Economy

Pakistan’s central bank has raised lending rates by 300 basis points to 20 per cent, the highest of any country in Asia, as it struggles to contain rising prices and a deepening financial crisis.The announcement on Thursday came after the rupee fell more than 6 per cent against the US dollar. Foreign exchange traders had earlier sold off Pakistan’s currency in response to a delayed IMF loan.The interest rate rise is one of several measures Pakistan hopes will free up a stalled tranche of about $1bn held back by the IMF under its $6.5bn financing agreement with the country, which ends in June this year.Pakistan’s central bank said “anchoring inflation expectations is critical and warrants a strong policy response”. On Wednesday, the Pakistan Bureau of Statistics reported that inflation climbed to 31.5 per cent in February, up from 27.6 per cent a month earlier.The country has been hit hard by rising food and fuel prices and catastrophic floods last year, a crisis compounded by political tensions that have weakened the government of Prime Minister Shehbaz Sharif. His opponents say he has resisted making tough unpopular reforms for fear of losing support ahead of parliamentary elections due to be held by October.In recent weeks, the government has introduced austerity measures and raised a VAT-style sales tax. But critics say it has stopped short of raising the taxes of the politically influential elite such as landowners, industrialists and businessmen.Pakistan’s failure to secure IMF funding has caused the government’s foreign exchange reserves to sink to the equivalent of less than the cost of a month’s imports. Meanwhile, businesses complain of long delays in making payments for imports, often because of unofficial restrictions by the central bank. Companies such as automotive manufacturers have been forced to scale down production due to delays in imports of spare parts. Elsewhere, foreign airlines have faced delays in repatriating funds abroad.The rating agency Moody’s this week cut Pakistan’s sovereign credit rating by two notches to “Caa3”, saying the country’s “increasingly fragile liquidity and external position” had significantly raised the risk of default.Moody’s warned that “weak government and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing”.

“Pakistan’s economy is heading towards a very dangerous future. Our already sluggish growth will fall further. The new interest rate will make it impossible for many businesses to afford borrowings and still make money,” said Ihtisham ul Haque, a commentator on the Pakistan economy. “The situation has become very grim.”IMF managing director Kristalina Georgieva recently told German broadcaster Deutsche Welle that the multilateral lender was trying to help Pakistan avoid “a dangerous place where its debt needs to be restructured”. She denied Islamabad’s criticism that such measures would hurt the poor, arguing that rich Pakistanis benefited from government largesse. “It should be the poor to benefit from [subsidies],” she said. “We want the poor people of Pakistan to be protected.” More

KARACHI, Pakistan (Reuters) -Pakistan’s central bank raised its key interest rate by 300 basis points on Thursday, exceeding investor expectations, as the cash-strapped country attempts to encourage the International Monetary Fund to release critical funding.The key rate of the State Bank of Pakistan (SBP) now stands at 20%, its highest level since October 1996. Investors polled by Reuters had expected a rate hike of 200 bps.The SBP had brought forward its policy meeting from an original date of March 16, with local media saying the rate hike was a key requirement to get the IMF funding released.In its last policy meeting in January the bank raised the rate by 100 bps to 17%. It has now raised rates by a total of 1025 bps since January 2022.”The MPC noted that the recent fiscal adjustments and exchange rate depreciation have led to a significant deterioration in the near term inflation outlook and a further upward drift in inflation expectations, as reflected in the latest wave of surveys,” the SBP said in a statement.The SBP sees inflation rising further before it begins to fall. The central bank states that the average inflation for the year is now expected in the range of 27 – 29% against the November 2022 projection of 21 – 23%.”In this context, the MPC emphasized that anchoring inflation expectations is critical and warrants a strong policy response.”Suleman Maniya, head of advisory at Vector Securities, said that while the CPI can potentially increase more with the fiscal actions related to subsidy removals and exchange rate weakness, the government needs to focus on improving the supply side urgently, especially of food and agricultural items.The government, for its part, is trying to cut expenditure and increase revenue through taxes, and has allowed the rupee to depreciate.As per the ninth review of a previous deal with the international lender, the IMF is due to release a tranche of over $1 billion to Pakistan.The Pakistani rupee slumped nearly 6% against the U.S. dollar on Thursday with no clarity on the IMF fund release.”Today’s slide in the rupee and policy rate hike can be seen as a step towards unlocking the next tranche from the IMF,” said Saad Rafi, head of equities at Al Habib Capital Markets. Pakistan’s consumer price index (CPI) jumped 31.5% in February year-on-year, the highest annual rate in nearly 50 years, as food, beverage and transportation prices surged more than 45%.The Committee also decided to hold its next meeting on April 4, 2023. It was previously scheduled for April 27, 2023. More

