September CPI: Market Finally Recognized the Reality

Summary:

This inflation report has little reason for optimism and has also led to a surge in market expectations for a 75-basis-point hike in November and December. For the Fed, a 75-basis-point hike in November is no big deal, but a 50-basis-point hike in December is highly possible if inflation develops unexpectedly.

The September CPI released yesterday (October 13) once again showed the high viscosity of inflation and confirmed that fighting inflation is not an easy task. It is only in the early stage of fighting inflation. There is still a long way to go to defeat inflation. There is little reason for optimism in this CPI report. The core CPI, in particular, has been plagued with many problems. This time these problems are completely exposed, which has set a record since August 1982.

In September, the CPI rose by (expected value: 8.10%, former value: 8.3%) YoY, and grew by 0.4% (expected value: 0.2%, former value: 0.1%) MoM.

Core CPI increased by 6.6% (expected value: 6.5%, former value: 6.3%) YoY, and 0.6% (expected value: 0.5%, former value: 0.6%) MoM.

In terms of overall inflation, energy and food are basically in line with expectations, and the reason why the MoM exceeded expectations is mainly due to the drag of core inflation.

Core inflation, which was mainly driven by core commodities due to the COVID-19 pandemic restriction measures last year, has turned to core services as the main driving force this year. Moreover, as core service inflation is closely related to the labor market and has strong stickiness, its decline will be very slow. This is also why Fed officials are not optimistic when talking about core inflation. Because the U.S. labor market is still strong.

In September, core goods grew 0 MoM (former value: 0.5%), while core services grew 0.8% MoM, the highest level since the COVID-19 pandemic.

Among the core commodities, the price of second-hand cars decreased by 1.1% (former value: -0.1%) MoM, falling for the third consecutive month. The prices of second-hand cars have all dropped significantly recently, and the drop is greater than the average level before the pandemic. On the one hand, the supply of second-hand cars is rebounding, and the prices paid by dealers for inventories have been dropping significantly. On the other hand, according to Cox Automotive, the largest online and offline (O2O) automotive trading platform in the United States, the Manheim Used Vehicle Value Index has seen a relatively large drop recently. High-frequency indicators show that retail prices have also started to drop recently, and the price level is still more than 50% higher than before the pandemic. Therefore, the price of second-hand cars will show a relatively obvious drop in the next three months.

As for new cars, the growth was 0.7% MoM. There was a slight drop from last month, but supply remained severely tight, which limited the extent of the price drop. The price of a new car is more of a supply chain problem than a problem that can be solved in a short period.

Automobiles will be the most extreme example of products hit by the pandemic, accounting for 40% of the core commodities, undoubtedly having the greatest impact on them, and also being the main factor of commodity inflation. The combination of slowing production, the shutdown of overseas factories, the shortage of spare parts, and transportation problems have led to a shortage of cars and a surge in consumer demand for cars. The conflict has pushed prices so high that second-hand and new cars are the main drivers of headline inflation. September CPI: Market Finally Recognized the Reality_1

September CPI: Market Finally Recognized the Reality_1

If all the large items are put together, core commodities did not contribute to the MoM growth rate of overall inflation in September, while food and energy offset positively and negatively. Therefore, the 0.4% MoM growth rate of overall CPI was entirely driven by core services. In other words, the service sector alone can now sustain a very strong inflation rate (as the 0.4% MoM growth rate is up to 5% for the seasonally adjusted annual rate). September CPI: Market Finally Recognized the Reality_2

September CPI: Market Finally Recognized the Reality_2

As for core services, as housing inflation, which accounts for one-third of the CPI and half of the core CPI, tenants' rentals and owners' equivalent rentals (OER) increased by 0.8% (former value: 0.7%) and 0.8% (former value: 0.7%) MoM, respectively. On a YoY basis, both climbed to 7.2% and 6.7% respectively, continuing to record their highest levels in decades.

