Economy

COLOMBO (Reuters) – Sri Lanka’s finance minister held talks with a top International Monetary Fund (IMF) official on Monday, two sources said, as the island nation seeks help to deal with its plunging reserves, a sliding currency and surging inflation.IMF Asia and Pacific Department Director Changyong Rhee met Finance Minister Basil Rajapaksa and Treasury Secretary S.R. Atygalle, two finance ministry officials told Reuters.Sri Lanka is expected to start formal negotiations with the IMF in April on a possible programme that could boost reserves and put growth on a sustainable path.In Monday’s talks, officials discussed details of the IMF’s latest review of the economy and the assessments outlined by IMF executive directors at an IMF board meeting in late February. Rhee meets Sri Lankan President Gotabaya Rajapaksa on Tuesday. “The talks were wide ranging and covered key challenges the economy is facing,” said one of the ministry officials, asking not to be named given the sensitivity of the talks.”Right now, the focus is on how Sri Lanka can get IMF support. Talks on specific proposals will come later,” the official added, adding that Rajapaksa would brief the cabinet about the talks at a weekly meeting on Monday evening.Sri Lanka has been hit by a dollar drought with reserves dropping to $2.31 billion in February. The country is struggling to pay for critical imports including fuel, food and medicines.Chronic shortages have hit Sri Lankans hard with rolling power cuts, long lines at pumps and record levels of inflation. Last week the Sri Lankan rupee fell 30% after the government allowed the currency to free-float, driving prices even higher. More

New Delhi (Reuters) -India will take “appropriate” steps to calm the rise in oil prices, triggered by Russia’s invasion of Ukraine, the junior oil minister said on Monday, indicating the country could release more oil from national stocks if required.India, the world’s third biggest oil consumer and importer, imports about 85% of its oil needs.”Government of India is ready to take all appropriate action, as deemed fit, for mitigating market volatility and calming the rise in crude oil prices,” Rameswar Teli said in a written reply to lawmakers.Last month India said it was prepared to release additional crude from its national stocks in support of efforts by other major oil importers to mitigate surging global prices.Teli said in November the federal government had joined other major consumers to release 5 million barrels of oil from its strategic petroleum reserves to contain inflationary pressures.On Monday, Teli said India is “closely monitoring global energy markets as well as potential energy supply disruptions as a fallout of the evolving geopolitical situation”. India buys only a fraction of its oil from Russia but has been hit hard by a spike in global oil prices due to Western sanctions against Moscow, the world’s second largest crude exporter.The Indian basket of crude oil had jumped to $112.59/barrel by March 11, after averaging $84.67/barrel in January and $94.07 in February. Indian oil companies have not raised fuel prices since Nov. 4 to shield the customers from higher costs. However, to ease the import cost for companies, India is considering a Russian offer to sell its crude oil and other commodities at a discount, Indian government sources said. More

Security workers are staging a full-day walkout at airports including Duesseldorf, Cologne/Bonn and Berlin on Monday, and further strikes have been called for Tuesday, among others in Frankfurt and Hamburg.In Duesseldorf, around 160 flights have been cancelled for Monday, which is more than half of the planned 290 departures and arrivals, the airport said in a statement.At Cologne/Bonn, 94 out of 136 flights have been called off, the airport said. Berlin airport’s website also showed many cancelled flights.On Tuesday, no departing passengers will be able to board their flights at Frankfurt airport, Germany’s biggest, only passengers who are in transit, operator Fraport said.Around 770 departures and arrivals were initially scheduled for Tuesday, serving close to 80,000 passengers, according to Fraport.Labour union Verdi demands that employers raise the wages of airport security staff by at least 1 euro an hour for the next 12 months and that staff in different parts of Germany earn the same.BDLS, the association of aviation safety companies, said all of Verdi’s demands amounted to increases of up to 40% and were “utopian”. A next round of wage talks has been scheduled for Wednesday and Thursday, the two parties said. More

