Economy

The writer is head of global equity at Bank of America. He writes in a personal capacityThe toxic trifecta of soaring food and energy prices, coupled with the threat of drought, is having a severe impact on a number of developing nations. Several countries commonly referred to as emerging markets could perhaps be better described as “submerging markets”. Sri Lanka, where frustrated citizens stormed the presidential palace in July, could be merely the opening act in a wave of instability across the developing world. In 2015 the G7 made a commitment (reiterated in 2022) to lift over 500mn people out of hunger and malnutrition by 2030. At this point, however, we appear to be going in the opposite direction. The World Food Programme predicts that over 320mn people are at risk of acute hunger. Many emerging market countries took advantage of the era of low global interest rates to fund spending by raising debt in the international capital markets. But rate increases by the US Federal Reserve, combined with weaker EM currencies, are now resulting in severe debt servicing burdens which are eating into governments’ discretionary spending on health and education. The impact of emerging market meltdown could be felt in developed countries across North America and Europe in the form of increased migration flows. As several Central American countries, among others, grapple with dramatically slowing growth and food price inflation, we may again see waves of refugees gathering along the US’s southern border. We could also see more boatloads of desperate people from Africa and the Middle East arrive on European shores in search of better lives.Food insecurity and economic downturns will result in many countries experiencing civil war-type conflicts as local groups compete for scarce resources. And these economic and security challenges will result in migration flows that adversely affect both potential migrants and the countries that receive them. There are several steps that can be taken to address the challenges facing emerging market nations. In the short term, the IMF and sovereign donors should announce a three-year debt servicing moratorium for the most vulnerable countries. This will help create much-needed fiscal space, and should be coupled with a requirement that the proceeds saved in lieu of debt payments be invested in agriculture, health and education. Furthermore, the IMF, together with the G7 and EU, should also increase lending to emerging markets to help fund fertiliser, food and energy imports. Countries such as Saudi Arabia and the United Arab Emirates, which benefit from higher energy prices, should be strongly encouraged to contribute to these global efforts, along with China and Japan. Aid should also be channelled towards groups such as the World Food Programme and the International Rescue Committee, which together operate in over 120 developing countries and have built-in processes to direct food and other supplies to the most needy. The G7 and larger trading blocks across Europe, North America and Asia should also encourage targeted duty free imports from these countries, with the assistance of the World Trade Organization. The G7 summit in July announced an incremental $4.5bn to combat hunger — but the Greek bailout packages in the last decade totalled over $300bn. While stabilising Greece helped to stabilise Europe, the gap between these numbers is massive. We don’t want a planet where millions go hungry, countries default on their debt, the hungry are forced to leave their homes to find subsistence elsewhere and civil wars rage — in short, a world in which countries submerge. We can and must do better.   More

U.K. inflation was 9.9% in August, well ahead of the BoE’s 2% target.
Higher rates come as the U.K. faces a falling pound, recession forecasts and a set of economic reforms under new Prime Minister Liz Truss.

The Bank of England warned that the U.K. will enter recession later this year. The expected recession is forecast to be the longest since the global financial crisis.
Vuk Valcic | SOPA Images | LightRocket | Getty Images

LONDON — The Bank of England voted to raise its base rate to 2.25% from 1.75% Thursday, lower than the 0.75 percentage point increase that had been expected by many traders.
Inflation in the U.K. dipped slightly in August but at 9.9% year-on-year remained well above the bank’s 2% target. Energy and food have seen the biggest price rises, but core inflation, which strips out those components, is still at 6.3% on an annual basis. 

