Economy

Costa Rica suspended tariff benefits for its southern neighbor after Panamanian authorities failed to comply with a 2021 ruling regulating tomato trade between both parties, according to a statement published by the ministry which did not specify the items affected or when the suspension would be enacted.”I hope they understand … we are ready to go all the way,” Costa Rican Trade Minister Manuel Tovar told lawmakers on Wednesday.”Taxing products that arrive through free trade as a retaliatory measure is an example of what we are willing to do,” he added.Costa Rica and Panama entered a Free Trade Agreement (FTA) in 2008.Authorities from Panama’s Ministry of Commerce and Industries could not be immediately reached for comment.Panamanian authorities have previously stated they are confident both sides will find a solution to solve the dispute. Commerce and Industries Minister Federico Alfaro said in a tweet late on Wednesday that both countries recognize the WTO’s competence to solve the dispute. Panama is the fifth largest market for Costa Rican products by value, according to government statistics. Costa Rica’s imports from Panama totaled $221 million and exports amounted to $603 million in 2021.(The story corrects Panama’s position in Costa Rican exports to fifth from third) More

LONDON (Reuters) -Rising interest rates and a rapidly appreciating currency are exporting the U.S. inflation problem and threaten to send the rest of the global economy into recession as other central banks are forced to raise their own rates. * U.S. overnight interbank interest rates have risen by 300basis points over the last 12 months, the fastest increase since1989 and before that 1981. * Traders anticipate the central bank will lift its targetfor the federal funds rate by another 150 basis by April 2023. * Yields on benchmark 10-year U.S. Treasuries have climbedto 3.80%, the highest level for more than 12 years, on theexpectation rates will have to remain higher for longer tocontrol inflation. * The U.S. Treasury yield curve between 2-year and 10-yearnotes is more inverted than at any time since 1982, a sign ofhow tight monetary policy has become. * Reflecting higher yields in the United States, the dollarhas appreciated by more than 10% against a trade-weighted basketof other major currencies in the last year. * The dollar’s real effective exchange rate is the strongestsince January 1986 and in the 96th percentile for all monthssince 1973.U.S. inflation, employment and business activity are all stronger than in other major economies in Europe and Asia, encouraging the central bank to lift interest rates faster in an effort to bring price increases under control.But rapidly rising rates at the core of the financial system (in this case the United States) are rippling outwards and heightening instability on the periphery (the United Kingdom, European Union, China and emerging markets).Central banks in the United Kingdom, European Union, India and other emerging markets are all raising interest rates or intervening to support their currencies even though local conditions are far weaker.CORE AND PERIPHERYRapidly rising U.S. interest rates have been one of the primary triggers of international financial instability in the last 40 years.Chartbook: U.S. interest rate and exchange rate cycleLatin America’s debt crisis in 1982, the dollar overvaluation crisis in 1984/85, Mexico’s default and devaluation in 1994, Asia’s financial crisis starting in 1997 and Russia’s default in 1998 were all ignited by rising U.S. rates.The U.S. central bank’s congressional mandate requires it to focus on controlling inflation and promoting employment in the domestic economy.But as the interest rate setter for the world’s reserve currency, the Federal Reserve is also at the centre of a system of central banks that are under pressure to follow its decisions, whether locally appropriate or not.If the U.S. central bank raises interest rates to counter domestic inflation, other central banks must follow or see their currencies depreciate and inflation rise via higher prices for energy and other imports.If the Federal Reserve cuts interest rates, other central banks must do so as well, or risk currency appreciation and the loss of competitiveness, output and jobs.Policymakers and commentators often talk about monetary policy as if each country makes its own decisions with complete sovereignty.In practice, central banks are linked in a system with Fed at centre as a policy-maker and others on periphery as policy-takers, with far fewer degrees of policy freedom.If countries try to deviate too far from the Fed’s easing and tightening cycle, they tend to run into an inflation crisis, a currency crisis, a debt crisis, or all three.GLOBAL SLOWDOWNConditions in the peripheral economies are not necessarily the same as in the core of the financial system.In this case, the United States is experiencing rapid inflation and still has very high employment and a relatively strong business conditions.But China’s economy has relatively low inflation and is struggling as a result of repeated city-level lockdowns to control the spread of coronavirus.The United Kingdom and the European Union have high inflation but are already close to or in recession because of the high cost of energy and spillovers from Russia’s invasion of Ukraine.Most of the major emerging markets are in a similar position with high inflation but slowing or falling business activity.In effect, the business cycle is much more mature in the other major economies with a cyclical slowdown already underway.Rapid interest rate increases to control inflation in the core are not necessarily appropriate at the moment in the peripheral economies.But interest rates are still rising on the periphery; central banks have no choice but to follow the Fed because their currencies are depreciating, increasing cost of dollar-denominated imports and driving their inflation rates higher.GREATER VOLATILITYIn financial markets, the cyclical rise and fall of interest rates and yields in the United States induces a cyclical and destabilising flow of capital towards and then away from the peripheral economies.When U.S. rates are low, capital flows to the periphery accelerate in search of higher returns; when U.S. rates rise, capital flows slow or reverse, putting downward pressure on asset prices in peripheral economies.Relatively small changes in financial conditions in the core are amplified on the periphery, where indebtedness is often higher, markets are shallower, liquidity is low, and policy flexibility is lower.Rate changes in the United States always have potential to induce instability in other economies via this financial channel; the effect is especially severe when the Fed lifts them rapidly to regain control of the inflationary process.U.S. rate raising cycles in 1980, 1982, 1984, 1989, 1994, 1999 and 2022 all contributed to financial instability and economic slowdowns in other countries.”As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023,” the World Bank has warned.”Central banks around the world have been raising interest rates this year with a degree of synchronicity not seen over the past five decades,” it noted (“Risk of global recession in 2023 rises”, World Bank, Sept. 15).The bank cautioned about a possible “string of financial crises in emerging market and developing economies” as a result of tighter monetary conditions.The risks to other economies from inflation and rising interest rates in the core have been understood by policymakers and investors for decades.But as long as the Fed’s mandate requires it to focus exclusively on domestic inflation and employment, ignoring international spillovers, and the dollar remains the main reserve currency, rising rates in the United States will continue triggering instability elsewhere.John Kemp is a Reuters market analyst. The views expressed are his own More