The constant increase in interest rates by the Federal Reserve has led to a constant increase in loan interest rates, which will cause a group of potential home buyers to turn to rent, thus maintaining the prices in the rental market. The current housing demand has weakened significantly as non-seasonal sales have fallen and inventories have increased slightly due to heightened concerns about affordability, which undoubtedly supports rents. In addition, labor demand remains strong, and this imbalance between supply and demand is mainly reflected in strong wage growth. The combination of high rents and housing costs means that housing inflation will remain strong for some time to come.

Forward-looking indicators show that the YoY growth rate of market-based rentals peaked at the beginning of this year, and the MoM growth rate was lower than the high level of 2021 but still higher than the pre-pandemic level. Frankly speaking, the rental item in the CPI is indeed a lagging indicator. As the penetration of market-oriented rentals into the CPI indicator has a long lag, these new changes are not reflected in the data at present. Therefore, although the current popular housing inflation is hardly optimistic, it can still be expected to show signs of slowing down and stabilizing in the future.

Nevertheless, there are two points to keep in mind. First, we only know that market-based rentals are at least six months ahead of CPI rentals. Therefore, the YoY growth rate of CPI rentals may peak this autumn or at the end of the year. It is impossible to predict exactly when the peak will occur. Second, even if the YoY peak occurs, the MoM may remain stabilized. Therefore, even if the CPI rent drops to 0.4-0.5% from 0.6-0.7% MoM, it is still too high, which is quite different from the level corresponding to the 2% inflation target.

On the whole, there is little hope that housing inflation will be improved in a short period, but we can expect it in the future, and we are not clear when it will be improved.

September CPI: Market Finally Recognized the Reality_3

Apart from rentals and volatile economic re-opening services, inflation in other services strengthened further in September, reflecting an overheated labor market and strong wage inflation.

In addition, there is the price of medical services, which has been growing at a rate of about 2% per month for the past 12 months, up from 28.2% in September. Boosted by this sub-item, the average MoM growth rate of the major medical service items in the past 12 months was as high as 0.5%. Fortunately, from October onwards, medical insurance will continue to fall sharply, thus significantly easing the price of medical services (the second most important item in core services).

This is related to the medical insurance preparation method. Since 2018, the U.S. Census Bureau has used the indirect method to measure the cost of health insurance, that is, the cost is indirectly measured by the retained earnings (premium income–expenses reimbursed) of the health insurance company. In other words, when the retained earnings (or profit margin) of a health insurance company rises, the health insurance component in the CPI rises, and vice versa.

However, these data are not available to the Census Bureau every month and can only be obtained after the end of the fiscal year when the U.S. National Association of Insurance Commissioners releases its annual report (in September or October). As a result, there is a lag in the data, and the retained earnings for 2020 will be used to calculate the data for October 2021-September 2022 and the retained earnings for 2021 will be used to calculate the data for October 2022-September 2023.

In 2020, when the premium did not change significantly, the non-urgent need for medical treatment decreased, and retained earnings increased significantly; however, with the re-opening, the reimbursement for medical treatment increased and the retained earnings decreased significantly. As a result, the significant decrease in retained earnings in 2021 will be averaged over the next 12 months of health insurance.

This will slow the rally in core inflation slightly. But it still cannot change the grim pattern of inflation.

Following the beginning of Q4, Halloween, Thanksgiving, Christmas Eve and other major U.S. holidays followed. In particular, the Christmas holiday season, which begins with Black Friday and continues until New Year's Day, will be the peak of consumer demand for goods and services. If inflation rises again next month, it will not come as a surprise.

In addition, the labor shortage problem is likely to intensify again due to the economic and social costs implicit in the new variant of Omicron and the long-term symptoms of COVID-19, adding fuel to the already tight labor market. This will cause stores and companies in the retail industry, for example, to increase their salaries to attract or retain employees. The increase in salaries will also have an impact on inflation.

This inflation report provides the reason for the Federal Reserve to maintain its historic pace of raising interest rates. The data surprised investors and triggered a market crash as concerns grew that continuing inflation would prompt the Fed to take more aggressive action.

