Economy

CARTAGENA (Reuters) – Candidates most likely to win Colombia’s presidential elections on Friday agreed for the need to reform the country’s unbalanced pension system so that it provides greater coverage for millions of poor people and redirects subsidies.Ideas for financing the reform ranged from a bulky tax reform to more radical plans such as using savings from private funds to pay the pensions of older adults who have not managed to save enough for their retirement, among others.Colombia’s public pensions are beset by the need to expand coverage while contending with a shortfall of more than $11.3 billion dollars a year which the government must cough up to ensure payments to the 2.4 million people affiliated with the system.Left-wing candidate Gustavo Petro, who leads election polls has proposed using pension savings from private funds to help finance pensions in the public system and pay bonuses to some 3 million people who do not have enough for retirement.Private pension funds manage assets worth around $92 billion dollars, equivalent to almost 30% of the country’s annual gross domestic product (GDP).According to Petro’s manifesto, the right to a pension “will be a collective state guarantee based on social solidarity and not on the private appropriation of benefits to the detriment of the savings of all Colombians.” The proposal has raised fears among economists.Second-favorite Federico Gutierrez, the center-right candidate, proposed maintaining the mixed public and private system while eliminating subsidies worth $5.3 billion dollars for high-value savings funds and redirecting them to those who do not have pensions.”There are big reforms that are absolutely necessary,” Gutierrez said during the annual congress of the pension fund association Asofondos in the Caribbean city of Cartagena. “The big reforms have to happen in the first year,” he added.Centrist candidate Sergio Fajardo proposed supporting the 3.6 million adults aged over 65 without a pension or income with payments worth some $133 a month. The plan would need some $4.79 billion to finance and Fajardo, who is fourth in the polls, would fund the move by pushing a tax reform worth $8.78 billion through Congress, he said. “People cannot take anymore,” Fajardo said, recognizing citizens’ unhappiness with the pension system. More

(Reuters) -With expectations for a half-percentage point rate hike at the Federal Reserve’s May meeting now locked in, traders on Friday piled into bets that the central bank will go even bigger in subsequent months, but one Fed policymaker pushed back, saying a more “methodical” approach was appropriate even in the face of too-high inflation. “You don’t need to go there at this point,” Cleveland Fed President Loretta Mester told CNBC, referring to possibility of a 75 basis point rate hike. Traders are now pricing in two such outsized rate hikes, at the Fed’s June and July meetings. Coming from Mester, one of the Fed’s more hawkish policymakers and a supporter of using half-point hikes to get inflation on a downward trajectory more quickly, it was a notable bid to tamp down market panic on a day when U.S. stock indexes tumbled. “Let’s be on this methodical rather than overly aggressive path,” Mester told CNBC in what is likely to be the last public set of comments from Fed policymaker ahead of their May meeting.Fed Chair Jerome Powell on Thursday gave a “go” sign to a half-point hike then and signaled he would be open to “front-end loading” the U.S. central bank’s retreat from super-easy monetary policy.Those remarks solidified traders’ bets on a rise in short-term borrowing costs to the 0.75%-1% range at the Fed’s May 3-4 meeting, and sent them newly piling into expectations for bigger hikes in June and July. At Friday’s market close, after Mester spoke, futures contracts tied to the Fed’s policy rate signaled a more than 80% chance of another 1.5 percentage point increase in the fed funds rate, to the 2%-2.25% range, by the close of the Fed’s July 26-27 meeting.Some economists are also newly penciling in stepped-up policy tightening. Jefferies chief economist Aneta Markowska on Friday said she expects the Fed to use a string of half-point hikes to get rates to a 2.25%-2.5% level by September, a more aggressive path than she had previously anticipated.And Nomura Research analysts, who now see the Fed delivering increases of 0.75 percentage points at each of the Fed’s June and July meetings, said Friday that market bets could help cement that actual outcome. “Stronger (market) pricing for such a move would likely ease the path for the FOMC and participants could likely forge a consensus on such action quickly,” they wrote in a note published early Friday.The Fed lifted its policy rate by a quarter-percentage point last month in its first increase after what had been two years of a near-zero policy rate, though “many, many” Fed policymakers felt bigger rates hikes would be appropriate, Powell noted Thursday. “50 basis points will be on the table for the May meeting,” Powell said. “I also think there’s something in the idea of front-end loading” the removal of accommodation, he added.The Fed raised its target range for the fed funds rate to 0.25%-0.5% in March, from the 0%-0.25% range it had been for the prior two years.Adding to the sense of urgency, even dovish Fed policymakers like San Francisco Fed President Mary Daly and Chicago Fed chief Charles Evans this week embraced the idea of a half-point hike in May and of getting interest rates to a “neutral” level by the end of the year. Most at the U.S. central bank say that level is likely between 2.25%-2.5% in the long run. But with inflation as high as it is — consumer prices rose 8.5% last month, well above the Fed’s goal of 2% — some observers say interest rates will need to rise even further for the “real” cost of borrowing to be high enough to start biting into economic activity.Daly told reporters earlier this week that she believes 2.25%-2.5% is still a “reasonable” estimate for neutral, but noted that policymakers won’t really know until rates get closer to that level and they can observe what happens in the economy. More