(Reuters) – Federal Reserve policymakers will press ahead with raising U.S. borrowing costs to fight the corroding effects of too-high inflation, taking in stride both turmoil in global financial markets and early signs their actions are weakening the job market. “I’m quite comfortable” with raising interest rates to 4%-4.5% this year and 4.5%-5% next year, San Francisco Fed President Mary Daly told reporters after a speech at Boise State University on Thursday, adding she expects that rates will need to stay at that level for all of 2023. Those ranges encompass what the majority of Daly’s fellow policymakers wrote in their rate path projections published last week, when the Fed lifted interest rates to 3%-3.25% in what is proving to be the most aggressive round of rate hikes since the 1980s. The Fed’s steeper-than-expected policy tightening, aimed at bringing down inflation that’s running at more than triple the Fed’s 2% target, is expected to slow economic growth and lift unemployment. Global stock markets have tumbled, and major currencies have lost ground against the dollar. Loretta Mester, president of the Cleveland Fed, speaking on CNBC on Thursday, offered an even more aggressive outlook on what is needed to tame inflation.Mester said she does not see a case for slowing rate hikes right now, and in fact said she expects the central bank will need to go even further than it signaled last week.”I probably am a little bit above that median path because I see more persistence in the inflation process,” Mester said. Daly addressed the turmoil in financial markets, noting that markets are “trying to get their footing,” with investors assessing a myriad of risks, including market dysfunction in the U.K. which prompted intervention by the Bank of England, the war in Ukraine, the damaged gas pipeline in the Baltic Sea, continued COVID lockdowns in China, and policy tightening by many central banks globally. “What I ultimately want to know is how much have financial conditions tightened, what has this done to the global economy, how much of a headwind will that be blowing against U.S. growth, and then how does that factor in to where what we need to do in our policy,” Daly said. And while Daly sees some signs that U.S. labor markets are slowing – noting that firms she talks to say they are recruiting new hires with less intensity — consumer spending remains robust. Still, Daly said she does not believe the Fed will need to raise rates so high they will trigger a deep recession — for now. Unemployment, at 3.7%, is low, and the labor market is still strong, she said. But if households and businesses start expecting inflation to continue to get worse, or if supply chains don’t heal as expected and goods shortages continue to push upward on prices, Daly told reporters, “then I am prepared to do more.” Mester said she did not see distress in U.S. financial markets that would alter the central bank’s campaign to lower very high levels of inflation through interest rate hikes. While “no one knows for sure” if there is a big problem lurking in the financial sector right now, “so far, we haven’t seen the kind of market dysfunction, even through what’s happening in the global markets right now, we haven’t seen that in the U.S. markets,” Mester said.Earlier Thursday, St. Louis Federal Reserve President James Bullard said he doesn’t see U.K. market turmoil “really impinging on the U.S. inflation or real growth developments.”Tax cuts proposed by the government of new British Prime Minister Liz Truss touched off a drop in the value of the pound to an all-time low of $1.0327 on Monday. The drop reflects widespread fears the government’s plan will further stoke inflation and put Britain’s fiscal and monetary policy at odds with each other. More