The BOE now expects inflation to peak at just under 11% in October, down from a previous forecast of 13%.
The smaller-than-expected hike came as the bank said it believed the U.K. economy was already in a recession, as it forecast GDP would contract by 0.1% in the third quarter, down from a previous forecast of 0.4% growth. It would follow a 0.1% decline in the second quarter.
Numerous analysts, along with business association the British Chambers of Commerce, have previously said they expect the U.K. to enter a recession before the end of the year. As well as energy price shocks, it faces trade bottlenecks due to Covid-19 and Brexit, declining consumer sentiment and falling retail sales.
The BOE dropped its key rate, known as the Bank Rate, down to 0.1% in March 2020 in an attempt to prop up growth and spending at the onset of the coronavirus pandemic. However, as inflation began to rise sharply late last year, it was among the first major central banks to kick off a hiking cycle at its December meeting. 

Seventh consecutive rise

This is its seventh consecutive rise and takes U.K. interest rates to a level last seen in 2008.

In a release explaining its decision, the bank noted volatility in wholesale gas prices but said announcements of government caps on energy bills would limit further increases in consumer price index inflation. However, it said there had been further signs since August of “continuing strength in domestically generated inflation.”
It added: “The labour market is tight and domestic cost and price pressures remain elevated. While the [energy bill subsidy] reduces inflation in the near term, it also means that household spending is likely to be less weak than projected in the August Report over the first two years of the forecast period.”
Five members of its Monetary Policy Committee voted for the 0.5 percentage point rise, while three voted for a higher 0.75 percentage point rise that had been expected by many. One member voted for a 0.25 percentage point rise.
The bank said it was not on a “pre-set path” and would continue to assess data to decide the scale, pace and timing of future changes in the Bank Rate. The committee also voted to begin the sale of U.K. government bonds held in its Asset Purchase Facility shortly after the meeting and noted a “sharp increase in government bond yields globally.”
The bank’s decision comes against a backdrop of an increasingly weak British pound, recession forecasts, the European energy crisis and a program of new economic policies set to be introduced by new Prime Minister Liz Truss. 
Sterling hit fresh multi-decade lows against the dollar this week, trading below $1.14 through Wednesday and dipping below $1.13 early Thursday. It has fallen precipitously against the greenback this year and was last at this level in 1985. It was up 0.2% after the BOE decision with the 0.5 percentage point rise fully priced in.

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The devaluation of the pound has been caused by a combination of strength in the dollar — as traders flock to the perceived safe-haven investment amid global market volatility and as the U.S. Federal Reserve hikes its own interest rates — and grim forecasts for the U.K. economy. 

Mini-budget Friday

Meanwhile, the country’s newly-formed government has set out numerous significant economic policy proposals this month ahead of a “fiscal event,” dubbed a mini-budget, when they will be officially announced on Friday.
This is expected to include a reversal of the recent rise in National Insurance tax, cuts in taxes for businesses and home buyers, and a plan for “investment zones” with low taxes.
Truss has repeatedly stressed a commitment to lowering taxes in a bid to boost economic growth.
However, the energy crisis has also meant the government has announced a huge spending package to curb soaring bills for households and businesses.
Data published Wednesday showed the U.K. government borrowed £11.8 billion ($13.3 billion) last month, nearly twice as much as forecast and £6.5 billion more than the same month in 2019, due to a rise in government spending.

‘Critical moment’

David Bharier, head of research at business group the British Chambers of Commerce, said the bank faced a “tricky balancing act” in using the blunt instrument of rate rises to control inflation.
“The bank’s decision to raise rates will increase the risk for individuals and organisations exposed to debt burdens and rising mortgage costs – dampening consumer confidence,” he said in a note.
“Recent energy price cap announcements will have provided some comfort to businesses and households alike and should place downward pressure on the rate of inflation.”
“The bank, looking to dampen consumer demand, and government, looking to increase growth, could now be pulling in opposite directions,” he added, saying the coming economic statement from the finance minister Friday was a “critical moment.”
Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said the bank was hiking at a “sensible pace” given the lower inflation outlook and emerging slack in the economy.
Tombs forecast a 50 basis point hike at the bank’s November meeting, with risks titled toward a 75 basis point hike given the hawkishness of three committee members. He said this was likely to be followed by a 25 basis point hike in December, taking the bank rate to 3% at the end of the year, with no further hikes next year.
The U.K. is not alone in raising interest rates to combat inflation. The European Central Bank raised rates by 75 basis points earlier this month, while Switzerland’s central bank hiked by 75 basis points Thursday morning. The U.S. Federal Reserve raised its benchmark rate range by the same amount Wednesday.

