Aurelia Butler

Traditionally, inflation control has been the primary objective for most central banks, but in today’s economic environment, is inflation the only answer to the questions central banks face? Central banks operate in a data-dependent manner, basing their decisions on a wide array of economic indicators. As per analysts at Morgan Stanley, inflation, while critical, is not the only factor shaping central banks’ policy choices. “As inflation decelerates from its post-covid highs, the set of data that determine monetary policy paths are large,” the analysts said.In recent months, inflation has begun to slow, but the data remains noisy. For example, Morgan Stanley says that inflation figures are still volatile, making it difficult for central banks like the European Central Bank (ECB) and the Bank of England (BoE) to commit firmly to rate cuts or hikes​. The inconclusive nature of recent U.S. payroll data has only added to this uncertainty, further emphasizing that inflation control alone cannot address all the concerns facing central bankers.Central banks must balance inflation control with other macroeconomic considerations, including economic growth and exchange rate stability. As per Morgan Stanley, U.S. consumer spending remains robust, supporting GDP growth even as inflation moderates. However, the strong dollar, driven by a relative shift in central bank policies between the U.S. Federal Reserve and other economies like the Eurozone, poses new challenges. A stronger dollar has bolstered the euro and yen, adding to the complexity of the inflation-growth equationFor example, the ECB’s decision to cut rates in June 2024 was expected, as slow economic growth and soft wage increases seemed to signal that inflation was cooling. However, as Morgan Stanley points out, balancing inflation with growth concerns has left a “murky path forward” for the ECB, which now faces pressure to stimulate growth without reigniting inflation​.Another critical factor for central banks, flagged by Morgan Stanley, is the role of foreign exchange (FX) rates in shaping inflationary pressures. In August 2024, the euro strengthened against the dollar due to divergent central bank expectations, which helped contain inflation temporarily. However, a sharp appreciation of the dollar could undo some of these gains by driving up the cost of imports, thereby contributing to imported inflation in the missing regions like Europe​.“Back in Japan, where much of the crossmarket adjustments started, the inflation data have cooled temporarily. The market has been particularly attuned to the Governor and Deputy Governor’s balancing act in communicating the implications of the inflation volatility,” the analysts said.The BoJ’s choice to keep rates unchanged, while navigating the balance between rising wages and inflation, underscores the complex relationship between managing inflation and broader economic factors, as per Morgan Stanley.Inflation may be the headline economic issue, but labor markets and wage growth are equally critical for central banks in shaping monetary policy. Morgan Stanley mentions that wage dynamics in the Eurozone and the U.S. will play a key role in determining inflationary outcomes in the near future. Softer wage growth, as seen in the Eurozone, points to potential easing inflationary pressures. However, this also raises concerns about consumer spending and growth, which are equally important factors for central banks. More

As per analysts at Citi Research, the question of when deflation will begin to carry more weight in policy calculations centers on whether the authorities perceive real growth to be under significant threat.Citi Research report points to the inflation readings from August as the latest evidence of deflationary pressure. While food prices surged due to supply constraints caused by weather disruptions, contributing to a 3.4% month-over-month increase, this was not enough to offset the overall weakness in demand. Core inflation, excluding volatile components like food and energy, dropped to its lowest level since 2016, with core goods prices particularly affected. Home appliances, telecom equipment, and automobiles all saw sharp declines, signaling softness across various sectors. Services prices also contracted, with tourism demand easing significantly compared to previous years.The Producer Price Index (PPI), which reflects changes in prices received by domestic producers, also registered deeper deflation than expected. In August, PPI deflation worsened with a 1.8% year-over-year drop, driven largely by falling upstream commodity prices, such as oil and ferrous metals. Downstream industries, like durable goods and automobiles, showed little improvement, with only minor sequential changes.Despite the surge in food prices, the underlying narrative of broad-based demand weakness remains. “Looking ahead, online sales events into November may add further downside risks to inflation. Soft oil prices may not bode well for industrial prices either,” the analysts said.The structural issues within the Chinese economy have been vital in maintaining this deflationary environment. Citi notes that while food price inflation persisted, it failed to lift the broader inflation metrics due to the persistently weak demand across most sectors. Consumer sentiment remains fragile, with cautious spending and limited appetite for big-ticket purchases like automobiles and electronics.The anticipation of lower prices, especially during upcoming online sales events like November’s, intensifies concerns.Combined with global factors such as low commodity prices, China’s domestic economy faces mounting challenges. The government’s current policies appear insufficient to stimulate widespread recovery, as demand remains sluggish and producers continue to face an uphill battle.The consequences of deflation in China are complex. Citi Research highlights two main dimensions of its impact. First, deflation could entrench the economy in a vicious cycle, where falling prices reduce corporate revenues, which in turn leads to weaker wages and diminished household demand. This feedback loop deepens deflationary pressures, making it harder to break free from the cycle.Second, deflation heightens the disconnect between macroeconomic indicators and policy responses. Despite nominal deflation, the government’s primary focus has remained on real GDP growth. “Some minor reflationary moves could have started, yet with the policymakers’ primary focus on real GDP, we may not see a policy pivot until real growth becomes more challenging,” the analysts said.Citi Research argues that deflation has not yet become a key consideration in policy-making because the government’s attention is still centered on real GDP growth. The current policy stance is based on the assumption that, as long as real growth holds steady, inflationary and deflationary pressures are secondary concerns. So far, minor reflationary moves have been observed, such as the government’s emphasis on addressing “anti-involution” strategies. Certain sectors, like cement production, have taken steps to clear excess capacity, which may pave the way for price growth in the future. However, these moves are seen as sector-specific adjustments rather than broad-based measures to counteract deflation.Without improvement in end demand, these strategies are unlikely to reverse the deflationary trend. For the time being, the broader policy paradigm remains unchanged, as policymakers seem to believe that nominal deflation does not pose an immediate threat to the broader economy.The key question posed by Citi Research is: When will deflation begin to carry more weight in policy decisions? As per their analysis, the answer depends on whether real growth begins to falter. At present, deflation has not prompted a major shift in government thinking because the primary focus remains on maintaining steady real growth. However, if economic conditions worsen and downside risks to real growth become more pronounced, deflation will inevitably take on greater importance in shaping policy responses.While some initial efforts to address deflation are evident, such as the government’s efforts to reduce excess capacity in specific industries, these moves are unlikely to make a difference without an improvement in underlying demand. Citi analysts caution that if deflationary pressures continue to intensify, a broader policy pivot could be necessary to support both consumer and corporate confidence. More

