchanged.“What matters are not this week’s [gross domestic product] print or the next [consumer price index] print, or the next Fed meeting, the fundamentals are what drives the longer run,” said Steven Major, HSBC’s head of fixed income research. Those fundamentals, he argued, include America’s vast debt burden and an ageing population. Robert Tipp, PGIM’s head of global bonds, said the prices of US government bonds — which move inversely to yields — will be supported in the long run by demographic trends and fiscal fundamentals. The argument floated by the bulls is that Americans approaching retirement — a large and wealthy generation — will increasingly be shifting into low-risk investments that provide consistent income streams over a long time horizon, such as Treasury bonds. This cohort is expected to grow rapidly in the coming years, with the proportion of Americans 65 years and older rising from about 17 per cent in 2020 to 21 per cent in 2030, according to projections by the US Census Bureau. The debt load the US has accumulated from fiscal spending and tax breaks in recent years, partly to support the US economy through the pandemic, could also limit the possibility of future borrowing, further depressing the growth outlook, some bond analysts argue. Federal debt held by the public in 2020 reached 100 per cent of gross domestic product for the first time since the wake of the second world war, and is expected to continue rising, the Congressional Budget Office estimates. Those long-term trends are pushing back against rising inflation and economic growth, both of which lift yields on 10-, 20- and 30-year bonds higher. Many investors wagering that inflation will continue to rise are betting against longer-dated Treasuries. For bond bears such as Sonal Desai, the chief investment officer at Franklin Templeton, there is no evidence that inflation will ease significantly. She noted that the Federal Reserve will continue buying bonds next year, albeit at a slower pace than at the height of the pandemic, just as the government is deploying “another year of another massive amount of fiscal spending.”“Overall policy remains very expansionary. So these things together, make me think that inflation is likely to stay around for quite a while,” said Desai.The bond bull thesis is not just about long-term trends — they are arguing that growth and inflation will not rise to levels that would change the course of those broad economic shifts. On inflation, the bond bulls are aligned with the Fed: they believe that although inflation is currently running hot, it is primarily being driven by temporary forces such as supply chain disruptions.Some investors who recognise the long-term waves that Major and Tipp are focusing on say they think those trends are unlikely to be the primary drivers of yields in the coming year. These long-term drivers “are going to continue to be a force for lower rates in the future, but over the near term, I would give some greater weight to the cyclical and technical factors driving yields higher”, said Gregory Whiteley, portfolio manager at DoubleLine Capital. These include rising inflation, above-trend growth and demand for Treasuries from European and Japanese pensions.The Fed’s decision earlier this month to begin slowing its $120bn a month asset purchase programme, which will rob the Treasury market of its biggest buyer, is unlikely to have a lasting impact on Treasury yields, the bond bulls argue, pointing to the lack of any long-term correlation between the supply of bonds and their price.“So the bond supply narrative is that there’s a lot more bonds coming. More supply brings the intuitive view that the yield will have to go up,” said Major. “I don’t see any empirical evidence of that playing out. Frankly, I find that view is nonsense.”Other investors are relatively relaxed about the Fed’s imminent departure because it will come at a time when the US Treasury — and other big bond issuers around the world — are reducing the scale of their borrowing from the levels reached at the height of the pandemic.“It’s not clear to me that tapering will necessarily mean a big increase in yields, not least because the net supply in a lot of places isn’t actually going to be larger than it has been over the last couple of years despite the fact that purchases are going to stop,” said Isobel Lee, head of global bonds at Insight Investment.“We’re not facing some kind of cliff edge,” she said. More

The Reserve Bank of New Zealand is expected to raise interest rates on Wednesday to cool a hot economy and runaway housing market, in a decision that will be closely watched by central banks around the world. Economists said the monetary policy decision would be a close call between a 25 basis points increase in the official cash rate, with more aggressive guidance for further rate rises, or a 50 basis points rise.The RBNZ’s move is of international interest because it was one of the first central banks to tighten policy after the coronavirus pandemic struck — raising interest rates to 0.5 per cent last month — amid a global surge in inflation.New Zealand’s central bank is unusual among its peers in that both inflation and employment are running at or above target levels, putting pressure on the central bank to reduce monetary stimulus.“Recent data has reinforced that demand in the New Zealand economy is running hot and that inflation pressures are building,” said Michael Gordon, Westpac New Zealand’s chief economist, who expects a 25 basis point rise but added there was a material risk of a 50 basis point increase. With New Zealand keeping Covid-19 cases near zero until recently, its labour market has not been badly disrupted by the pandemic. Third-quarter data showed the unemployment rate fell to a record low 3.4 per cent even as participation in the labour force rose to a high of 71.2 per cent.The data, including for wage growth, was much better than the RBNZ’s forecast.Meanwhile, third quarter inflation at an annualised rate rose to 4.9 per cent, well above the RBNZ’s forecast for 4.1 per cent. House prices climbed further in October and were up about 30 per cent year-on-year.Andrew Ticehurst, Nomura Australia’s senior economist, cited a rise in longer-term inflation expectations along with other strong data as reasons for the RBNZ to raise rates by 50 basis points.“The data suggest a clear risk of overheating,” Ticehurst said. Another reason for a bigger rise, he added, was that the next meeting would only take place in February.“Because of the three-month gap between meetings, we see merit in a harder tap on the brakes, and one which would result in the cash rate finishing the year at a symmetrical 1 per cent,” Ticehurst said.