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ISTANBUL (Reuters) – Turkey’s central bank delivered another surprise 100 basis-point rate cut on Thursday, sending the lira tumbling to an all-time low, even as inflation rose above 80% and as central banks globally race in the opposite direction and tighten policy.Turkey’s lira touched a record 18.42 versus the dollar, surpassing the level reached during a full-blown currency crisis last December. It edged back to 18.37 by 1223 GMT.Analysts called the monetary easing unsustainable and driven by President Tayyip Erdogan’s effort to lower borrowing costs to stoke exports and investment, and they predicted more currency depreciation ahead. [L8N30T3FS]Unorthodox rate cuts over the last year, along with rising commodity prices, have sent inflation to a 24-year high and sparked a cost-of-living crisis for Turks.The central bank justified the move by citing continued indications of an economic slowdown, and it repeated that it expected disinflation, or a deceleration in the inflation rate, to set in.”Leading indicators for the third quarter continue pointing to loss of momentum in economic activity due to the decreasing foreign demand,” its policy committee said.”It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment,” it said, pointing to increasing uncertainties in global growth and escalating geopolitical risk. GRAPHIC – A widening gap A widening gap The rate cuts go against a global tightening cycle that saw the U.S. Federal Reserve hike its benchmark overnight interest rate by 75 basis points on Wednesday to a range of 3.00%-3.25%. The European Central Bank also raised its key rates by 75 basis points this month.NEGATIVE YIELDS, WEAKENING LIRAEleven of 14 economists in a Reuters poll forecast rates would be kept on hold. One had predicted a 50 basis-point cut to 12.50%, while two forecast a 100 basis-point cut to 12%.Liam Peach, senior emerging markets economist at Capital Economics, said that the “window for easing remains open” but that further cuts would likely be more gradual.”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 said.”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,” Peach added.Last month, in a previous shock to market expectations, the bank slashed its key one-week repo rate by 100 basis points to 13% to head off a cooling economy. It had left the rate steady the previous seven months.In the latter part of last year it lowered the rate by 500 basis points in line with an unorthodox policy advocated by Erdogan, leaving real rates deeply negative, which is a red flag for investors.Turkey’s lira has halved in value in the last year largely due to the policy of cutting rates despite soaring prices. GRAPHIC – Turkish lira timeline September 2022https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnkkmlvq/Turkish%20lira%20timeline%20September%202022.PNG Each rate cut weighs more on country risks and the lira, said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.”As an economist, it is hard to comment on this decision, because normally, higher inflation requires higher interest rates,” she said. “The freestyle monetary policy management costs, and is certainly not sustainable.”Erdogan has prioritised exports, production and investments under an economic programme aiming to lower inflation by flipping chronic current account deficits to a surplus.That target is all but unattainable this year due to the surge in energy prices and a global economic slowdown that is likely to hit Turkey’s exports.Since last month’s cut, the central bank has taken steps that are meant to address the widening gap between the bank’s policy rate and lending rates, sowing confusion for lenders and borrowers alike. More

