Economy

France’s central bank head has warned that the recent turmoil in the UK’s bond markets illustrates the “vicious loop” governments face if they undermine efforts by rate-setters to curb soaring inflation. François Villeroy de Galhau, who sits on the European Central Bank’s rate-setting governing council, said in an interview that the sharp rise in the British government’s cost of borrowing after it unveiled £45bn worth of unfunded tax cuts last month highlighted the importance of “a consistent policy mix” between central banks and lawmakers. Underlining the risks of fiscal expansion at a time of rapidly rising interest rates, the Banque de France governor said: “If you have a monetary policy with an anti-inflationary stance and there are doubts about whether your fiscal policy will fuel inflation, then you really risk nurturing a vicious loop.” The sell-off in gilts forced the Bank of England to intervene to halt the collapse of parts of the UK’s pensions industry, which the Banque de France governor cautioned was the latest example of the non-bank financial sector’s vulnerability to cash crunches. He urged global regulators at the Financial Stability Board to “deliver now on clearer and stricter rules” to ensure funds and traders build up stronger liquidity buffers. “We need more data and in each jurisdiction we need some kind of liquidity stress testing,” he said. Comparing the UK turmoil with the money market fund panic after the Covid-19 pandemic hit in 2020 and a collateral shortage at energy traders after Russia invaded Ukraine in February, Villeroy said: “They have one thing in common and it is about the liquidity of non-banks.” The UK government concluded an about-turn on Monday after new chancellor Jeremy Hunt announced he would ditch two-thirds of the tax cuts announced by his predecessor Kwasi Kwarteng, who was sacked on Friday. Laughing with disbelief at recent events in the UK, which he said had dominated the IMF and World Bank annual meetings in Washington last week, Villeroy said he did not anticipate major euro area governments repeating the mistake. While governments in the currency bloc are yet to encounter the turmoil seen in the UK over recent weeks, they are spending big to cushion the blow of surging energy prices on businesses and households. Economists, including those at the IMF, believe the energy packages raise the risk high inflation becomes entrenched. Villeroy said the measures were “understandable”, however. France’s energy price cap, which has limited electricity price increases at 4 per cent this year and frozen domestic gas prices, had helped to keep inflation at a more manageable 6.2 per cent — the lowest in the eurozone — up until now. “As far as these measures remain targeted and temporary — and time will tell — they are rather helpful.”The ECB raised rates by 1.25 percentage points over the summer to combat record-high inflation of 10 per cent — five times its 2 per cent goal — and is set to increase its deposit rate by 0.75 percentage points to 1.5 per cent next Thursday. France’s president, Emmanuel Macron, told Les Echos in an interview published on Monday that he was concerned by the view that demand needed to “be shattered” through aggressive monetary tightening “to better contain inflation”. Villeroy declined to comment on Macron’s concerns. But he expressed irritation at the idea the ECB risked pushing the economy into recession, saying this “misses the point”. The “predominant” risk was not higher rates, but the energy crisis. The ECB would continue to “go quickly” until its deposit rate reached 2 per cent — the so-called neutral rate of interest at which it neither stimulates nor restricts the economy — at the end of the year. Any increases beyond that point would be at “a more flexible and slower pace”, he said. The ECB aims to start shrinking the €9tn balance sheet that ballooned during the pandemic once rates are at neutral. Villeroy said from the end of this year the bank could stop replacing some of the bonds maturing under its €3.26tn asset purchase programme.

Before that, private lenders should be encouraged to repay the €2.1tn of ultra-cheap loans made by the ECB under its targeted longer-term refinancing operations (Tltro), he said.The Tltros were designed to encourage lenders to keep lending during the pandemic by providing them with financing at minus 1 per cent. However, rising rates mean lenders are now in line for a risk-free profit of more than €25bn.Shrinking the balance sheet would be handled with care, he said. “Let us start clearly but cautiously, and then accelerate gradually.” More

Latin America rarely leads the world in economic policy. The region has struggled to grow since the last commodity boom, lacks competitiveness and remains overdependent on raw material exports. But can it teach the G7 a thing or two about fighting inflation?While central banks in the UK, US and Europe remain on the back foot in battling stubbornly high inflation, Latin America’s central banks have flexed their inflation-busting muscles and are reaping the rewards.Good timing helped. Latin America was quick off the mark to raise interest rates, beginning with Brazil in March 2021 — a full year before the US Federal Reserve.“Latin America led the tightening cycle,” said Alberto Ramos, Latin America chief economist at Goldman Sachs. “Its central banks didn’t have the luxury of credibility.” Barely a month after congress approved the central bank’s independence from the government, the Banco Central do Brasil started to push up rates aggressively, from 2 per cent to a lofty 13.75 per cent, one of the world’s highest levels for a major economy. Its tactics worked. Brazil is now making gains in the war on inflation, which has declined from a peak of 12.1 per cent in April to just under 8 per cent last month. That price-fighting success has not killed growth: JPMorgan expects Brazil’s economy to expand a better than expected 2.6 per cent this year, not far short of the 3 per cent it predicts for China.Chile and Colombia were not far behind Brazil. The two orthodox-leaning Andean economies pushed up interest rates by 10.75 and 8.25 percentage points respectively and are now almost done with rate-rising. Citi economists expect their rates to peak by the year end, with inflation halving next year as a result.Peru and Mexico complete the picture of Latin American monetary prudence, with increases of 6.5 and 5 percentage points respectively. By contrast, the Fed has tightened by just 3 percentage points and the Bank of England 2.15 points, despite the US and the UK suffering inflation rates similar to those of some Latin American nations.