WASHINGTON (Reuters) -Indonesia’s new palm oil export ban will hurt other countries but is necessary to try to bring down the soaring domestic price of cooking oil driven up by Russia’s war in Ukraine, Indonesia’s finance minister told Reuters on Friday.Sri Mulyani Indrawati said that with demand exceeding supplies, the ban announced earlier on Friday is “among the harshest moves” the government could take after previous measures failed to stabilize domestic prices. “We know that this is not going to be the best result,” for global supplies, she said in an interview on the sidelines of the International Monetary Fund and World Bank spring meetings. “If we are not going to export, that’s definitely going to hit the other countries.”China and India are among big importers of palm oil from Indonesia, the world’s largest producer accounting for more than half the world’s supply. Palm oil is used in products from cooking oils to processed foods, cosmetics and biofuels.Indrawati said previous measures requiring producers to reserve stocks for domestic use did not result in “the level of prices that we want. It’s still too expensive for the ordinary household to buy those cooking oils.”At this week’s meetings in Washington, policymakers have expressed concern about growing prospects of food shortages due to the war in Ukraine, a major producer of wheat, corn and sunflower oil. World Bank President David Malpass said repeatedly that countries should avoid hoarding of food stocks, export controls and other trade barriers to food.COUNTRY NEEDS FIRSTBut Indrawati, a former World Bank managing director, said that as a political leader and policy maker food security issues needed to be defined first at the country level, then regionally and globally.She likened the current food supply situation to the early weeks of the COVID-19 pandemic, when countries competed with each other for masks, medical protective gear and other critical supplies.”Just like we were facing during the pandemic, we know this is not good in the medium and long term, but in the short term, you cannot stand in front of your people when you have the commodity which is needed by your people and you let (supplies) just go out” of the country.Indonesia’s move, which takes effect on April 28, caused prices of alternative vegetable oils to surge, with soybean oil hitting a record high on Friday. An Indian trade group called the ban “rather unfortunate and totally unexpected.”Indrawati said her government would analyze the impact of the measure on global and regional market dynamics.For palm oil and other food commodities, she said the World Bank and other international institutions needed to focus on “supply side measures” to increase production.But Indrawati said Indonesia has limited ability to increase palm oil production due to environmental concerns. Since 2018, the government stopped issuing new permits for palm oil plantations, which are often blamed for deforestation and destroying habitats of endangered animals such as orangutans.Instead, Indonesia was focusing on improving infrastructure to allow producers to become more efficient and increasing production of other crops in high demand, including corn and soybeans, she said. More