HONG KONG (Reuters) – Beijing has sent a team of regulatory officials to Hong Kong to assist the U.S. audit watchdog with onsite audit inspections involving Chinese companies, four people familiar with the matter said, as part of a landmark deal between the two countries.A China-U.S. agreement last month allows U.S. regulators, for the first time, to inspect China-based accounting firms that audit New York-listed companies, a major step towards resolving an audit dispute that threatened to boot more than 200 Chinese companies from U.S. exchanges.About 10 officials from the China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF) have arrived in Hong Kong and joined the audit inspection, which started on Monday, three of the people said.The officials will assist a team of inspectors from the Public Company Accounting Oversight Board (PCAOB), the U.S. audit watchdog, who are in Hong Kong for the onsite inspection, the four people said.All of the sources declined to be named due to the sensitivity of the matter.Representatives at CSRC and MOF did not immediately respond to Reuters requests for comment. The PCAOB did not respond to Reuters queries sent outside U.S. business hours.The gathering of U.S. and Chinese officials together in Hong Kong marks a major step forward in what was expected to be a fraught process implementing the audit deal, the most detailed agreement the PCAOB has ever reached with China.State-owned China Southern Airlines and data centre company GDS Holdings (NASDAQ:GDS) are among the U.S.-listed Chinese companies for audit inspection in the Asian financial hub, two separate sources said.China Southern Airlines and GDS did not respond to requests for comment.Reuters reported last month that U.S. regulators had picked a number of U.S.-listed Chinese companies including e-commerce majors Alibaba (NYSE:BABA) Group Holding Ltd and JD (NASDAQ:JD).com Inc for audit inspection.FULL ACCESSOfficials from the CSRC, which has been leading negotiations with U.S. authorities to resolve the audit dispute, are expected to be present when the PCAOB conducts interviews with and takes testimony from the audit firms’ staff, one of the four people familiar with the audit process said. The whole inspection process will last about eight to 10 weeks, said two of the four sources, in line with comments by U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler in a meeting with lawmakers last week.It was not clear whether the Chinese officials would be present for every step of the inspection process with PCAOB representatives.A separate source familiar with the matter said that involvement by the Chinese regulators was consistent with the way the PCAOB conducts inspections elsewhere around the world and that the U.S. watchdog was not giving China any special consideration. U.S. regulators have for more than a decade demanded access to audit papers of U.S.-listed Chinese companies, but Beijing has been reluctant to let U.S. regulators inspect its accounting firms, citing national security concerns.Despite the audit deal, legal experts and China watchers last month warned they could still clash over how it is interpreted and implemented, with the U.S. side seeking full access to Chinese audit papers without any consultation or input from Chinese regulators.Beijing’s statement on the deal last month, however, emphasised that the U.S. watchdog will have to obtain documents through the Chinese regulators, and must involve the China side during interviews and testimony taking. The onsite inspections by the PCAOB are being conducted in the Hong Kong offices of the selected Chinese companies’ audit firms, said two of the sources.The PCAOB will spend the first week inspecting the auditors’ compliance and internal control systems and move to review the audit working papers of selected companies from the second week, they added.In line with the U.S. regulators’ statements, the PCAOB inspectors can see complete audit work papers without any redactions, and they will adopt view-only procedures for personally identifiable information, the two sources said. More

