Aurelia Butler

WHY IT’S IMPORTANTBrazil’s government has been seeking new sources of revenue to meet fiscal targets that include reducing its fiscal deficit to zero, while being loath to adopt broad spending cuts. It says the new move is in line with global efforts to combat tax evasion.DETAILSThe executive order sets an additional levy on Brazil’s social contribution tax on corporate income (CSLL) to make sure the minimum taxation stands at 15%, according to the publication.Brazilian officials had previously said the move was being considered both as a way to align the country with tax discussions it has been addressing as chair of the G20 and to ensure that the 2025 fiscal goal is met.KEY QUOTEThe move comes as Brazil “adapts to the Global Anti-Base Erosion Rules (GloBE Rules) elaborated by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting,” the order signed by President Luiz Inacio Lula da Silva said.ADDITIONAL BACKGROUNDBrazil’s Finance Ministry did not immediately detail how much it expects to collect in additional tax revenue following the move. Government officials will hold a press conference on the topic later on Friday, the ministry said.Executive orders in Brazil have immediate validity but must be endorsed by lawmakers within four months or they expire. More

LONDON (Reuters) -Sudden ebbs and flows of inflation without equivalent hits to economic output may be a feature of a post-pandemic world of fragile supply chains – potentially requiring more forceful and hyperactive central banking, and possibly in both directions.The speed of the global inflation spike after the twin shocks of COVID-19 and the Ukraine invasion has by now almost been matched by the disinflation that’s followed. So much so, that central banks are now just as rapidly reversing the steep, and arguably late, interest rate squeeze they used to contain prices over 2022 and 2023.The truly remarkable outcome despite that roller-coaster is a likely “soft landing” for economies without any major contraction of overall output. And a big question for policy makers, business and financial markets alike is whether we’ve just returned to square one while dodging a rare bullet.Trying the frame the lessons of the episode this week, the Bank for International Settlements – the umbrella organisation for global central banks – once again sketched a world where supply shocks may be more frequent and inflation edgier.But in a speech in London this week, BIS Deputy General Manager Andrea Maechler nuanced the picture to suggest central banks should no longer “look through” supply shocks as temporary inflation irritants in the way they had often done pre-pandemic.In particular, she spotlighted much steeper supply curves and a steeper “Phillips Curve”, which plots the relationship between unemployment and wages, or more broadly output and prices.The gist of her argument is that such steep supply curves mean bigger moves in prices for a given shift in output, seen most spectacularly as post-pandemic labour shortages led to wage surges for companies that wanted to ramp up business quickly.Disruptions to overseas supplies and imports – most obviously in the post-Ukraine energy price shock – similarly meant rising output twinned with a supply shock had a much sharper effects on overall prices than previously.And crucially, the impact on economy-wide inflation was greater and more rapid than prior commodity and sectoral shocks of recent decades because they hit when overall inflation was already above central bank target rates, Maechler said, pointing to BIS studies illustrating that effect. TAKE CAREMaechler concluded “central banks must exercise care when assessing the extent to which they can afford to look through supply shocks”. And that should colour their approach as those supply shocks were set to be more frequent in a world of de-globalisation, geopolitical tension, falling workforces, high public debt, climate change and a transition to green energy.Being more “forceful” and active in their policy response, regardless of the impact on underlying demand, was likely necessary to ensure more volatile inflation in the short term did not disturb longer-term inflation expectations and faith in 2% targets remained.But most intriguingly, given the head-scratching over how the wild swings in inflation and interest rates of late did not sow a major recession, Maechler said steep supply curves also meant wages and prices may more quickly subside to target with only relatively mild hits to output from higher interest rates.”Raising policy interest rates in response to adverse supply shocks may have only limited effects on activity if Phillips curves are steep,” she said. “Then, slowing the economy to tame inflation could be less costly in terms of output.””Today’s soft landing outlook may be partially explained by the economy – and in particular labour markets – being in a state where the Phillips curves are steeper than had been the case in the decades prior to the pandemic.”UNDERSHOOTWhere all of that fits into today’s picture is less clear, though the theme of persistent supply is clearly topical in a week of such ramped-up geopolitical anxiety. Whether the steep supply curves of the post-pandemic period endure or whether most of the quirks have already been ironed out is another question.But presumably it would also suggest supply-related developments that see inflation suddenly undershooting targets again and potentially threatening price stability on the downside should similarly be met with central banking force.Only this week, European Central Bank policymaker Mario Centeno made that case clearly as the ECB en masse appeared to pivot to faster easing. “Now we face a new risk: undershooting target inflation, which could stifle economic growth,” he said.Facing falling monthly prices last month and annual