BEIJING (Reuters) – Pressure on China’s imports and exports will increase significantly this year, Wang Wentao, commerce minister, told a news conference on Thursday, three days before the annual meeting of parliament.The risk of a global recession is growing, China’s external environment poses serious challenges, and there is increased risk of weakening external demand, he added.China’s trade exports tumbled sharply in December, with exports contracting by 9.9% year-on-year, extending a 8.7% drop in November, according to the latest official data from the National Bureau of Statistics.Wang acknowledged that some foreign companies are currently considering investing in places other than China, but described it as “a special phase,” adding that “in the long run, the China market remains a ‘must’ rather than an ‘option.'”The American Chamber of Commerce in China released its annual business sentiment survey yesterday, in which a majority of companies said China is no longer seen as “a top three investment priority,” for the first time in the survey’s 25-year history.China’s vice minister for commerce, Chen Chunjiang, addressed trade relations with the United States, reiterating that “China is willing to conduct candid consultations with the United States to reduce restrictions on bilateral trade and investment,” in response to a question on the state of China’s trade relationship with the U.S. Outbound shipments from China to the U.S. shrank by 19.5% in December, according to Reuters’ calculations based on the official data, reflecting faltering demand.China and the U.S. “need to create a stable and predictable trade and economic environment to enhance confidence and business cooperation,” Chen added. More