The Bank of England raised interest rates by 0.5 percentage points to 2.25 per cent on Thursday, setting out the prospect of a further big increase in November to bring inflation under control.The move takes the BoE’s benchmark rate to its highest level since the start of the global financial crisis in 2008. However, the nine-member Monetary Policy Committee held back from the even more aggressive approach adopted by peers at the European Central Bank and US Federal Reserve. The Fed implemented a third successive 0.75 percentage point increase this week. Sterling cut its gains on the day against the US dollar after the BoE’s rate increase, which was less than markets expected. At around $1.13, sterling is still trading near its weakest level since 1985 against the US currency. The MPC split three ways, with the majority — including BoE governor Andrew Bailey and chief economist Huw Pill — voting for the 0.5 percentage point move. Three members — Jonathan Haskel, Catherine Mann and deputy governor Dave Ramsden — favoured a bigger, 0.75 percentage point increase, arguing that acting faster now could help the BoE avoid “a more extended and costly tightening cycle later”. Swati Dhingra, a newcomer to the committee, favoured a more modest 0.25 percentage point move on the grounds that economic activity was already weakening.Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the BoE’s decision not to follow other central banks with a 0.75 percentage point rise provided “reassurance that it is focused on the outlook for consumer price inflation and evidence of emerging slack in the economy, rather than with arbitrarily keeping up with the Joneses”.The BoE said it now expected UK gross domestic product to fall 0.1 per cent in the third quarter of the year, compared with August’s forecast of 0.4 per cent growth. This would mark a second consecutive quarter of decline, cementing fears that the economy is falling into recession. The MPC suggested it would wait until November, when it updates its forecasts, to take a firmer view on the effects of the new government’s fiscal policy. Chancellor Kwasi Kwarteng’s “growth plan”, set to be announced on Friday, was likely “to provide further fiscal support” and “to contain news that is material for the economic outlook”, it said.It added that, “should the outlook suggest more persistent inflationary pressures, including from stronger demand, the committee would respond forcefully, as necessary”.Economists noted this signalled an intention at the BoE to offset the effects of tax cuts with a large rate increase at the November meeting. Paul Dales, chief UK economist at Capital Economics, said the bank’s statement contained a “not-so-subtle reference” to Friday’s mini-Budget. “In short, the Bank has indicated it will raise rates further to offset some of the boost to demand from the government’s fiscal plans,” he said. The energy price guarantee the government had already announced would lower inflation in the short term, the MPC said, with CPI now likely to peak at just under 11 per cent in October, earlier than expected. But inflation would still hover at around 10 per cent for several months, and this would not necessarily be enough to stop high inflation expectations driving household and business behaviour.Highlighting this warning about further price pressures in the pipeline, Kitty Ussher, chief economist at the Institute of Directors, said that “many of our members think that the peak [in inflation] will come next year and so may price accordingly, running the risk that inflationary expectations become self-fulfilling”.The BoE also confirmed that it would press ahead with plans outlined in August to reduce the stock of assets it had amassed under previous quantitative easing programmes, aiming for gilt sales of £80bn over the next 12 months, bringing the total down to £758bn. More

FRANKFURT (Reuters) – A host of central banks from across the world raised interest rates again on Thursday, following the U.S. Federal Reserve in a global fight against inflation that is sending shockwaves through financial markets and the economy.Japan, the outlier among major developed economies, kept interest rates steady on Thursday only to be punished as traders pushed the yen to a record low against the dollar – prompting the first intervention by Japanese authorities to support the currency since 1998.The Fed set the pace on Wednesday with a 0.75% rate hike, its fifth increase since March, and a half dozen central banks from Indonesia to Norway followed suit with rises of similar or identical size within hours, often issuing guidance pointing to more action to come.They are fighting inflation rates ranging from Switzerland’s 3.5% to nearly 10% in Britain – the result of a rebound in demand since the pandemic subsided accompanied by sluggish supply, especially from China, and rising prices for fuel and other commodities in the wake of Russia’s invasion of Ukraine.Central bankers were adamant that curbing runaway price growth was their main task at present but they were bracing for their actions to take a toll on the economy, as rising borrowing costs typically dampen investment, hiring and consumption.”We have got to get inflation behind us,” Federal Reserve Chair Jerome Powell told reporters after Fed policymakers unanimously agreed to raise the central bank’s benchmark overnight interest rate to a range of 3.00%-3.25%. “I wish there were a painless way to do that. There isn’t.”The Fed said it expected the economy to slow to a crawl and unemployment to rise to a degree historically associated with a recession – a prospect looming ever larger in the euro zone too and seen as highly likely in Britain.The Bank of England raised rates and said it would continue to “respond forcefully, as necessary” to inflation, despite the economy entering recession.”For borrowers, this will mean significantly higher costs yet again and yet still no real control on the soaring cost of living,” Emma-Lou Montgomery, an associate director at Fidelity International said.World stocks fell close to a two-year low and emerging market currencies plummeted as investors prepared for a world where growth is scarce and credit harder to get. [MKTS/GLOB]Market participants have also pushed up their rate expectations for the European Central Bank, which is all but certain to hike again on Oct. 23. It is now seen taking its own interest rate to almost 3% next year from 0.75% now.Japan opted to hold its rates near zero to support the country’s fragile economic recovery, but many analysts believe its position to be increasingly untenable given the global shift to higher borrowing costs. “There’s absolutely no change to our stance of maintaining easy monetary policy for the time being. We won’t be raising interest rates for some time,” Bank of Japan Governor Haruhiko Kuroda said after the policy decision.But the yen plummeted against the dollar following the decision, forcing Japanese authorities to step in and buy the domestic currency in a bid to stem the slide.Meanwhile, Turkey’s central bank continued with its unorthodox policy on Thursday by delivering another surprise interest rate cut despite inflation running at more than 80%, sending the lira to an all-time low against the dollar. More