TOKYO (Reuters) – Japan’s government will confirm on Friday the amount it spent intervening in the foreign exchange market last week to prop up the yen, which may highlight the hurdles Tokyo could face in making frequent forays into the market to stem sharp falls.Estimates based on money market brokers showed Tokyo likely spent a record 3.6 trillion yen ($24.9 billion) on Sept. 22 in its first dollar-selling, yen-buying intervention in 24 years to stem the currency’s sharp weakening.A final figure will become available when the Ministry of Finance (MOF) releases the total amount it spent for intervention from Aug. 30 to Sept. 28, at 1000 GMT on Friday.Japan currently holds roughly $1.3 trillion in reserves, the second biggest after China, of which $135.5 billion are held in the form of deposits parked with foreign central banks and the Bank for International Settlements (BIS).The $135.5 billion in deposits can easily be tapped to finance further dollar-selling, yen-buying intervention. This means Japan is left with deposits than can finance four more interventions of the scale conducted on Sept. 22.”Even if it were to intervene again, Japan likely won’t have to sell U.S. Treasury bills and instead tap this deposit for the time being,” said Izuru Kato, chief economist at Totan Research, a think-tank arm of a major money market broker firm in Tokyo.If the deposits dry up, Japan would need to dip into its securities holdings sized around $1.04 trillion.Of the main types of foreign assets Japan holds, deposits and securities are most liquid and can be converted into cash immediately.Other forms consisted of gold, reserves at the International Monetary Fund (IMF) reserve and IMF special drawing rights (SDR), though procuring dollar funds from these assets will take time, analysts say.($1 = 144.7200 yen) More

Erdogan doubled down on his controversial monetary plan on Thursday, saying that he told central bank decision-makers to continue lowering rates at its next meeting in October.
Faced with deepening economic problems, Erdogan also took the time to throw some barbs at the U.K., saying that the British pound has “blown up.”

Turkish President Tayyip Erdogan addresses members of his ruling AK Party (AKP) during a meeting at the parliament in Ankara, Turkey May 18, 2022. Murat Cetinmuhurdar/Presidential Press Office/Handout via REUTERS THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. NO RESALES. NO ARCHIVES. MANDATORY CREDIT
Murat Cetinmuhurdar | Reuters

Turkey will keep cutting interest rates, its President Recep Tayyip Erdogan said, despite soaring inflation at over 80%.
The central bank of Turkey will not be raising rates, he told CNN Turk on Wednesday night, adding that he expects the country’s key rate, currently 12%, to hit single digits by the end of this year.