(Reuters) – With the Federal Reserve almost certain to hike interest rates this week for the first time in more than three years, investors will be focused on how it plans to curb a surge in inflation inflamed by the Ukraine crisis without triggering a recession.The U.S. central bank is expected at the very least to raise borrowing costs at each of its next three policy meetings as it scrambles to address the fastest inflation in 40 years. Consumer prices rose 7.9% in February on an annual basis. But having waited until it was sure the economy and labor market had recovered from the COVID-19 pandemic, the Fed also risks tightening monetary policy just as growth is slowing. Western sanctions to punish Russia for its invasion of Ukraine have sent the prices of oil and other commodities soaring, adding to uncertainty over the trajectory of the global economy.”The policy path set forward is going to be one for further increases,” said Kim Rupert, managing director of global fixed income analysis at Action Economics, who added that Fed Chair Jerome Powell and his fellow policymakers would likely take a cautious data-dependent approach. “They really can’t do anything else given the uncertainties from the war.”Powell’s news conference after the end of the two-day policy meeting on Wednesday will be closely watched for possible clues as to how aggressive the Fed may be in fighting inflation and whether it will risk a recession to dampen price pressures. Bond markets are already betting on a possible economic contraction down the road, with the two-year, 10-year U.S. Treasury yield curve flattening to only 25 basis points, a much smaller gap than at the beginning of previous Fed tightening cycles. An inversion in this part of the yield curve is seen as a reliable indicator of a recession in one to two years.The Fed’s benchmark overnight interest rate ahead of this week’s policy meeting was 0.08%. Fed fund futures traders are pricing in a policy rate of 1.75% by the end of this year. [FEDWATCH]The Fed will also on Wednesday release updated quarterly economic projections and a “dot plot” showing policymakers’ interest rate projections. Markets expect the Fed to indicate more rate hikes this year and possibly a higher terminal rate, the neutral interest rate seen as consistent with full employment and stable prices.”Our sense is that they are going to want to front-load the policy tightening and probably go at a slower pace in 2023,” said Zachary Griffiths, a macro strategist at Wells Fargo (NYSE:WFC). “It will be interesting to see if any policymakers are starting to revise up their expectations for the terminal rate in response to expectations that inflation will be a fair bit higher perhaps throughout this cycle than what we saw throughout the last economic expansion.”The new economic projections will show if officials see a near-term easing of price pressures and to what extent GDP growth expectations have been lowered.BALANCE SHEET REDUCTIONThe Fed also may indicate how fast and large the cuts to its $8.9 trillion balance sheet will be when the bonds it holds start rolling off the books, which many analysts expect to happen in May or June. The central bank also is widely expected to announce that it has ended the massive bond-buying program initiated in early 2020 to blunt the damage of the pandemic. The asset purchases had dwindled since November 2021.In January, the Fed said it did not anticipate it would sell its holdings of Treasuries, but instead would allow them to mature without being replaced. It may, however, sell its mortgage-backed securities, which could relieve some of the pressure in hot housing markets.Meanwhile, money markets will key in on whether the Fed raises the rate it pays investors to borrow Treasuries overnight in its repurchase agreement facility by 25 basis points, or only 20 basis points, following a five-basis point increase last June that was meant to stop short-term interest rates from falling too low.That could impact demand for the Fed’s reverse repo facility, in which investors borrow Treasuries overnight, and which continues to see near-record daily volumes of around $1.5 trillion, said Padhraic Garvey, regional head of research for the Americas at ING.A smaller rate hike for this facility could “unwind some of this excess cash that goes back into that window on a daily basis,” he said. That said, given it’s the first rate hike, the Fed may want to simplify the messaging by keeping the 25-basis-point hikes consistent across rates and highlight that there are more to come, he noted.The central bank raised counterparty limits in the reverse repo facility twice last year to address excess liquidity amid a dearth of safe, short-term investments. More

Le Maire, who on Tuesday will preside over a meeting with other EU finance ministers in Brussels, said the time had come for a joint “targetted, fast and temporary” economic response to the effects of the Ukraine crisis.The suspension of the EU fiscal rulebook till the end of the year caused by the COVID crisis gave all the flexibility needed to finance emergency support for households and for companies dependent on gas or exposed to the Russian market, he said.”We need to keep fiscal policy reactive,” Le Maire told journalists.He added that sanctions imposed on Russia over its invasion of Ukraine had been effective and would trigger an 8% slump in the Russian economy. More