FRANKFURT (Reuters) – Huddled in a retreat in a remote Arctic village, European Central Bank policymakers faced up last week to some cold hard facts: companies are profiting from high inflation while workers and consumers foot the bill.The prevailing macroeconomic narrative over the past nine months has been that sharp increases in prices for everything from energy to food to computer chips were ramping up costs for companies in the 20 countries that make up the euro zone.The European Central Bank (ECB) responded by raising interest rates by the most in four decades to cool demand, arguing it faced the risk that higher consumer prices would push up wages and create an inflation spiral.But at the retreat in the Finnish village of Inari intended to give the bank’s Governing Council a chance to delve into themes only touched upon at regular meetings, a slightly different picture emerged, three sources who attended the meeting said.Data articulated in more than two dozen slides presented to the 26 policymakers showed that company profit margins have been increasing rather than shrinking, as might be expected when input costs rise so sharply, the sources told Reuters.An ECB spokesperson declined to comment for this story.”It’s clear that profit expansion has played a larger role in the European inflation story in the last six months or so,” said Paul Donovan, chief economist at UBS Global Wealth Management. “The ECB has failed to justify what it’s doing in the context of a more profit-focused inflation story.” The idea that companies have been raising prices in excess of their costs at the expense of consumers and wage earners is likely to anger the general public. But it has implications for central bankers too. Inflation fuelled by higher corporate margins tends to self-correct as companies eventually put the brakes on price rises to avoid losing market share, making it a very different beast to tame than a wage-price stampede. So a new inflation narrative focused on margins could give the more dovish members of the Governing Council some ammunition to fight against further rate rises after their resistance proved largely futile over the past year, according to economists interviewed by Reuters.The debate is due to resume at the ECB’s next policy meeting on March 16, when the bank has promised to raise rates to their highest level since the height of the financial crisis in 2008.CHANGE IN NARRATIVEThe received inflation narrative in the euro zone has been slowly starting to shift. Businesses are anticipating smaller price rises as the outlook for costs and demand becomes less clear, according to surveys published by the ECB and Germany’s Ifo institute. Some European countries such as Greece have tabled measures to curb inflation in essential goods while France and Spain are debating similar steps.”The economics of profitability suggest we might see more of a profit squeeze coming up,” ECB chief economist Philip Lane told Reuters. “European firms know that if they raise prices too much, they will suffer a loss in market share.” In the United States, the profit margin expansion started earlier and has already started to reverse, albeit slowly and unevenly.But unlike the United States, there is no official corporate margin data for the euro zone. Instead, national accounts and earnings reports from listed companies are being used as proxies to paint the inflation picture.Euro zone consumer good companies, for example, boosted operating margins to an average of 10.7% last year, up by a quarter over 2019, before the global pandemic and the war in Ukraine, Refinitiv data shows. The 106 companies included in the survey ranged from French resort owner Pierre et Vacances to carmaker Stellantis to luxury goods group Hermes and Nordic retailer Stockmann.Similarly, profits rather than labour costs and taxes have accounted for the lion’s share of domestic price pressures in the euro zone since 2021, according to ECB calculations based on Eurostat data. (Graphic: Profits, not wages, have driven inflation, https://fingfx.thomsonreuters.com/gfx/mkt/zjpqjyaqkvx/Profits%20not%20wages%20drive%20inflation.png) DETACHED DISCOURSEIndeed, wages have been growing far more slowly than inflation, implying a 5% drop in the standard of living for the average employee in the euro zone compared with 2021, according to ECB’s calculations. That’s pretty much the opposite of the wage-led inflation that characterised the 1970s, an era which has become the most widely used point of comparison in the public debate about appropriate central bank policy responses, economists say.”The public discourse to some extent is detached from what’s actually happening out there,” said Philipp Heimberger, an economist at the Vienna Institute for International Economic Studies. “The main story of the risks going forward is still that there’s a looming wage-price spiral which should make the central bank even more aggressive in hiking interest rates.” For example, wages were mentioned 14 times in ECB President Christine Lagarde’s latest news conference while margins didn’t get a single mention. Her deputy, Luis de Guindos, also warned that the ECB needed to be careful because labour unions might demand excessive pay rises. “You see a very clear reluctance to discuss profit,” Daniela Gabor, a professor of economics and macro-finance at the University of West England in Bristol. “That illustrates that the distributional politics of inflation targeting is: You don’t go for profits; you don’t go for capital.”In the United States, the issue of runaway margins has been raised by former Federal Reserve Bank vice-chair Lael Brainard, who is now President Joe Biden’s top economic adviser, and Democratic senators Elizabeth Warren and Bernie Sanders. Even inside the ECB, labour representatives demanding higher pay for central bank staff have distanced themselves from what they described as the institution’s “anti-worker bias”.They cited, among others, a paper by researchers at the International Monetary Fund showing that accelerating wages have not historically led to a wage-price spiral.PROFIT VS WAGESECB policymakers gathered in Finland went through similar data sets showing that profits had outpaced wages thanks to savings built up during lockdowns being spent, but also because of companies’ power to set prices, the sources said.With those savings now being depleted and competition returning, things may be changing for ECB policymakers who have been calling for a redrafting of the inflation narrative.In January, Portuguese central bank governor Mario Centeno was among the first to warn about the risk of a very clear increase in profit margins, saying it should be brought up the European policy agenda. ECB board member Fabio Panetta later said workers had borne the brunt of the surge in prices while, on balance, company mark-ups had remained stable, or even increased in some sectors.Wages are accelerating, with the ECB’s forward-looking wage tracker anticipating a rise of nearly 5% in 2023 for contracts signed in the last quarter of 2022. But that won’t offset the massive drop in real wages over the past year, analysts said.”A key missing ingredient is the bargaining strength of the labour movement, which is structurally weakened by the disinflation policies of the 1980s and the ensuing liberalisation of labour markets,” said Mattias Vermeiren, a professor of international political economy at the Ghent Institute for International and European Studies.During the last inflation crisis in the 1970s, nearly 70% of economic output went to employees, with just over 20% going to profits, according to Eurostat data. Now, labour’s share stands at 56% with a third going to profits.The ECB policymakers went over those differences at their Finnish retreat, though their tentative conclusions were dotted with caveats, the sources who attended the meeting said.Some argued that furlough schemes during the pandemic may buttress incomes, the sources said, and that a sustained period of high inflation may raise salary demands in a way that models developed during periods of stable prices fail to predict. And the interest rate doves might have their work cut out after data showed inflation in France, Spain and Germany exceeded expectations last month. More

Inflation in the euro zone eased slightly to 8.5% in the month of February, even as the ECB signalled that interest rate hiking cycle might not be at an end.
Core inflation rose to an estimated 5.6% in February, from 5.3% in January.
Goldman Sachs said earlier this week that they were raising rate hike expectations for the ECB.

All eyes on the latest inflation numbers out of the euro zone as market players consider what the ECB will do next.
Bloomberg | Bloomberg | Getty Images

New data out of the euro zone on Thursday suggested that inflation is taking a while to come down significantly, raising prospects of further rate hikes in the region in the coming months.
Headline inflation across the 20-member bloc came in at 8.5% in February, according to preliminary data released Thursday. This indicates that prices are not coming down at the pace that had been registered in recent months. Headline inflation stood as high as 10.6% in October, but reached a revised 8.6% in January.