Faced with deepening economic problems, Erdogan also took the time to throw some barbs at the U.K., saying that the British pound has “blown up.”
The U.K. currency recently hit a historic low against the U.S. dollar at close to $1.03, as the new Conservative government led by Prime Minister Liz Truss put forward an economic plan — based heavily on borrowing and tax cuts despite mounting inflation — that sent markets reeling.
It’s prompted alarmed reactions from U.S. economists, policymakers and the International Monetary Fund, with some saying the U.K. is behaving like an emerging market.
Turkey’s lira, meanwhile, hit a record low of 18.549 against the dollar on Thursday. The currency has lost roughly 28% of its value against the dollar this year and 80% in the last 5 years as markets shunned Erdogan’s unorthodox monetary policy of cutting interest rates despite high inflation.
“Oh the irony, Erdogan giving Truss advice on the economy,” Timothy Ash, an emerging markets strategist at BlueBay Asset Management, said in an email note. 

“Turkey has 80% inflation and I guess the worst performing currency over the past decade. Lol. How low the U.K. has sunk.”

People browse gold jewelry in the window of a gold shop in Istanbul’s Grand Bazaar on May 05, 2022 in Istanbul, Turkey. Gold prices ticked higher on Monday as the dollar hovered near recent lows, with investors’ focus being on a key U.S. inflation reading as it could influence the size of the Federal Reserve’s next interest-rate hike.
Burak Kara | Getty Images News | Getty Images

Erdogan doubled down on his controversial monetary plan on Thursday, saying that he told central bank decision-makers to continue lowering rates at its next meeting in October.
“My biggest battle is against interest. My biggest enemy is interest. We lowered the interest rate to 12%. Is that enough? It is not enough. This needs to come down further,” Erdogan said during an event, according to a Reuters translation.
“We have discussed, are discussing this with our central bank. I suggested the need for this to come down further in upcoming monetary policy committee meetings,” he added. Turkey’s central bank shocked markets with two consecutive 100 basis point cuts in the last two months, as many other major economies seek to tighten policy.
The lira meanwhile is set to fall further as Turkey prioritizes growth over tackling inflation, which is at its highest in 24 years. In addition to the skyrocketing living costs this has brought on Turkey’s population of 84 million, the country is burning through its foreign exchange reserves and has a widening current account deficit.
As the U.S. Federal Reserve raises its interest rate and the dollar grows stronger, Turkey’s many dollar-denominated debts, and the energy it imports in dollars, will only become more painful to pay for.
“With external financing conditions tightening, the risks remain firmly skewed to sharp and disorderly falls in the lira,” Liam Peach, a senior emerging markets economist, wrote in a note after Turkey’s last rate cut on Sept. 22.
“The macro backdrop in Turkey remains poor. Real interest rates are deeply negative, the current account deficit is widening and short-term external debts remain large,” he wrote. “It may not take a significant tightening of global financial conditions for investor risk sentiment towards Turkey to sour and add more downward pressure on the lira.”