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The lesson Latin America offers the world, says Ilan Goldfajn, the IMF’s western hemisphere director, “is that if you tighten ahead of the curve, if you react fast and you go immediately to where you need to go, that helps to win the fight against inflation”.The Latin American exception, as so often, is Argentina. Its government-controlled central bank is printing money to fund a budget deficit and it is losing control of inflation, which is projected to end the year at 100 per cent.Latin America’s central banks did loosen monetary policy by more than the G10 during the pandemic. But their subsequent assertiveness was not just a reaction to higher inflation. “Every country in LatAm has tightened the real ex-ante policy rate [the policy rate adjusted for one-year ahead inflation expectations] to positive territory, while every central bank in the G10 is still below zero,” Bank of America said in a recent study.High real interest rates have also kept Latin America’s currencies strong. While the pound, euro and yen are wilting against the strong dollar, three Latin American currencies have appreciated against the US currency this year: the Brazilian real, the Mexican peso and the Peruvian sol. So why did Latin America’s central banks act so decisively while their developed world counterparts dithered?Alejandro Werner, director of the Georgetown Americas Institute and Goldfajn’s predecessor at the IMF’s western hemisphere department, believes that G7 central banks put too much trust in flawed economic models.“We are much more model-based in the advanced economies,” he says. “And when you put into your model 25 years of data, in which inflation has been around 2 per cent, whatever you put on the independent variable side will not give you an inflation rate that is much higher than 2.5 per cent . . . the data that you feed the model is giving you an answer that leads to complacency.”By contrast, he said, Latin American central bankers use models “but they also use their experience and their experience of inflation is much more recent”.Goldman’s Ramos also believes that Latin America’s painful experience of high inflation helped bring home to its central bankers just how dangerous the inflation threat was.“Developed world central banks had never seen anything like this but in Latin America, central bankers understood that when inflation crosses 5 per cent, there is a regime shift,” he says. “At 5 or 6 per cent, inflation feeds on itself and becomes a monster. They [developed world central banks] never understood that.”[email protected] More

Speaking at 2022 AFIA Conference in Sydney, Michele Bullock said the move of 25 basis points in October was due to the economic circumstances at home and the fact that the central bank board meets more frequently than most of its counterparts for 11 times a year. “This is a particular advantage in uncertain times, as it allows more frequent evaluation of the evidence and recalibration if necessary,” said Bullock. “It also means that if we increase interest rates at every meeting, we can potentially move much faster than overseas central banks.”The RBA has already lifted its cash rate by 250 basis points to 2.6% since May and surprised markets earlier this month with a smaller-than-expected 25bp increase following four outsized moves of 50bp.”The Board expects to increase interest rates further over coming months. But the pace and timing will be determined by the economic data,” Bullock said. She said the Board was concerned about how household spending will respond to the successive hikes and price inflation, while the international economic environment has also deteriorated sharply.Inflation ran at a 21-year high of 6.1% in the June quarter and is thought to have accelerated to 6.9% in the September quarter.Surging inflation and expectations for further aggressive policy action from the U.S. Federal Reserve and other central banks have led markets to wager rates in Australia will have to rise to around 4%, while many analysts are forecasting a peak between 2.85% and 3.6%.”Our policy rate trajectory has been as steep, or steeper, than other central banks,” said Bullock. More

Suzuki, speaking to reporters, declined to comment when asked whether authorities are conducting stealth intervention to support the weakening currency.”We cannot tolerate excessive currency moves driven by speculators,” Suzuki said.”We are closely watching currency moves with a sense of urgency.”Japan spent 2.8 trillion yen ($18.81 billion) in dollar-selling, yen-buying intervention last month when authorities intervened to prop up the yen for the first time since 1998.Speculation lingers that Japanese authorities may have intervened in the market since then without announcing, but Suzuki declined to comment.”Generally speaking, there are times when we intervene by making announcement and some other times when we do without it,” Suzuki said, declining to comment further.($1 = 148.8400 yen) More

