Economy

The European Central Bank’s rate-setters have expressed concerns over the potential for “self-reinforcing” inflation, with governments’ fiscal packages and the weakness of the euro threatening to push up prices for years to come. Monetary policymakers, now battling record high inflation of 10 per cent, warned that the nature of the price-setting process was changing, with price growth becoming “self-reinforcing, to the point that even a projected weakening of growth was not sufficient to bring inflation back to target”.The comments came in the minutes from the ECB’s September monetary policy meeting, when the benchmark deposit rate was increased by 75 basis points, a record margin for the central bank, to 0.75 per cent. The statements, which were published on Thursday, will reinforce expectations of large interest rate increases in the months ahead, despite concerns the region’s economy is edging towards a recession. The eurozone’s growth prospects have been hit hard by Russia’s invasion of Ukraine, with the region’s energy crisis also triggering the surge in inflation. Rate-setters highlighted the priority placed on bringing price pressures closer to their 2 per cent target, stating that “growth concerns should . . . not prevent a needed forceful increase in interest rates.” They also argued that acting “forcefully” now could avoid the need to increase interest rates more sharply later in the economic cycle when the economy was slowing down.“[The account] gives green light for further large hikes,” said Ken Wattret, head of European analysis and insights at S&P Global Market Intelligence.Markets are pricing in a 66 per cent probability of a 75 basis points increase at the next meeting on October 27. There is a 34 probability of a full percentage point rise.The minutes warned that a number of indicators pointed to an increased risk of inflation staying high over the long term. “The longer high inflation persisted, the higher the risk that inflation expectations could become unanchored and the costlier it would be to bring them back to target,” said the minutes.Since the policy announcement on September 8, eurozone inflation has come in higher than expected. Despite the large rate increases over the summer, the ECB members said that the key policy rates remain “significantly below the neutral rate,” at which they neither stimulate nor limit activity. Andrew Kenningham, chief Europe economist at Capital Economics now saw the deposit rate rising to 2.5 per cent by the end of this year and a peak of 3 per cent early next year.The weakness of the euro, which has fallen to multi-decade lows against the dollar in recent weeks, was also a concern for the central bank. “Without a timely reduction in monetary policy accommodation, inflationary pressures resulting from a depreciation of the euro might increase further,” the minutes said.Governments’ response to the energy crisis constituted “an upside risk to inflation,” according to the ECB. Members agreed that measures to tackle energy prices should not be too broad, and instead should be “temporary and targeted at the most vulnerable households and firms in order to limit the risk of fuelling inflationary pressures.” Overall, inflation risks remained “tilted to the upside over the entire projection horizon,” the minutes said. More

The global economy will feel like it is in recession next year, the head of the IMF warned on Thursday, as the fund prepared to downgrade its economic forecasts again. Speaking ahead of the annual meetings of the fund and the World Bank, Kristalina Georgieva said a third of the world’s economy would suffer at least two quarters of economic contraction in 2023. Georgieva added that the combination of “shrinking real incomes and rising prices” would mean many other countries would feel like they were in recession even if they avoided outright declines in output. The remarks signal that the IMF is set to downgrade its economic forecasts again next week, for the fourth consecutive quarter.Blaming “multiple shocks”, including Russia’s invasion of Ukraine, high energy and food prices, and persistent inflationary pressures, she said growth in all of the world’s largest economies was slowing down, leaving “severe strains” in some places. The situation was “more likely to get worse than to get better” in the short term, she said, partly because there are emerging financial stability risks in China’s property market, in sovereign debt and in illiquid assets. The near collapse of some UK pension funds last week following UK chancellor Kwasi Kwarteng’s announcement of £45bn worth of unfunded tax cuts has sparked concerns that low growth and higher borrowing costs will trigger market turmoil. However, the IMF wants central banks to continue to tighten monetary policy at pace to deal with the persistence of inflationary pressures and to ensure that rising prices do not become ingrained in company attitudes to their charges and wages.“Not tightening enough would cause inflation to become de-anchored and entrenched, which would require future interest rates to be much higher and more sustained, causing massive harm on growth and massive harm on people,” said Georgieva.She acknowledged, however, that it would be very difficult for monetary policymakers to judge the impact of their policies when they were moving in sync with each other so quickly. Too many big rate rises could lead to a “prolonged recession”, but the risk of doing too little was at present greater, she said. In an interview with CNBC later on Thursday, the IMF’s managing director said the task confronting the US central bank was particularly challenging and described the path chair Jay Powell has to navigate as “very narrow”.“If he doesn’t tighten enough, inflation may de-anchor. If he tightens too much, there could be a recession,” she said, also noting the material impact that the Federal Reserve’s aggressive campaign to tighten monetary policy was having globally. “The combination of a strong dollar and high interest rates is hitting emerging markets with weaker fundamentals and, practically across the board, low-income countries quite significantly,” Georgieva warned. That would “inevitably” cause defaults, as had already been the case for Sri Lanka and Zambia, she added.“Both official creditors and the private sector, please come together. Face the music.”Meanwhile, Janet Yellen, the US Treasury secretary, on Thursday implored central banks, whose “prime responsibility” is to restore price stability, to “recognise that macroeconomic tightening in advanced countries can have international spillovers”.Without naming the UK or Germany, the managing director took a swipe at their recently announced measures to tackle high energy prices that insulated households and companies from much of the rise in prices. The IMF has already publicly rebuked the UK government for its generous energy support and unfunded tax cuts. Georgieva’s speech showed the fund was in no mood to offer more nuanced advice ahead of the visits of finance ministers and central bankers to Washington next week.