Meanwhile, the expectation of a slight slowdown in interest rate hikes previously generated by the minutes of the meeting was once again annihilated. According to the FedWatch Tool tool of CME, the probability of a 50-basis-point interest rate hike by the Federal Reserve in November is 3.7%, the probability of a 75-basis-point interest rate hike is 96.3%, and the probability of a 100-basis-point interest rate hike is 0%. The probability of a 25-basis-point increase in December is 1.0%, the probability of a 50-basis-point increase is 27.6%, and the probability of a 75-basis-point increase is 71.5%.

It is obvious that this inflation report not only nailed down the 75-basis-point interest rate hike in November but also sharply increased the expectation of a 75-basis-point interest rate hike in December. A month ago, the market's expectation of a rate hike in December was only 25 basis points.

However, there will be a "false alarm" in the market's expectation of December's rate hike. For the Federal Reserve, the rate hike path this year has been basically fixed and will not be fundamentally changed due to the September inflation data. The Fed's baseline given at the September FOMC meeting is that it is expected to raise interest rates by 75 basis points in November and 50 basis points in December.

This was also reflected in director Waller's speech on October 6, when Waller said that before the next meeting, there would not be too much new data to make a major adjustment to my views on inflation, employment, and other economic areas. It is expected that most policymakers would feel the same way.

The 75-basis-point rate hike in November is no big surprise. The Fed's task is to eliminate inflation completely. The current inflation trend shows that the problem cannot be fundamentally solved without cooling the labor market. The non-farm payroll data released early this month have already determined the result. Even if the CPI meets expectations, it will still be a 75-basis-point rate hike.

The Fed's bitmap forecast of a 50-basis-point rate hike in December and a further 25-basis-points next year all indicate that the Fed also wants to be more cautious as policy interest rates enter a more restrictive range, making policy adjustments more difficult. This was also reflected in the minutes of this week's meeting, which showed that officials believed it was "important to calibrate the pace of interest rate hikes so as not to have a significant adverse impact on the economic outlook".

Given the popularity of CPI in September, the market is currently expecting a further 75-basis-points hike in December. However, it is still too early to draw a conclusion. There are still two non-farm payrolls and CPI reports between the December meeting. If the non-farm payrolls can continue to cool slowly and the possible slowdown mentioned above can be realized, the Fed will most likely choose to raise interest rates by 50 basis points. On the contrary, if the non-farm payroll sector is still too strong and core inflation keeps rising, the Fed may change its original plan. Meanwhile, the slowdown that should have occurred will be postponed until next year. The original 25-basis-point rate hike may be changed to a 50-basis-point one, and there is a risk that the terminal interest rate will exceed 5%.

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Devin

The European Central Bank is considering entering the maelstrom of volatile world markets to start winding down its massive bond holdings - just as governments scale up spending to respond to an energy crisis likely to induce a recession.

The ECB, which bought 5 trillion euros of bonds ($4.9 trillion) over the past decade to lift low inflation, now finds itself battling record high inflation at 10%.

On top of aggressive interest rate hikes including an unprecedented 75 basis-point move last month, policy hawks want to begin quantitative tightening (QT): the scaling back of the ECB's bond holdings.

ECB chief Christine Lagarde this week acknowledged the discussion had started and would continue.

The process may still be months away, and will likely come after the ECB hikes to around 2% and be very gradual, but bond markets - sent reeling by aggressive rate hikes globally, by an energy crisis and by a rout in British bonds - are nervous.

"There is much at stake in the euro zone when it comes to QT," said ING senior rates strategist Benjamin Schroeder, adding that the closely watched gap between Italian and German yields was the main focus.

"But beyond spreads there is also a fear of stoking further market volatility, especially when government funding plans in the eurozone are under growing upside risk."

At 2.35%, Germany's 10-year bond yield is up 250 basis points this year and Italy's are up almost 360 bps -- the largest surges in decades.

Germany last month unveiled a 200-billion-euro package funded by new borrowing to help cushion the blow from the energy shock. BofA expects net European government bond supply to rise close to 400 billion euros next year, the highest on record and well above the 120-145 billion euros expected this year, dampened in part by ECB bond-buying.

"This consideration also makes the practical implementation of ECB QT significantly harder," BofA said.