BEIJING (Reuters) -China’s industrial output growth slowed to a five-month low in August, while retail sales and new home prices weakened further, bolstering the case for aggressive stimulus to shore up the economy and help it hit its annual growth target.The sluggish data released on Saturday echoed soft bank lending figures on Friday, underscoring weak growth momentum of the $18.6 trillion economy, the world’s second-largest, in the third quarter. Industrial output in August expanded 4.5% year-on-year, slowing from the 5.1% pace in July and marking the slowest growth since March, data from the National Bureau of Statistics (NBS) showed on Saturday.That missed expectations for 4.8% growth in a Reuters poll of 37 analysts.Retail sales, a key gauge of consumption, rose only 2.1% in August despite the summer travel peak, decelerating from a 2.7% increase in July. Analysts had expected retail sales, which have been anaemic this year, to grow 2.5%.”The momentum is slowing down…The bottleneck remains domestic demand,” said Xing Zhaopeng, ANZ’s senior China strategist.China’s oil refinery output fell for a fifth month while crude steel output in August fell 6.1% from July, suggesting disappointing demand.Faltering Chinese economic activity has already prompted global brokerages to scale back their 2024 China growth forecasts to below the government’s official target of around 5%. The economy grew by 4.7% in the second quarter. “The Q3 GDP is likely to be lower than Q2 based on current data flows. We expect large-scale stimulus to come soon,” said Xing.President Xi Jinping urged authorities on Thursday to strive to achieve the country’s annual economic and social development goals, state media reported, amid expectations that more steps are needed to bolster a flagging economic recovery.”As we are already toward the tail-end of the third quarter, time is running low for policymakers to introduce measures to buoy the economy amid numerous headwinds,” said Lynn Song, chief China economist at ING. The protracted property slump has led to Chinese consumers cutting back on spending. Some experts have even proposed distributing shopping vouchers to counter the trend.Premier Li Qiang said last month the country will focus on stimulating consumption and look at measures to boost household income.A central bank official said last week China still has room to lower the amount of cash banks must hold as reserves while it faces some constraints in cutting interest rates.NO PROPERTY SECTOR REBOUND Fixed asset investment rose 3.4% in the first eight months of 2024 from the same period a year earlier, compared with an expected 3.5% expansion. It grew 3.6% in the January to July period.Liu Aihua, spokesperson of NBS, said at a press conference on Saturday that China’s economic operations remained stable, but high temperatures and natural disasters affected growth last month. Cash-strapped local governments issued bonds at a quicker pace in August for construction of major projects, with Liu saying the quickening bond issuance and policy initiatives will support investment growth. However, the troubled property sector remains a major drag on growth. China’s new home prices fell at the fastest pace in more than nine years in August. Only two of 70 surveyed cities reported home prices gains both in monthly and annual terms in August.Property sales and investment slumped in the first eight months of the year. To aid the housing market, China may cut interest rates on over $5 trillion in outstanding mortgages as early as this month, according to Bloomberg News.While Beijing has ramped up efforts to rescue the housing market, many analysts say much more aggressive steps are needed to help debt-laden developers and encourage would-be home buyers back to the market.Some other economic indicators released on Saturday too were unflattering. China’s nationwide survey-based jobless rate climbed to 5.3% in August from 5.2% in the previous month, the NBS said, adding that more college graduates entered the job market to hunt offers.The one bright spot for China recently has been exports, but analysts are not sure for how long the trend of rising exports will continue, given the increasing trade tensions with some countries and regions. Zhiwei Zhang, chief economist at Pinpoint Asset Management, said investors will shift focus and wonder what will happen to growth in 2025.”Will the tight fiscal policy stance continue into next year, when global growth will likely slow down and put pressure on China’s exports?,” Zhang said. More