IMF mission chief Laura Jaramillo said the deal came after an in-person review of Somalia’s Extended Credit Facility in Nairobi, Kenya. She praised authorities for sticking to economic reforms despite a prolonged drought, the impact of Russia’s war in Ukraine and continued security concerns.The IMF’s board is expected to review the staff-level agreement in early December, Jaramillo said.If Somalia continues to make steady progress on reforms, it could reach the completion point of the Heavily Indebted Poor Countries (HIPC) global debt forgiveness process by late 2023, which would allow Somalia to pare its debt to around $550 million from $5.2 billion, Jaramillo said.”That would be a tremendous milestone,” she said, noting it would reduce Somalia’s debt to around 7% of gross domestic product from around 90% now.It would also open up new sources of financing for Somalia, a big help as the country works to implement development programs and promote growth and employment. One pillar of the country’s economic reforms would be to improve domestic revenue, including through enhancing collection of sales taxes.The IMF said Somalia still needed continued and immediate support from international partners given the current severe food crisis, but also needed to work on building longer-term resilience to climate shocks.Somalia’s outlook remained clouded, with GDP growth for 2022 projected at 1.9%, down from 2.9% in 2021, and inflation projected to reach 9% from 4.6% in 2021, the IMF said.Near-term risks were elevated, including a worsening of the food crisis that already has 4.3 million people facing acute food insecurity, if healthy rains do not resume in 2022 or if commodity prices rise further, it said. More

By Lucy CraymerWELLINGTON (Reuters) -New Zealand’s consumer inflation outpaced expectations in the third quarter and remains at historically high levels amid widespread price pressures.Annual inflation rose to 7.2% in the third quarter, slowing from 7.3% in the second quarter and sits just below three-decade highs, Statistics New Zealand said in a statement on Tuesday.The consumer price index (CPI) rose 2.2% quarter-on-quarter, following a 1.7% rise in the second quarter. The data was above economists’ expectations for a 1.6% rise for the quarter and a 6.7% annual rise, according to a Reuters poll.The Reserve Bank of New Zealand (RBNZ) has raised interest rates to 3.50% from a record low 0.25% in October last year. It has signalled it will increase the cash rate further as it works to dampen inflation.The New Zealand dollar rose slightly after the data showed inflation was hotter than expected.The main drivers of the 7.2% annual inflation were rising prices for construction, local government taxes and rentals for housing, Statistics New Zealand said in a statement.”The cost to construct a new house has continued to rise with supply-chain issues, labour costs and higher demand, all of which combine to push up prices,” said Nicola Growden, Statistics New Zealand prices senior manager.Statistics New Zealand added that annual non-tradable inflation – products made in New Zealand for domestic consumption – rose to 6.6%, the highest since it began tracking that data in June 2002. More

The restrictions included preventing firms from promoting and selling certain products or providing specific services like advice on defined benefit – or final salary – pension transfers, the Financial Conduct Authority said in a statement.Under Chief Executive Nikhil Rathi, lawmakers have pressured the FCA to make radical changes so it can spot misconduct faster, after a surge in online scams since people were forced to work from home due to COVID-19 restrictions.The watchdog was heavily criticised in 2020 in an independent report into the collapse of investment firm London Capital & Finance and it has pledged to improve how it deals with information received from the public.”We want to see a consumer investment market where consumers can invest with confidence, understanding the level of risk they are taking, and where assertive action is taken when harm is identified,” said Sarah Pritchard, executive director of markets at the FCA.The FCA said it stopped 17 firms and seven individuals from getting new FCA authorisation last year where it suspected phoenixing – people moving to or setting up a new firm to avoid the consequences of having provided unsuitable advice.It also stopped the UK operations of 16 contracts for difference providers where it suspected scams, or where consumers were encouraged to trade excessively to generate revenue.Without FCA action, consumers could have lost around 100 million pounds ($114.28 million) a year, the watchdog said. The FCA said it published more than 1,800 consumer alerts about unauthorised firms or individuals last year, 40% more than the previous year.   ($1 = 0.8750 pounds) More

The highly unusual delay comes amid the week-long congress of the ruling Communist Party, a twice-a-decade event that is an especially sensitive time in China.The data for third-quarter gross domestic product (GDP) – originally scheduled for release at 10:00 a.m. (0200 GMT) on Tuesday – has been highly anticipated after the world’s second-largest economy grew just 0.4% in the second quarter from a year earlier.A person answering the telephone in the media office at the National Bureau of Statistics (NBS) said the change was “due to adjustment to work arrangements” but gave no further details.No date for a rescheduled release has been given. GDP was expected to have expanded 3.4% in July-September, according to a Reuters poll, as the economy started to feel the impact of a raft of government supportive policies introduced in recent months. “The delayed economic data release is not because of bad economic recovery but the ongoing congress, as authorities want media and the public to concentrate on the key messages delivered by the big event,” said Bruce Pang, chief economist at Jones Lang Lasalle (NYSE:JLL) in Hong Kong.He said the delay was unlikely to affect market sentiment as most preliminary economic data pointed to a pick-up in recovery in the third quarter.September releases for a host of other figures including industrial production, retail sales and the urban jobless rate that are typically issued along with the GDP data had also been delayed, according to the NBS website. Also delayed was data for China’s home prices for September, which had been scheduled for publication on Wednesday. The delays followed the unexplained delay in the release of September’s trade data by the General Administration of Customs, which had been due out on Friday.The trade statistics had been expected to show China’s export growth weakened further from August, dragged down by soft global demand, while its imports remained tepid. The trade data was not released on Monday and calls to the customs administration seeking comment went unanswered. At the conclusion of this week’s congress, President Xi Jinping is widely expected to win a precedent-breaking third leadership term. At the last party congress, in 2017, third quarter GDP data was released as usual. More