Analysts polled by the Wall Street Journal were expecting a lower February inflation rate of 8.2%. Food prices increased month-on-month, offsetting declines in energy costs.
On top of a small drop in headline inflation, the core figure — which strips out energy and food costs, and is therefore less volatile — picked up to an estimated 5.6% in February, from 5.3% in January. All combined, this fuels arguments that the European Central Bank could keep its hawkish stance for longer.
In recent days, market players have been considering this prospect following hotter-than-expected February inflation figures from France, Germany and Spain.

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Euro versus U.S. dollar since the start of the year

ECB President Christine Lagarde said Thursday that bringing down inflation will still take time, according to comments reported by Reuters. The bank targets a headline rate of 2%.
The Frankfurt-based institution has indicated that another 50 basis point hike is on the cards for when the central bank adjourns later this month. In comments reported by Reuters, Lagarde said Thursday that this move is still on that table, as inflation remains well above target.

Analysts at Goldman Sachs said earlier this week that they were raising rate hike expectations for the ECB and pricing in another 50 basis points hike in May.
European bond yields have been moving at multi-year highs in recent days, amid considerations that the hawkish monetary policy is here to stay.

‘Too slow for comfort’

“Euro zone inflation has trended down since its 10.6% year on year peak last October. Helped by base effects, it looks set to decline substantially further this year. However, the process is too slow for comfort,” Salomon Fiedler, economist at Berenberg, said in a note to clients Thursday.
“The ECB is virtually guaranteed to follow through with its plans for a 50 basis point rate hike at its 16 March meeting, in our view. It will most likely also maintain strong guidance towards further rate hikes thereafter,” he added.

Analysts at Capital Economics shared this view.
“February’s increase in core inflation will reinforce ECB policymakers’ conviction that significant rate increases are needed,” Jack Allen-Reynolds, deputy chief euro zone economist, said in an email.
“It now look increasingly likely that rates will rise even further,” he added.

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Investing.com — Risk assets are under pressure again as the benchmark 10-year Treasury yield hits 4% for the first time in over three months on fears of sticky inflation and higher interest rates. Analysts warn of another big ECB rate rise in May after core Eurozone inflation accelerates. Salesforce stock jumps after strong guidance but Tesla’s investor day leaves the market cold. The bank that services some of the U.S.’s biggest crypto exchanges warns it could collapse, and oil prices inch higher after digesting another big rise in U.S. stockpiles. Here’s what you need to know in financial markets on Thursday, 2nd March.1. Hello again, 4% 10-year yieldThe yield on the benchmark 10-year Treasury note hit 4% for the first time since November, as fears of sticky inflation and higher-for-longer interest rates cause investors to dump bonds.The latest leg up in yields followed an ISM manufacturing survey which contained an ugly-looking prices paid component, hidden by an innocuous-looking headline number. It’s the latest in a string of numbers over the last month suggesting that inflation will be harder to bring down than the market hoped at the end of 2022.Federal Reserve Governor Chris Waller, a noted hawk, may ram home that point in a speech at 16:00 ET (21:00 GMT), while the historically more dovish Neel Kashkari opened the door late on Wednesday to a 50-basis point hike in March, rather than the 25 basis points currently priced in. He speaks again at 18:00 ET.Initial jobless claims and revised data for fourth-quarter unit labor costs are the only highlights on the data calendar later.2. Hot Eurozone inflation stokes fears of more ECB rate hikesHeadline inflation in the euro zone eased slightly in February but the core rate rose again, keeping the pressure on the European Central Bank to continue raising interest rates.Eurostat said consumer prices rose a chunky 0.8% from January, both for the all-items index and for the index that excludes volatile food and energy prices. That left the annual headline rate at 8.5%. down from 8.6% in January. But core inflation – excluding food, energy, alcohol, and tobacco – rose to 5.6% from 5.3%.With a hike of 50 basis points at the ECB’s next policy meeting already priced in, analysts now say that another 50 basis points is in play at its May meeting. Short-term interest rates now imply the ECB won’t stop hiking until next year, by which time its deposit rate will have risen to 4%.3. Stocks set to open mixed; Salesforce shines, Tesla weighsU.S. stock markets are set to open mixed, with higher discount rates hurting long-duration technology stocks particularly hard.By 06:30 ET, Dow Jones futures were up 54 points or 0.2%, while S&P 500 futures were down 0.4% and Nasdaq 100 futures, which are dominated by the tech sector, were down 0.6%.Heavyweight Tesla (NASDAQ:TSLA) stock was a drag on the latter two contracts, after its Investor Day passed disappointingly without any news on new models, but with an eye-watering $175 billion for its expansion plans. Anheuser Busch Inbev (EBR:ABI) also fell in Europe after signs of a customer revolt against never-ending price hikes, especially in North America.Salesforce (NYSE:CRM) stock performed markedly better, rising 15% in premarket after the business software company put out strong guidance for revenue and profit margins in its new fiscal year.Kroger (NYSE:KR) and Hormel Foods (NYSE:HRL) lead the early line-up of companies reporting, while Broadcom (NASDAQ:AVGO), Costco (NASDAQ:COST), Marvell (NASDAQ:MRVL), Dell (NYSE:DELL) and Hewlett Packard Enterprise (NYSE:HPE) all update after the close.4. Silvergate sounds the alarm for crypto clientsA crucial part of the U.S.’s cryptocurrency infrastructure is at risk of collapse, under the weight of a depositor run and regulatory investigations into its business.Silvergate (NYSE:SI), which provides banking services to big crypto exchanges such as Coinbase (NASDAQ:COIN) and Kraken and did the same for FTX’s U.S. operations, said it may not survive as a going concern, as a massive firesale of assets wipes out its capital and leaves it struggling to repay maturing loans. The bank had advances of $4.3B from Federal Home Loan Bank as of the end of last year.Silvergate stock fell another 33% after the bank said in a filing late on Thursday that it’s still losing money as it liquidates its securities portfolio to meet client withdrawal demands. Those forced sales, which skyrocketed after the collapse of FTX in November, had already driven it to a $1B loss in the fourth quarter.5. Crude drifts amid signs of growing pressure on RussiaCrude oil prices continued to struggle for direction, with traders still struggling to assess the net impact of disruption to Russian exports of crude and products due to G7 sanctions.While there’s plenty of data to suggest that Russian oil is still finding its way to world markets – Indian refiners processed a record high amount of crude in February and their Turkish counterparts are also running at record rates – Platts reported that Russia’s seaborne exports of products fell by one-fifth last month as a new EU ban came into force.Lower oil and gas receipts are putting increasing pressure on Russia’s financial health. The central bank warned of rising financial stability risks on Thursday, while the ruble has fallen by 25% against the dollar since the end of November.U.S. crude futures were up 0.6% at $78.13 a barrel by 06:45 ET, while Brent was up 0.6% at $84.78 a barrel. More