The RBNZ’s monetary policy is very stimulatory because its funding programme for banks, introduced late last year to deal with the impact of Covid-19, will continue until it ends in December 2022. Its asset purchases programme ended in July but it still holds all the bonds.Jarrod Kerr, Kiwibank’s chief economist, said there was chance of a 50 basis points increase but he expected the RBNZ to achieve the same outcome through forward guidance via its “OCR track”, which provides a forecast of changes to interest rates.“We expect the RBNZ to adjust their OCR track by pulling forward forecast hikes and pushing higher the end point,” Kerr said.The rate decision will be accompanied by a quarterly monetary policy statement showing updated forecasts on the economy. In the last statement in August, the RBNZ projected the cash rate would rise to 2 per cent by September 2023 and stay near that level until September 2024. Kerr expects the RBNZ to project a peak of about 2.7 per cent, while Westpac’s view is a peak of 3 per cent.Gordon said that the risk of getting behind the curve could prompt the RBNZ to do more now. The advantage of a bigger move on Wednesday was that the RBNZ could avoid a higher peak in the cash rate, he said. More

Pakistan’s central bank governor has warned that emerging markets are vulnerable to a taper tantrum-style shock if advanced economies do not act sooner to manage rising global inflation.The comments by Reza Baqir, a former senior IMF official, signal growing unease among developing-economy policymakers that central bankers in rich countries are not doing enough to rein in pandemic-era monetary stimulus and combat rising prices.This will disproportionately hurt developing countries if foreign investors end up dumping emerging and frontier-market assets owing to unexpected interest-rate rises in advanced economies, Baqir said in an interview with the Financial Times.“If there’s volatility in financial markets because there is a somewhat sudden realignment of expectations of interest-rate changes in advanced economies, that volatility will impact emerging markets with high debt and moderate or low levels of reserves more than otherwise,” he said.Baqir’s comments came after the State Bank of Pakistan last week raised its own benchmark interest rate by 150 basis points, to 8.75 per cent, as the country battled rising inflation, a depreciating currency and a widening current account deficit.“In Pakistan, we don’t have much presence of foreign investors in our local currency markets,” he said. “But we could have an impact on the credit, on our sovereign bonds, if fund managers pull out of emerging markets as an asset class.”Central banks are under pressure to wind back stimulus programmes introduced at the height of the coronavirus pandemic, on concerns that easy money was fuelling sustained global inflation.Policymakers and investors fear that inaction, followed by abrupt tightening, could spark a repeat of the 2013 taper tantrum when the US Federal Reserve’s signalling of stimulus withdrawal sparked an emerging market sell-off.Gita Gopinath, the IMF’s chief economist, has warned that low and middle-income countries already weakened by the pandemic “cannot afford” a similar shock.On Friday the Fed’s vice-chair Richard Clarida said the bank was open to faster tapering of its bond-buying stimulus programme, introduced in the darkest days of the pandemic, owing to the “upside risk” to inflation.Baqir said: “Gradually, central banks around the world are moving towards a realisation that there is a justifiable reason to be proactive about moderating monetary stimulus.”He added: “For emerging markets with high debt, with reserve levels not where they would like them to be, they don’t have the luxury of waiting as much as those central banks that issue hard currencies have.”Some emerging market central banks have been more active on inflation than in advanced economies. Brazil, for example, last month raised interest rates by the most in almost 20 years — the sixth increase this year — owing to inflation concerns.Pakistan was recently reclassified by index provider MSCI from an “emerging” to a “frontier” market, considered less developed or smaller. Concern about inflation prompted the central bank to bring forward its monetary policy meeting.Inflation rose to 9.2 per cent in October, adding to pressure on prime minister Imran Khan’s government. Imports have also surged, with the current account deficit in the quarter that ended in September rising to $3.4bn, compared with $1.9bn in the entire previous financial year ending in July.Investor unease about a deadlock with the IMF, which suspended a multiyear $6bn loan agreement, contributed to the fall of the Pakistani rupee to an all-time low of about Rs175 to the dollar this month.The IMF announced on Monday that it had reached a “staff-level” agreement with Pakistan to resume the payouts, with the next $1bn tranche now pending approval from the IMF’s executive board.Additional reporting by Farhan Bokhari in Islamabad More