LONDON (Reuters) – Energy prices that have soared since Russia’s war in Ukraine are a “major concern” for South Africa’s economy, Finance Minister Enoch Godongwana said on Friday, while it was too soon to quantify the full impact of last week’s devastating floods. Whether high prices of the commodities that South Africa exports, including gold and platinum metals, would counter this was still unclear, Godongwana told Reuters in a video call from Washington at the International Monetary Fund Spring Meetings.Inflation has risen worldwide after Russia invaded Ukraine on Feb. 24, particularly food, fertiliser and fuel, with subsequent interest rate rises by the U.S. Federal Reserve and lockdowns in China adding pressure to the global economy.”Energy prices are of major concern,” Godongwana said. “Fuel prices are pervasive in the economy – they push your food prices up… It is becoming a more worrying threat.”He said interruptions to Durban port operations caused by floods, which killed 435 people and caused at least 10 billion rand ($640 million) of infrastructure damage in KwaZulu-Natal province, would limit the benefits of commodity exports.”It is still too early to estimate the impact of the floods on the broader economy.”South Africa’s rand had been among the best performing currencies in the world this year, thanks to metal exports, but fell 7% this week in the wake of the floods and severe power cuts that have long held back the country’s economy.CHINA-AFRICA LENDINGThe IMF meetings also focused on a lack of progress with the issue of debt sustainability, Godongwana said, welcoming the “breakthrough” that came with China’s pledge on Thursday to join the creditor committee for restructuring Zambia’s debt.”China has been the one who has been slowing progress in relation to Zambia. I don’t blame them. Their approach has been… let’s do it on a case-by-case basis,” he said.Godongwana described China’s approach to lending in Africa as “aggressive”, but said that it may have reached “saturation” both from its perspective and as borrowing countries realise the loans are just as stringent as others.Chinese bank financing for infrastructure projects in Africa fell from $11 billion in 2017 to $3.3 billion in 2020, according to a report by international law firm Baker McKenzie.”The reason China went case-by-case is that they are more exposed than any other nation as a lender to the African continent,” Godongwana said.”And that suggests that it may have become a problem for China as a lender and it is also becoming a problem for the recipients.”Godongwana said that in late May African governments would discuss changes they wanted to see to the Common Framework, the debt restructuring process set up in response to the coronavirus pandemic by the Group of 20 (G20) major economies.”There’s little uptake, which shows that there’s some problem with the design of the policy,” he said.Chad, Ethiopia and Zambia requested relief from the programme over a year ago and have yet to receive any.($1 = 15.6150 rand) More

Cleveland Fed President Loretta Mester said she’s in favor of raising interest rates by 50 basis points, perhaps multiple times, but wouldn’t favor going higher than that.
Mester called the Fed’s pivot from the historically high levels of accommodation during the pandemic era “the great recalibration of monetary policy.”

Cleveland Federal Reserve President Loretta Mester said Friday she’s in favor of raising interest rates quickly to bring down inflation, but not so quickly as to disrupt the economic recovery.
That means a strong likelihood of backing a 50 basis point rate hike at the next Fed meeting and perhaps a few more after, but not going to 75 basis points, as St. Louis Fed President James Bullard suggested earlier this week. A basis point is 0.01 percentage points.

“My own view is we don’t need to go there at this point,” Mester said on CNBC’s “Closing Bell” when asked by host Sara Eisen about the 75-basis-point move. “I’d rather be more deliberative and more intentional about what we’re planning to do.”
Mester said she would like to see the Fed get its benchmark overnight borrowing rate to 2.5% by the end of this year, a rate that she and many Fed officials see as being “neutral,” or neither stimulating nor repressing growth.
The fed funds rate sets what banks charge each other for overnight borrowing, while also serving as a benchmark for many forms of consumer debt. It currently is set in a range between 0.25%-0.5%, following a quarter-percentage point increase in March.
“I would support at this point where the economy is a 50 basis point rise and maybe a few more to get to that 2.5% level by the end of the year,” Mester said. “I think that’s a better path. … I kind of favor this methodical approach, rather than a shock of a 75 basis point [increase]. I don’t think it’s needed for what we’re trying to do with our policy.”
Her comments mesh with what Chair Jerome Powell said Thursday.