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BENGALURU (Reuters) – Australia’s central bank will hike interest rates by another half-point on Tuesday and increase borrowing costs further than previously thought in its most aggressive tightening cycle since the 1990s to arrest red hot inflation, a Reuters poll showed.At the August meeting, Reserve Bank of Australia (RBA) Governor Philip Lowe tempered guidance on further hikes as they were approaching the estimated neutral level of 2.50%, a level that neither stimulates nor restricts economic activity.But with the U.S. Federal Reserve raising rates by 75 basis points last week and expected to take borrowing costs higher than previously expected many central banks are likely to follow suit to prevent their currencies from weakening further against the U.S. dollar.The Australian dollar, down over 12% for the year, touched its lowest level in two years on Wednesday.Over a 70% majority of economists, 21 of 29, in the Sept. 26-29 Reuters poll predicted the RBA would hike its cash rate by half a point to 2.85% at its Oct. 4 meeting. The remaining eight forecast a smaller 25 basis point hike.If realized, that would mark the fifth successive 50 basis point rise, matching the fastest hiking cycle since 1994 when rates went from 4.75% to 7.50%.”A lot of global interest rate expectations are being set in the United States,” said Tony Morris, head of Australia and New Zealand economics at Bank of America (NYSE:BAC).”If the Reserve Bank doesn’t maintain the current pace, then further currency weakness will feed through into a much faster pace of domestic inflation.”Although the median forecast showed rates going up another 50 basis points next quarter to peak at 3.35% there was a five way split among economists over where it would be at end-2022.While 11 of 27 economists held the median view, one said 3.50% and two said 3.60%. Among the remaining 13 economists, ten said rates would end the year at 3.10% and three said 2.85%.Only four of 29 economists predicted the cash rate at 3.35% by end-2022 in an August poll when the peak rate was expected to be 3.10%. Graphics: Reuters Poll – Reserve bank of Australia inflation and monetary policy outlook – https://fingfx.thomsonreuters.com/gfx/polling/dwpkroakxvm/Reuters%20Poll-%20Reserve%20bank%20of%20Australia%20inflation%20and%20monetary%20policy%20outlook.PNGWith inflation at a 21-year high of 6.1%, more than twice the RBA’s target range of 2%-3% and forecast to stay about above that until early 2024, peak interest rate could be revised up again.Indeed, 11 of 25, or 44%, of analysts expected rates to go higher than the current expected peak of 3.35% by the end of Q1 2023. The survey showed inflation averaging 7.0% this quarter and then peaking at 7.5% in the next. Across 2023 it was predicted to average 4.5% and then fall to 2.7% in 2024.A new official monthly measure of Australian consumer prices on Thursday showed annual inflation eased slightly to 6.8% in August from 7.0% in July.”Our expectation is conditional on several factors such as medium-term inflation expectations remaining well anchored, a sustainable pick up in wage growth and easing global inflationary pressures,” said Jameson Coombs, economist at St. George Bank.”If upside risks to inflation materialised, the RBA Board may need to go beyond our expectation for the terminal rate.”Australia’s economic growth was predicted to average 4.0% for this year and then halve to 2.0% in 2023 and 2024.(For other stories from the Reuters global long-term economic outlook polls package:) More

The country’s industrial output fell 1.8% on a seasonally-adjusted monthly basis, by a faster pace than 1.3% in July and 0.5% tipped in a Reuters poll.It rose 1.0% compared with the same month a year earlier, also missing a 1.3% rise seen in the survey and marking the slowest pace since September 2021.Output for the services sector rose 1.5% on month, while retail sales jumped 4.3%, marking the fastest gain since May 2020. More

“I’m quite comfortable” with policymaker projections published last week that show the majority see the Fed’s policy rate rising to 4%-4.5% this year and 4.5%-5% next year, Daly told reporters after an event at Boise State University. “It’s going to take restrictive policy for a duration of time to get clear and convincing evidence that inflation is getting back to 2% — so from my mind, that’s at least through next year.” The Fed last week delivered a third-straight 75-basis-point interest rate increase, lifting its policy rate target range to 3%-3.25%. Asked if global market turmoil could move her to support pausing rate hikes, Daly said global financial markets are just one part of the equation.”I’m really looking at have financial conditions tightened more than the funds rate has tightened, and more than they were projected to be tight, because now people are realizing there’s global tightening everywhere and financial markets are really responding. If that’s the case, then, you know, slowing the pace of increases but still heading for the right terminal rate would be appropriate,” Daly said. “But if inflation continues to print very high and we get no easing of inflation and only modest easing of labor markets, then that’s basically an economy that’s still got a lot of momentum, and inflation is still too high — we’re going to have to keep moving up because we are going to understand that the terminal rate isn’t as close as it would be More