BRUSSELS (Reuters) – Top European Union diplomats have agreed to add Chelsea football club owner Roman Abramovich to the EU list of Russian billionaires sanctioned after Moscow’s invasion of Ukraine, two diplomatic sources said on Monday.The informal greenlight to Abramovich’s listing came in a meeting on Sunday, one source said, and the EU envoys will reconvene at 1100 GMT on Monday to adopt the measure and a further set of economic sanctions against Russia.Sanctions will be effective only after publication on the EU’s official journal, which usually happens within hours or the day following formal approval.The West has sanctioned Russian billionaires, frozen state assets and cut off much of the Russian corporate sector from the global economy in an attempt to force Russian President Vladimir Putin to change course on Ukraine.In what would be the fourth package of EU sanctions against Russia since its Feb. 24 invasion of Ukraine, the 27-nation bloc will ban the export of luxury goods to Russia, including expensive cars.It will also prohibit the import of Russian steel and iron products, European Commission President Ursula von der Leyen said on Friday.At Sunday’s meeting, diplomats asked the Commission, which drafted the economic sanctions, to explain some aspects of the new economic measures to make sure they cannot be successfully challenged in EU courts, according to two EU sources.No concerns were raised about the new listings of oligarchs and businessmen, which are in a separate legal document drafted by the EU external action service, one diplomat said, noting that Abramovich’s listing “will go through”. Further Russian oligarchs will be added to the EU list. Dozens have already been sanctioned.The new sanctions will hit people active in the Russian steel industry and others who provide financial services, military products and technology to the Russian state, EU foreign policy chief Josep Borrell said on Friday.Abramovich has already being blacklisted by Britain.He holds a Portuguese passport, which means that Portugal could in principle refrain from imposing on him the asset freeze and travel ban decided at EU level, a second EU official told Reuters. More

Nick Mazing is head of research at financial intelligence platform Sentieo. In this post, he explains why the CPI for shelter is set to add to the problems facing Federal Reserve chair Jay Powell.When the Federal Reserve’s monetary policymakers sit down later this week to discuss how to tackle the surge in US inflation, the recent moves in the price of energy will feature prominently. That’s clearly important. The invasion of Ukraine has triggered a fresh surge in shiny rocks, black goo and air you burn. To boot, Americans care more than most what they pay at the pump — it is a nation built around the automobile.But the Fed’s travails don’t begin and end with what’s happening to gas prices. In the coming quarters, officials are set to face price pressures from another essential item for consumers: housing. The housing component of the Consumer Price Index, or CPI, accounts for just over 42 per cent of the weight of goods and services in the “inflation basket” used to calculate the rate of change in prices in the US. That’s a far higher portion than energy. Shelter, specifically, is over 33 per cent of the basket. Breaking it down further, rent of primary residence is 7.862 per cent and owners’ equivalent rent is 24.263 per cent.So what’s happening to housing costs right now? The measures of consumer price inflation that the Fed relies upon are already at multi-decade highs. The reading for shelter currently comes in at 4.7 per cent — much higher than monetary policymakers might like. Yet even that figure underestimates what’s actually happening in the housing market.On the chart below the red line is the year-on-year per cent change in the S&P / Case-Shiller 20-city composite home price index, which measures year-on-year changes in house prices. The blue line is the official CPI inflation figure for shelter.