Though the statements from both officials also were in line with recent Fed communications, they coincided with a fresh round of selling on Wall Street in both stocks and bonds.
Mester called the Fed’s policy pivot from the historically high levels of accommodation during the pandemic era “the great recalibration of monetary policy.”
“We are trying to let the markets know where we see the economy going and why monetary policy needs to move off of that real extraordinary level of accommodation that was needed at the start of the pandemic,” she said.
“Of course, our goal is to do that in a way that sustains the expansion and sustains healthy labor markets,” Mester added.
According to the CME Group’s FedWatch tracker, market pricing currently indicates the Fed taking the funds rate a bit past where Mester indicated — possibly to 2.75% following anticipated hikes of 50, 75, 50, 25, 25 and 25 basis points respectively at its six remaining meetings through the end of the year.

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“I would support at this point, given where the economy is, a 50 basis point rise in May and a few more to get to that 2.5 percentish level by the end of the year,” Mester said on CBNC, referring to the level of borrowing costs she believes would be “neutral” for economic activity. At that point, she said, the Fed could assess the state of the economy and inflation, and either pause rate hikes or make further increases. Asked if she would support a 75 basis point rate hike, she said: “You don’t need to go there at this point.” Traders on Friday were pricing in two such rate hikes following a half-point hike in May, a day after Fed Chair Jerome Powell signaled he would be open to “front-end loading” the U.S. central bank’s retreat from super-easy monetary policy.”Doing one outsized move in the funds rate doesn’t really appear to me to be the right way to go,” Mester said. “I would rather be more deliberative and more consistent in bringing up the funds rate.” Her remarks are likely to be the last public commentary from any Fed policymaker before they next meet, on May 3-4. More

MARKET REACTION:* STOCKS: Dow down 2.71%, S&P 500 down 2.65%, Nasdaq down 2.42%* BONDS: The yield on the benchmark 10-year note fell to 2.9025%. [US/]* FOREX: The dollar index rose 0.527% [FRX/]* VIX: The VIX was up 23.5% at 28.01 and touched its highest level in more than a monthCOMMENTS:JOHN LYNCH, CHIEF INVESTMENT OFFICER, COMERICA WEALTH MANAGEMENT, CHARLOTTE, NC (email)“The combination of Jerome Powell’s comments and some disappointing earnings news was too much for investors to handle heading into the weekend. Moreover, market-based breakeven inflation expectations are climbing, providing a more powerful statement on the potential for persistent pricing pressures than headlines have been suggesting.”We believe the concerns over the likelihood of 50-basis point rate hikes at the next two FOMC meetings is an overreaction.  Approximately $150 billion in securities on the Fed’s balance sheet are maturing over the next few months, suggesting the central bank could still be purchasing up to $100 billion in bonds, essentially offsetting any impact from the interest rate moves.”In the months ahead, though, balance sheet reduction will not require elevated asset purchases, providing a better lever for the Fed to pull regarding rates and runoff.”STEPHEN MASSOCCA, SENIOR VICE PRESIDENT, WEDBUSH SECURITIES, SAN FRANCISCO “The market has concerns inflation is going to prompt central banks to tighten further and faster than investors are comfortable with and that it will have a negative effect on asset pricing including stocks,” “Inflation is starting to have an impact on corporate earnings and we saw that today.” “It’s starting to be pervasive.” THOMAS HAYES, CHAIRMAN, MANAGING MEMBER, GREAT HILL CAPITAL LLC, NEW YORK“This has nothing to do with Fed and interest rates. The one thing that no one is talking about is the French election on Sunday. There is a lot of fear in Europe that Le Pen gets elected. Le Pen is a populist who’d be potentially anti-euro and the fear is that it could be a shock along the magnitude of what Brexit was. Because if Le Pen wins, the knock-on implication is that they might withdraw from the European Union or that would be a possibility that’s on the table. “No one’s thinking about that. It was evident with the selling into the 11:30 a.m. close in Europe and then it carried through with margin calls in the U.S. through 2:30 p.m. No we’re getting a little relief, not much, after the margin calls at 2:30 p.m. This is all about the election on Sunday because that would be a something that nobody’s pricing in.”JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA (email)“Markets are very uneasy about the growing likelihood of a policy error by the Federal Reserve.  When a Fed official suggests a 50 basis points hike, markets immediately start trying to price in 75 basis point hikes.  It’s madness really.  Most investors would be well served to ignore the machinations of the pricing craziness and wait to see what actually happens with rates.” More