Calling for temporary and targeted support for vulnerable families, she said that “controlling prices for an extended period of time is not affordable, nor is it effective”.She highlighted the inflationary risks of pumping too much money into the economy to protect households at a time when central banks were raising interest rates to slow spending and return inflation to low levels. “While monetary policy is hitting the brakes, you shouldn’t have a fiscal policy that is stepping on the accelerator. This would make for a very rough and dangerous ride,” said Georgieva. High food prices were causing pain for households in emerging economies and unsustainable debt crisis in many countries, she added. For countries with an urgent need for food this winter, she offered a new “food shock” borrowing line, where countries could claim up to half of the money they have pledged to the IMF. The pain in the global economy would not be permanent, she said, but a speedy resolution of the world’s economic problems would depend on co-operation, especially on food security, climate change and debt relief for the most vulnerable countries. Also on Thursday, 140 civil society groups called on the IMF to issue at least $650bn in emergency aid through another allocation of its special drawing rights, a reserve asset. “The great majority of the world’s countries are struggling amid multiple historic, overlapping, and generally worsening crises,” the organisations wrote in a joint letter to the multilateral lender. “The world’s wealthiest countries must act quickly to assist them.” More

FRANKFURT (Reuters) -The world’s central bankers are caught up in a race to curb inflation that only the Federal Reserve can stop. The U.S. central bank has embarked on its most aggressive policy tightening cycle for four decades, raising interest rates by 3 percentage points since January to slow runaway inflation.That has left policymakers elsewhere with a tough choice: keep up with the Fed at the risk of hurting your own economy or watch your currency and bonds collapse as investors switch to dollars.”There is a growing risk that central banks will err on the side of caution by overtightening,” Capital Economics economist Jennifer McKeown said. “The risk is that rate hikes beyond our expectations prompt an even deeper downturn.”Central bankers and finance chiefs, who will meet in Washington next week, are mostly fighting inflation driven by factors including energy prices and trade supply snags.But few economies can stomach the diet of rate hikes the Fed has adopted to cool overheated domestic demand – largely the result of massive pandemic-era U.S. stimulus that the rest of the world couldn’t match.Responses have varied, with South Korea pledging to follow the Fed, belated but robust rate hikes in the euro zone despite a looming recession, and market interventions in Japan and Britain to stem bleeding in currencies and bonds.But they all face the same problem: there is less money to go around since the Fed turned off the taps, making investors impatient with profligate governments, stubborn central banks or lacklustre growth. Data from the United States, the euro zone, China and Japan shows the amount of money in circulation has fallen. That has long been a harbinger of trouble for poorer economies that rely on foreign capital, and central bankers in the Philippines and Mexico have been clear about the impact of the Fed’s actions on their own stances.But it is an unwelcome throwback for central bankers in richer countries, who had thought the resilience of their economies and their own reputations as inflation fighters would cushion the effects of U.S. monetary policy. What’s worse, worldwide rate hikes reinforce each other by depressing trade and markets, raising the risk of a global recession – as the World Bank has warned.The damage has already become visible in financial markets, where shares and bonds have fallen sharply, leaving investors hoping the Fed will change course.”Only the Fed can print the dollars necessary to fix the problem quickly,” Mike Wilson, chief investment officer at Morgan Stanley (NYSE:MS), said in a podcast.”A Fed pivot is likely at some point given the trajectory of global U.S. dollar money supply. However, the timing is uncertain.”Fed policymakers have this week restated their focus on taming inflation.Rather than competing with each other, economist Maurice Obstfeld has suggested central bankers should team up to pursue a “gentler tightening path”.This happened during the financial crisis, when central banks acted together to stabilise markets, and with 1985’s Plaza Accord, agreed by the top five developed economies to depreciate the dollar.But with the Fed happy for a strong dollar to bring down import prices and few signs of a political backlash against the currency’s appreciation, the chances of a repeat are low.”I think it’s unlikely at the current juncture to a large extent because it’s