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BEIJING (Reuters) -China’s new home prices fell at the fastest pace in more than nine years in August, official data showed on Saturday, as supportive measures failed to spur a meaningful recovery in the property sector.New home prices were down 5.3% from a year earlier, the fastest pace since May 2015, compared with a 4.9% slide in July, according to Reuters calculations based on National Bureau of Statistics (NBS) data.In monthly terms, new home prices fell for the fourteenth straight month, down 0.7%, matching a dip in July.The property market continues to grapple with deeply indebted developers, incomplete apartments, and declining buyer confidence, straining the financial system and endangering the 5% economic growth target for the year. A Reuters poll predicted China’s home prices will fall by 8.5% in 2024, and decline by 3.9% in 2025, as the sector struggles to stabilise.China’s property market is still in the process of gradually bottoming out as home buyers’ demand, income and confidence will take some time to recover, said Zhang Dawei, chief analyst at property agency Centaline.”The market is looking forward to a stronger policy.”Property investment fell 10.2% and home sales slumped 18.0% year-on-year in the first eight months, according to official data also released on Saturday.Chinese policymakers have intensified efforts to support the sector including reducing mortgage rates and lowering home buying costs, which has partly revitalised demand in major cities.Smaller cities, which face fewer home purchase restrictions and have high levels of unsold inventory, are especially vulnerable, highlighting the challenges faced by authorities to balance demand and supply across various regions.Of the 70 cities surveyed by NBS, only two reported home price gains both in monthly and annual terms in August.”With our view of a worsening growth slowdown undernew headwinds in H2, we expect Beijing will be eventually forced to serve as the builder of last resort by directly providing funding to those delayed residential projects that have been pre-sold,” said Nomura in a research note on Friday.China may cut interest rates on over $5 trillion in outstanding mortgages as early as this month, according to Bloomberg News.To support mortgage rate cuts, a cut of five-year Loan Prime Rate is likely in September, complemented by a 20bp cut of medium-term lending facility (MLF) and 50bp cut to the reserve requirement ratio (RRR), economists at ANZ said in a research note on Friday. More

Upwards of 600,000 people – more than 1 in 20 on the Caribbean island of 10 million citizens – are suffering from water supply issues, officials said earlier this month.Havana is the worst affected by water shortages, though most of the country’s largest cities report over 30,000 customers without water, the government has said.Officials blame the growing problems on crumbling infrastructure and a persistent lack of fuel, symptoms of a festering economic crisis that has blighted growth and left the Communist-run country nearly bankrupt.Rachel Trimiño, 32, said the root causes are no mystery, even in her Havana neighborhood of Vedado, a comparatively upscale district of the capital.”All of the streets are full of leaking pipes, clean running water … but nothing in our homes,” she said.The problem defies quick fixes. Spare parts for outdated water infrastructure, like pipes and pumps, are in short supply, officials said. And without fuel and adequate transportation, even emergency water supply by cistern truck has been limited, according to residents. Frequent blackouts only make matters worse.”When they cut off power, we can’t give water,” said San Miguel de Padron resident Pedro Martino, who works with a church group that offers residents small quantities to stem the shortfall. “One thing depends on the other, and that’s the game we play.”Isolated protests have erupted in some areas, as residents overwhelmed by the growing list of problems and shortages lose patience in the still blistering heat of the tropical summer.Cuba’s economy has been decimated by a combination of factors, including the COVID-19 pandemic, stiffened U.S. sanctions and a state-dominated business model plagued by bureaucracy, mismanagement and corruption. The social and economic crisis is widely seen as among the worst since Fidel Castro’s 1959 revolution, leading to a record-breaking exodus of Cuban migrants in the past two years. More

The agency also affirmed its rating for Greece at ‘Ba1’. It is the only ratings agency that continues to classify Greece as non-investment grade, placing it one notch below the investment grade threshold.Greece has seen a series of rating upgrades recently, with S&P Global Ratings upgrading in April and Fitch in December, after 13 years in the junk category.Since 2020, the nation’s debt, the highest in the euro zone, has shrunk by 40 percentage points, reaching 160% of its gross domestic product in 2023 and is projected to drop further to 152% of GDP by the end of this year.”With the possibility of economic growth and fiscal performance exceeding our expectations, Greece’s fiscal strength could improve faster than currently expected,” Moody’s said in its report. More