HOEVELAKEN, Netherlands (Reuters) – For five generations, Dutchman Dennis Toebast’s family has prospered as bread bakers. But since the war in Ukraine his energy bills have jumped fivefold, casting doubt on plans to eventually hand the business down to his daughter.With as many as a million Dutch households at risk of being pushed below the poverty line due to soaring gas and electricity bills, the government of the Netherlands on Tuesday announced 18 billion euros ($17.8 billion) worth of measures in 2023 to shield people from a cost of living crisis.For many family-run businesses like Toebast’s, plans to also provide financial support to businesses could come too late, and if nothing changes he might be forced to consider the painful option of cutting staff when the new year starts.“Our monthly income has vanished,” he said. “We are working to pay the energy bills.”Toebast’s monthly gas and electricity costs jumped from around 3,500 euros ($3,455) last year to more than 18,600 euros ($18,365).He said he’d need to charge as much as five euros ($4.90) for a normal loaf of bread in order to cover his costs, but “no one will pay that”.Efforts to reduce energy use, including no longer selling hot snacks after 4 pm and using leftover heat in ovens after baking bread to bake cakes, have not made enough of a dent in his expenses, he said.On a regular day, the bakery in the central Dutch town of Hoevelaken where he has worked for 30 years sells roughly 600 loaves, but some customers stopped coming after a price increase of 0.60 cents to 2.40 euros per loaf.Dutch inflation hit 12% in August, according to Statistics Netherlands, driven largely by a 151% year-on-year leap in gas and electricity prices. Toebast doesn’t expect the bills to lower or even stabilize any time soon. Instead, the bakery tries to work as efficiently as possible. But raw material prices have also jumped since Russia invaded Ukraine on Feb. 24.The Dutch government has been too slow to react, said Marie-Helene Zengerink, general manager of the Dutch Association for Bread and Pastry Bakers, pointing out that neighbouring Belgium and Germany already provided lifelines to businesses.Dutch Minister of Economic Affairs Micky Adriaansens said on Tuesday evening that a support package for businesses will be ready in November. “This is hopeful, but something needs to happen now as well”, said Zengerink.She said at least seven bakeries have gone bankrupt in recent weeks and that, without urgent help, thousands more are at risk of collapsing.Toebast has promised his 24 employees they would have jobs until at least the end of this year. He hopes that some day his daughter, Fabienne, will take over the bakery, but that too is no longer certain.”I can’t keep this up for longer than six more months,” he said. “Some of my employees have offered to be let go if that would help. That’s absolutely the last thing we want to do.”($1 = 1.0128 euros) More

The deal comes months after three Chinese state airlines placed an apparently coordinated order for nearly 300 Airbus jets, the biggest order by Chinese airlines since the pandemic.Boeing (NYSE:BA)’s top boss Dave Calhoun said earlier this week the outlook for selling planes to China in the next one or two years was negative. The 737 MAX has not flown commercially in China since March 2019, when it was grounded after two fatal crashes.The Airbus deal follows China Southern Airlines’ order in August for 96 A320neo-family aircraft worth $12.25 billion. (https:// The jets will be delivered to Xiamen Airlines, which is majority owned by China Southern Airlines, between 2024 and 2027. More