not in the U.S.’s interest to participate in such a move,” said Kamakshya Trivedi, head of global forex, rates and emerging market strategy at Goldman Sachs (NYSE:GS).Fed chair Jerome Powell said recently there was no “coordination” among central banks but that he and his colleagues were “very aware of what’s going on in other economies”. MARKET INTERVENTIONInstead, governments and central banks must bear alone the cost of market interventions to support their currencies and shield their financial systems from instability. Droves of emerging economies, including Chile, the Czech Republic and India, have intervened in the forex market, where volatility soared around 50% in two months, according to a widely watched Deutsche Bank (ETR:DBKGn) index.But richer countries are stepping in too.Japan has started buying the yen for the first time since 1998 after the currency was pummelled by the central bank’s decision to keep rates at zero.The Bank of England last week bought gilts to help shield pension schemes from market ire at government tax-cutting plans. The ECB has meanwhile unveiled an emergency scheme to cap any bond yields of the euro zone’s 19 member countries it feels are rising too fast.Analysts said none of these measures was likely to work unless the Fed stops raising rates, however – and for some, such actions are a sign of looming capitulation to market pressures.”If central banks are not yet waving the white flag, it has been (unfurled),” CrossBorderCapital, a market consultancy, said in a note. “The list of policymakers using some form of yield curve control is getting longer by the day.” More

PRAGUE (Reuters) -The European Union and its neighbours from Britain to Turkey met on Thursday to discuss shared security and energy problems stemming from Moscow’s invasion of Ukraine in a rare and symbolic summit of 44 European countries – but not Russia. The Prague gathering is the inaugural summit of the European Political Community (EPC), a format that is a brainchild of French President Emmanuel Macron and brings together the 27 European Union members with 17 other European countries. Some of them are waiting to join the bloc while another, Britain, is the only one ever to leave it.”All those who are gathered here know: Russia’s attack on Ukraine is a brutal violation of the peace and security order that we had over the last decades in Europe,” said German Chancellor Olaf Scholz.”We don’t accept that part of a neighbouring country is annexed.”His comments were echoed by Belgium’s Prime Minister Alexander De Croo, as well as the top EU diplomat, Josep Borrell. “This meeting is a way of looking for a new order without Russia. It doesn’t mean we want to exclude Russia forever, but this Russia, (President Vladimir) Putin’s Russia, does not have a seat,” said Borrell. British Prime Minister Liz Truss, after meeting the summit’s host, Czech Prime Minister Petr Fiala, stressed their “strong agreement on the importance of likeminded European democracies presenting a united front against Putin’s brutality”.Her decision to attend the summit left some hoping for a warmer tone between the EU and London after Brexit, where the two are still in disagreement over trade issues around Northern Ireland.The gathering at the sprawling Prague Castle is seen by its advocates as a grand show of solidarity for a continent mired in multiple crises from the security fallout of Russia’s war in Ukraine to dire economic consequences including an acute energy crunch.Macron said his priority was to build more electricity connections in Europe, and lower gas prices.”We share a same space. Very often, the same history. And we are meant to write our future together,” he said. “I hope we will be able to get common projects.”NO DECISIONSBeyond lofty declarations, there were doubts about the forum’s concrete goals and actions.Latvia’s Prime Minister Krisjanis Karins said no decisions were expected at the symbolic gathering the EU had pitched as only an “initial exchange” of thoughts.”The primary goal is that we all come together because Russian war in Ukraine is affecting all of us in the security sense and also through our economies, through the rising energy costs. The only way to handle this is working together,” he said.Some dismissed the EPC swiftly as just another talking shop, one that will be difficult to manage not just because of its size but also because of its diversity and the traditional rivalries between many of its members, from Armenia and Azerbaijan to Greece and Turkey.The 27 EU countries will go on to meet on their own on Friday, with tensions playing out over Germany’s 200 billion euro ($197.50 billion) energy support package that many of its peers see as damaging competition on the bloc’s single market. In their meeting, EU countries will look at their differences about how to cap gas prices to contain soaring energy costs that are harming the post-COVID economic recovery.($1 = 1.0127 euros) More