Quite the discrepancy. Online broker Redfin, meanwhile, reported that median home sale price in February 2022 was up 16 per cent compared with a year ago, while the monthly mortgage payment on the median asking price was up 23 per cent compared with the prior year, and up 36 per cent compared with the same period in 2020. Redfin previously reported that January 2022 was “the most competitive month on record” for homebuyers, with 70 per cent of home offers facing competition. This underestimation of shelter inflation also holds for rents. We’ve been looking closely at the rental rates reported by publicly traded residential REITs. They are also seeing mid-teen increases, year-on-year, based on their reporting for the fourth quarter of last year.Here are some examples from big players in the market. Mid-America Apartment Communities, with ownership interest in over 100,000 units across 16 states, reported a 16 per cent increase year-on-year on a “blended” — that is, new leases and renewals — basis. Essex Property Trust, with ownership interest in over 60,000 units, reported a 13.9 per cent “blended” rate rise. Camden Property Trust, with ownership interest in over 58,000 units, reported a 15.7 per cent “blended” rise. Invitation Homes, which focuses on single family home rentals and has ownership interest in over 82,000 homes, reported a “blended” rise of 11.1 per cent. Similarly, Redfin’s latest rental data release showed a 15.2 per cent year-on-year increase for January 2022, with the Top 10 out of their Top 50 metro areas recording annual increases between 31 per cent and 39 per cent.So what explains the discrepancy? Let’s look at the methodology behind the CPI calculation.As touched upon earlier, to measure shelter the Bureau of Labor Statistics uses two distinct indices: the OER (owners’ equivalent rent of primary residence) and Rent (the rent a lessee pays on their residence). The data for each index is collected from six samples of housing units. But each sample group is only surveyed once every six months. The rationale is that rents change less frequently than other goods and services in the CPI. However, in times of faster price increases, these data points are, in effect, “old news,” and not as reflective of the real market as what we can observe in the reports of the housing REITs.What adds to the complexity of this specific index component is that housing is a widely-owned asset: over 65 per cent of US households own their home, and about 60 per cent of owner households have a mortgage, with the balance owning their houses outright. The BLS itself views houses as capital goods rather than consumption items which is why house price changes are not directly reflected in the index.The official numbers are yet to reflect the reality of double-digit housing inflation for aspiring homeowners or people who rent. But we suspect that the large shelter component of the CPI will rise in the coming quarters. Even if other parts of the CPI ease, this will keep the pressure on the Federal Reserve to carry on raising rates. A 25 basis point rise this week looks a certainty, with further hikes later this year a sound bet too. The only “good” news for Powell and co is that they have the tools to cool the housing market. While the US has a chronic lack of housing supply, tighter credit conditions should help. Even if it doesn’t completely solve the problems facing aspiring homeowners and renters, the Fed has far more control over conditions in the market for mortgage credit and, indirectly, rents than it does over oil prices. More

The countries of central and eastern Europe have shown moral clarity in the face of crisis. As millions of people flee the war in Ukraine, Poland and others have thrown open their borders to offer refuge. A sense of solidarity between former Soviet-bloc states seeking to create new paths for themselves in Europe has driven much of this response. These countries are bearing the cost of a broad European imperative to offer support to those who need it the most. In return, the rest of Europe needs to come to the aid of these countries in a moment of economic turmoil. The proximity of central and eastern Europe to the conflict has spooked investors and prompted significant pressure on national currencies. Action is required now to help prevent this volatility from mutating into something altogether more serious. Central and eastern European central banks have certainly not been complacent in their response. Foreign exchange interventions have been paired with interest rate rises to help support national currencies. While this combination has brought momentary calm, more can be done to stave off further volatility. Investors’ lingering doubts about how well these economies will cope with the strain of a protracted conflict could result in sustained pressure on their currencies as they bet on depreciation or take fright.In the face of this pressure, central banks will have no choice but to take further action. This carries significant risk. If central banks are unsuccessful in their attempts to support currency values through higher interest rates, then inflation may continue to rise, threatening a “stagflationary moment” of low growth and high prices. Any broader slowdown in Europe provoked by high gas prices, especially in Germany — the dominant export partner of many central and European countries — would pose additional threats.On top of this comes the risk of a private debt squeeze. The situation is particularly precarious for countries that have relatively high amounts of private debt denominated in foreign currencies. If exchange rates continue to fall, payments on this external debt will become more expensive.The first task will be to expand the swap lines between the European Central Bank and non-euro central banks. Swap lines can provide a pipeline of euros into central and eastern Europe to service foreign-denominated debt, if needed. Their very existence should send a powerful signal to investors that there is no need to panic, with the ECB ready to intervene in a crisis. This alone should be enough to stave off further precipitous currency falls that could make swap lines necessary in the first place.Investors contemplating an exit from central and eastern Europe should meanwhile think twice. The EU has already demonstrated a surprising willingness to take bold steps during this crisis and its commitment to its eastern European members should not be doubted. If nothing else, self-interest should motivate caution: those with positions in the region have more to gain from improving the resilience of these economies rather than abandoning them. Reactivating the Vienna Initiative, originally created in 2009 to help prevent capital flight by western-owned banks, is the kind of effort that can help.European nations on the front line of the Ukrainian crisis undoubtedly find themselves in the midst of their own economic storm. Unusual political cohesion has been shown among the nations of Europe in recent times. Now is the moment to commit to economic solidarity too. More