The US urged the UK and the EU on Friday to reach a compromise on Northern Ireland’s post-Brexit trading arrangements after Boris Johnson threatened to tear up the agreement between the two sides.The British prime minister said during a trade mission to India that his government was willing to take unilateral steps to reform the Brexit deal, which has bedevilled UK-EU relations since taking effect.Asked whether he was prepared to legislate to give British ministers powers to neuter elements of the so-called Northern Ireland protocol in UK law — as first reported by the Financial Times — Johnson said: “Of course. That goes without saying.”Johnson’s stance came despite warnings from the European Commission and the opposition Labour party that taking unilateral action would put the UK in breach of international law.Washington urged the UK and EU to continue talks to resolve challenges around implementing the protocol. The US state department said America’s priority was to protect the “gains” of the Good Friday peace agreement.

“We recognise that there have been challenges over the implementation of the Northern Ireland protocol and that talks between the UK and EU to resolve these continue,” said a state department spokesperson.“The best path forward is a pragmatic one that requires courage, co-operation, and leadership.”The spokesperson added that Washington was urging all sides to “continue engaging in dialogue to resolve differences and bring negotiations to a successful conclusion”. Richard Neal, a Massachusetts Democrat and chair of the House ways and means committee, told the FT: “Preserving peace and stability on the island of Ireland is essential. Undoing the Northern Ireland Protocol could compromise the facilitation of post-Brexit trade between the UK and the European Union. The progress achieved thanks to the Good Friday Agreement should be maintained.” Asked about the protocol this week, a commission spokesman said it was “important to underline” that the Brexit deal which Johnson negotiated in 2019 created “legal obligations to which the UK is bound as much as we are”. EU diplomats have also warned it would be “utterly irresponsible” for the UK to be seen to be flouting international law at a time when Europe was trying to present a united front against Russia following its invasion of Ukraine.Boris Johnson made his comments on Northern Ireland while on a trade trip to India © stefan Rousseau/Pool/ReutersPeter Kyle, shadow Northern Ireland secretary, said the government’s plan risked undermining the UK’s reputation for sticking to its word as Johnson toured the world seeking post-Brexit trade deals with countries such as India.While Johnson said the UK still wanted to resolve outstanding issues over the protocol on a bilateral basis with the EU, officials on both sides stated that talks to resolve differences over implementation have stalled.The agreement leaves Northern Ireland following EU rules for goods trade and creates a customs border in the Irish Sea which the British government and all the region’s pro-UK Unionist parties say is “unsustainable”. Some businesses have also complained that the protocol has introduced unnecessary bureaucracy.

In a sign of how far apart Brussels and London are, the EU’s chief Brexit negotiator Maros Sefcovic wrote to his British counterpart Liz Truss last month complaining the UK was still not providing adequate access to customs data, in a letter seen by the FT.The news that the UK government was preparing legislation that would give ministers powers to “switch off” parts of the protocol has emerged ahead of elections to the Northern Ireland assembly on May 5.The plan drew an angry reaction from the nationalist Sinn Féin party, which could emerge as the largest group in the assembly for the first time.“These senseless acts by the British government are completely out of touch with the majority of people in the north who support the protocol and realise that it is here to stay,” said a Sinn Féin spokesperson. Unionists leaders rally against the protocol in County Tyrone on Thursday © Liam McBurney/PASir Jeffrey Donaldson, leader of the Democratic Unionist party, currently the largest group in the Stormont assembly, said the DUP had made clear it wants the issues around the protocol to be resolved before it will agree to return to power-sharing in the region’s executive.“The protocol is not supported by unionists and it needs to be replaced with arrangements that respect Northern Ireland’s place in the UK,” he added.Doug Beattie, leader of the Ulster Unionist party, said changes were needed “and if the [UK] government is going to do something, they should just do it”.But Stephen Farry, deputy leader of the centrist Alliance party, called unilateral action “counter-productive and damaging”.“Businesses need pragmatic and sustainable solutions — and crucially they must be legal,” he said. More