The ECB raised rates by 75 basis points at the meeting – more than expected – and signalled more as rapid inflation, once only evident in soaring energy prices, was now broadening out to affect everything from services to durable goods.While some policymakers made the case for a smaller, 50 basis point rate hike, a “very large” number backed a bigger increase and eventually all 25 rate-setters settled on the decision, the accounts published on Thursday indicate.”Inflation had started to become self-reinforcing, to the point that even a projected marked weakening in growth was not sufficient to bring inflation back to target,” the accounts said. “Inflation was far too high and likely to stay above the Governing Council’s target for an extended period.” Policymakers concluded that a recession was becoming “increasingly likely” but that risks were still skewed towards higher inflation outcomes than predicted. “The expected weakening in economic activity would not be sufficient to reduce inflation to a significant extent and would not in itself bring projected inflation back to target,” the accounts said.Policymakers remained relatively relaxed about longer-term expectations, though, noting that they remained anchored near the bank’s 2% inflation target and that rapid wage growth, a precondition of durable inflation, remained largely absent.Euro zone inflation accelerated to 10% last month, data released after the meeting showed, a level not seen in some member countries for over 70 years. Policymakers have already started to line up behind another 75 basis point increase in the 0.75% deposit rate at the ECB’s October meeting, a move that is now largely priced in.ECB President Christine Lagarde has said the bank will keep on raising rates at least until it hits the so-called neutral level, where the bank is neither stimulating nor holding back growth. While there is no universally accepted estimate for the nominal neutral rate, economists and policymakers tend to put it between 1.5% and 2%, suggesting that the ECB could get there by the end of the year. While inflation keeps rising, economic growth continues to slow and the 19-country currency bloc may already be in recession as a surge in energy costs is holding back consumption and discouraging investment. This in turn is bound to weigh on inflation further out, but policymakers insist that even a recession would not be enough to control prices, so rate hikes must go on, no matter what. The ECB will next meet on Oct 27. More

Some of the world’s cheapest equities are in Vietnam. The south-east Asian country’s benchmark index is trading at a its lowest valuation in a decade. That gives investors a reason to get serious about this long-overlooked market.A soaring dollar has left the Vietnam Stock Index down nearly 30 per cent this year, trading at less than 10 times forward earnings. It is one of the worst performing among regional peers. Its blue-chips include real estate and tech conglomerate Vingroup, which has fallen 37 per cent this year.There is plenty of potential. The economy is expected to grow at the fastest pace in Asia this year. The population is growing and young. More than 70 per cent of Vietnamese people are under the age of 35. GDP per capita is just $3,694, less than one-third of China’s figure. This leaves ample room for growth.Vietnam has been one of the biggest beneficiaries of the US-China trade war. US groups have moved suppliers to Vietnam to dodge US tariffs and blacklists for operating in China.Apple already sources a proportion of its popular AirPods earphones from Vietnam. It is also testing watch and laptop production there. Exports to the US grew more than a quarter in the year to September, reflecting the shift. Pandemic lockdowns in China have reduced its manufacturing dominance.Vietnamese growth has been impressive. The economy expanded 13.7 per cent in the third quarter, after growth of 7.8 per cent in the previous quarter. As travel normalises globally, tourism, which accounts for about a tenth of the economy, should give those numbers a further boost. Vietnam’s quasi-socialist market economy has helped it rapidly slash its poverty rate from 17 per cent to below 5 per cent in the span of just 10 years.But it has downsides. Moving capital out of Vietnam is complicated. Exchange controls limit foreign currency outflows.This has partly been why Vietnam has been the country of the future for much longer than investors have hoped. But at today’s valuations, the risks are attenuating. More