inflation back below 1%, new Swiss National Bank chairman Martin Schlegel also said the SNB was not ruling out taking interest rates back into negative territory.And even recent hold-outs at the Bank of England suggested they pick up the pace too, with BoE boss Andrew Bailey talking of being “a bit more aggressive” in cutting UK rates.For investors, the whole scenario points to a more volatile interest rate environment in both directions than they had been accustomed to in the pre-COVID decade. And yet it could remain a potentially positive horizon for company earnings and equities if broader economies can continue to surf wavier prices and borrowing rates much better than they have done for decades.The opinions expressed here are those of the author, a columnist for Reuters(By Mike Dolan; Editing by Jamie Freed) More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is First Deputy Governor of the Bundesbank and chair of the Central Banks and Supervisors Network for Greening the Financial SystemIt is clear that the effects of climate change have started to influence the monetary policy considerations of several central banks. Unfortunately, such factors will become even more relevant in the future.Severe weather events are intensifying, and so too are their economic impacts. Tropical storm Helene in south-eastern US is just the latest reminder of the damage that can be wrought.The annual damages on properties caused by natural catastrophes have more than doubled in real terms over the past two decades, reaching $280bn globally in 2023, according to Swiss Re. The overall impact is much larger, as acute physical effects ripple through the economy, influencing supply, demand and financial flows — and thus also monetary policy. A new Network for Greening the Financial System report compellingly illustrates how natural catastrophes such as floods and hurricanes affect the economy. They destroy homes, local infrastructure and production sites, requiring years and enormous amounts of money to rebuild. Waning confidence could prompt companies and households to cut back on spending, further undermining economic growth prospects.Price impacts are not spared, as severe weather events, among other factors, damage agricultural production and drive up food prices across regions. These sectoral effects can lead to an increase in overall inflationary pressures, depending on how much a drop in demand balances them out. For instance, droughts tend to exert upward pressure on headline inflation for several years, with developing economies especially affected, because of their higher dependency on agriculture.Against this backdrop, central banks might face the complicated task of taming inflationary pressure in a weak economy. Think of a situation when rising inflationary pressure might warrant policy tightening — particularly for central banks, whose primary mandate is price stability — even though this could contribute to economic strain. The State Bank of Pakistan, for instance, in 2022 opted to continue raising policy rates after the devastating floods caused a sharp increase in food prices.Climate change — and its uncertain outcomes — mean that central banks must focus on looking ahead and extend their horizon beyond the usual projection period. Estimates of future impacts illustrate what could be in store for the economy and the financial sector. At a global level, climate change could drive up annual food price inflation by between one and three percentage points by 2035, according to a study of the European Central Bank and the Potsdam Institute for Climate Impact Research. However, most studies still fail to consider the risk of crossing climate tipping points, which can significantly accelerate climate change. According to the OECD, ignoring these critical thresholds results in a severe underestimation of the economic costs. Extreme weather events can also bring us closer to these tipping points. The current drought in the Amazon region — the most severe since systematic recording began in 1950 — exemplifies this risk. With one-fifth of the Amazon rainforest already lost, mostly due to deforestation, concerns are mounting that this carbon sponge is on the brink of collapse. That would trigger a cascade of climate events, leading to higher economic costs globally.What is more, uncertainties surrounding the magnitude and duration of severe weather events — coupled with governments’ responses — will make the short-term forecasting of key economic indicators particularly challenging. An example is Hurricane Katrina in 2005, and the subsequent landfalls of hurricanes Rita and Wilma. In the highly dynamic weeks and months that followed, staff of the Federal Reserve adjusted their estimates of output and inflation a few times, as new information trickled in. Throughout the process, the Fed remained predictable in its actions, highlighting that good communication is key.Central banks have another side to watch, too, namely the green transition. Inflation and output may become more volatile as we undergo a transformation of the energy sector and supply chains. In the short term, carbon pricing and rising climate investments could reinforce inflationary pressures.Intensifying climate change adds to the array of challenges that monetary policy needs to adjust to. As extreme weather events become more frequent, central banks must pay even greater attention to longer-term inflation expectations. Though the reaction of each central bank will depend on its mandate, clear communication is essential to guide market expectations and ensure that policy decisions are well understood. Climate CapitalWhere climate change meets business, markets and politics. Explore the FT’s coverage here.Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here More

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