Russia introduced strict controls on currency operations last year in response to Western sanctions over the conflict in Ukraine, limiting Russian residents from transferring money abroad.Nabiullina, speaking at a banking forum near Moscow, said that while many of these restrictions had been lifted or eased, current economic conditions meant that they would remain in place.”Deadlines for restrictions like limits on withdrawing cash currency from bank accounts, money transfers abroad, and restrictions on withdrawals by non-residents from ‘unfriendly’ countries are approaching,” she said.”All of them will be extended.”She also warned of possible “systemic risks” in the banking sector as lenders scramble to make up for a slump in profits recorded last year, but played down the effect of the latest round of Western sanctions on the banking sector.”The recent addition of new banks to the sanctions lists is no longer perceived as a shock and does not create systemic risks,” she said.The United States and Britain last week added several Russian banks to their sanctions lists, while the European Union cut off more banks from the SWIFT global payments system, among them online lender Tinkoff and the private Alfa Bank. More

China, the world’s largest bilateral creditor, has criticised multilateral lenders for not accepting losses, or haircuts, on loans to low-income countries while Beijing is being asked to do so on credit it has extended on its own.”We hope that multilateral financial institutions and commercial creditors will be actively involved in the debt treatment of developing countries,” Qin said during a gathering of foreign ministers from the Group of 20 (G20) leading economies in New Delhi.The G20 set up a Common Framework in late 2020 to offer relief to low-income countries facing mounting pressures resulting from COVID-19 and tightening global financial conditions amid the Ukraine war.”China has put forth relevant initiatives under the G20,” Qin said. “China has suspended more debt service payments than any other G20 member, and participated in the debt treatment under the Common Framework.”The United States has repeatedly criticised China over what it considers to be “foot-dragging” on debt relief for dozens of low-and middle-income countries including Sri Lanka.Last week, China urged G20 nations to conduct a fair, objective and in-depth analysis of the causes of global debt issues and to “resolve the problem in a comprehensive and effective manner”. More