LONDON (Reuters) -Euro zone government bond yields edged up towards September’s multi-year highs on Thursday, with analysts reckoning that the recent bond rally was too early as inflation might still surprise on the upside.Borrowing costs were roughly unchanged after the release of the European Central Bank minutes. Policymakers meeting last month worried inflation could get stuck at exceptionally high levels, so aggressive policy tightening was needed, even at the cost of weaker growth.”Although we believe that the Bund bear market should come to an end in 4Q22 with the peak in euro zone HICP inflation, we think that the rally occurred too early and too fast, and we would expect a return above 2.25% with even potentially a new high in yields in October,” Morgan Stanley (NYSE:MS) analysts said in a research note.Concerns about a further economic slowdown and potential systemic risks due to the impact of higher rates on heavily indebted countries triggered a fall in euro zone yields since last week.Money markets are almost fully pricing in another 75 bp interest rate hike in October with around 125 bps of tightening by year-end, according to data from Refinitiv. By 1154 GMT, the German 10-year yield, the benchmark for the bloc, was up 2 bps at 2.04%. It hit an 11-year high of 2.352% on Wednesday last week.Italy’s 10-year yield was down 0.5 to 4.44% after rising by 27 bps on Wednesday, its largest daily jump since March 2020.The rise in Italian yields came after ECB support for the country’s bonds faded during the summer. Bond yields move inversely with prices.The ECB said holdings of Italian bonds under its Pandemic Emergency Purchase Programme (PEPP) shrank by 1.24 billion euros in August and September. This followed a 9.76 billion euro increase in the previous two months, when the ECB announced plans to use PEPP reinvestments to prevent bond yields and spreads from rising too far or too fast in the weakest countries. “While the negative sign can be explained by timing issues over the thinner summer months, the data still reveal that the ECB has not followed up with larger purchases,” Commerzbank (ETR:CBKG) rate strategist Hauke Siemssen said in a note. “The positive interpretation for BTPs is that key spread levels continue to hold without ECB support despite rising yields.”The yield gap between Italian and German 10-year yields narrowed by 2 bps to around 239 bps on Thursday.A key market gauge of long-term inflation expectations in the euro zone crept as high as 2.2046% after falling as low as 2.0586% on Monday, its lowest since end-July. British bonds were underperforming with the 10-year gilt yield up 13 bps to 4.16% after ratings agency Fitch cut the outlook for Britain’s credit rating to “negative” from “stable” following the government’s Sept. 23 fiscal statement. That was the highest level since Sept. 30. More

OSLO (Reuters) – The Norwegian government expects record income next year from its oil and gas industry, it said on Thursday, predicting a rise of 18% from this year’s level and a fivefold increase over 2021 as production rises and prices soar.European gas prices have roughly tripled in 2022 following Russia’s cut in supplies both before and after its invasion of neighbouring Ukraine, and the price is up tenfold compared to levels seen prior to last year.Norway, Europe’s number one gas supplier and a major global crude producer, expects to pump 4.3 million barrels of oil equivalent per day next year, up from an expected 4.1 million barrels in 2022 and ensuring big financial gains from the spike in energy prices.The Norwegian finance ministry in its draft budget for 2023 said oil and gas revenue next year was seen rising to a record 1.38 trillion crowns ($131 billion) from 1.17 trillion crowns in 2022 and 288 billion crowns in 2021.While the nation of 5.4 million people has said soaring gas prices are not in its long-term best interest, it has rejected calls for a price cap, arguing that this would not help Europe secure more energy.TAX HIKEAs a result of higher prices, the government plans to raise taxes on the country’s oil and gas industry by 2 billion crowns in 2023 by partly reversing an incentive package introduced during the coronavirus pandemic. The proposal reduces the so-called uplift rate, a special tax deduction, to 12.4% from 17.69%.The decision is also part of a wider move by the left-leaning minority government to hike taxes on firms that use the country’s natural resources, including power producers and fish farms, and to combat rampant inflation. In an effort to cool the economy and help bring down inflation, the coalition of Labour and the rural-oriented Centre Party said it plans to cut spending in 2023 by the $1.2 trillion sovereign wealth fund, the world’s largest.The government proposed withdrawing 316.8 billion crowns from the wealth fund next year, down from a revised 335.1 billion crowns in 2022. It must now negotiate with the Socialist Left Party in parliament to pass the budget.Gross domestic product for the non-oil economy is expected to grow by 2.9% this year, declining to 1.7% in 2023 before rebounding to 2.0% in 2024, the ministry said.($1 = 10.5367 Norwegian crowns) (This story has been corrected to fix 2022 comparison in 4th paragraph to 1.17 trillion crowns, not 1.17 billion) More