Softly, Softly

Analysts expect the ECB would first gradually phase out reinvestments of bonds maturing under its conventional bond purchase programme. That would reduce its balance sheet by a "manageable" 155 billion euros in 2023 and 300 billion euros in 2024, ING reckons.

Goldman Sachs estimates that bond markets should be able to digest an annual 250 billion euro unwind of those holdings. Ten-year bond yields in higher-rated states would rise a mere 6 bps, and 15 bps in Southern Europe.

Even if those holdings were to be unwound, analysts widely expect the ECB would still continue reinvestments under its pandemic emergency bond purchase programme (PEPP), which it shifted to countries like Italy and Spain over the summer as a first line of defence for a divergence of the yield spread they pay over top-rated Germany's seen as "unwarranted".

Eric Oynoyan, head of European rates strategy at Morgan Stanley, estimates PEPP redemptions will equate to around 151 bln euros next year.

"To some extent, ironically the PEPP flexibility is a way to keep on doing QE for peripheral debt while doing QT and could even eventually lead to tighter spreads," he said, referring to the first half of next year.

An eventual wind-down of PEPP holdings could add to balance sheet reductions in 2025 worth a total 388 billion euros, ING said. Analysts don't expect the ECB to speed up the process with outright bond sales.

Unchartered Territory

How QT will play out is largely unknown in the same way that quantitative easing was a relatively new experiment.

The Federal Reserve has started to wind down its $9 trillion balance sheet and staff recently concluded that bond market strains could complicate QT by amplifying its impact and raising rates more than anticipated.

The Bank of England's plans to start QT in early October were delayed until Oct. 31 as it launched an emergency bond-buying programme to stem a bond market rout sparked by the UK government's Sept. 23 announcement of a "mini-budget".

"The lesson from the Bank of England is that essentially, if you don't have financial stability, there's no point trying to pursue price stability," said Piet Haines Christiansen, chief analyst at Danske Bank.

The big headache for the ECB is containing bond spreads.

In addition to PEPP reinvestments, it has also launched a new tool, the Transmission Protection Instrument (TPI), under which it would purchase bonds from states seeing an "unwarranted" widening of spreads over Germany.

AllianceBernstein portfolio manager Nick Sanders said he was "sceptical" how the ECB could achieve QT with those protections in place.

"If you've got euro zone yields supported by backstop they've got in place, it's going to be very hard for them to move into QT environment without a shock towards peripheral spreads, particularly Italy."

The ECB may also find itself undertaking QT during a recession, which would lead to "overtightening" of policy, said Annalisa Piazza, analyst at MFS Investment Management.

No doubt the ECB, whose assets rival the Fed's, adding to balance sheet runoff globally would be another source of uncertainty for broader markets.

A rough rule of thumb is that $1 trillion of QT is consistently worth about 10% off global equities, strategists said.

($1 = 1.0306 euros)

Source: Reuters

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Owen Li

Central Bank

The Westpac Melbourne Institute Index of Consumer Sentiment only fell by 0.9% from 84.4 to 83.7 in the October Survey.

The Index remains in deeply pessimistic territory but could have been much weaker.

As discussed, when we released the results of the survey we examined the two samples over the four day period.

The first sample (covering the responses on day 1 of the survey) preceded the RBA's decision to raise the cash rate by 25 basis points. The second sample covered responses which followed the rate decision.

The first sample (sample of 476) showed a Sentiment Index of 77.4 – down 8.3% from the September print of 84.4.

But the Index for the second sample (a sample of 724) printed an Index of 88.7 (up 5.1% on the September print). The difference between the two surveys represented a turnaround of 14.7%.

The turnaround in housing market confidence was even more spectacular. The first sample measure for the Westpac Melbourne Institute Index of House Price Expectations showed a 16% fall in the Index while the second sample showed a lift of around 8% relative to the September print.

This spectacular change in the Index is very likely attributable to the Reserve Bank's decision to raise the cash rate by "only" 25 basis points despite market pricing that gave a probability of around 90% to an increase of 50 basis points.

In my 30 years following RBA policy and markets I cannot recall the RBA moving against market expectations when the probabilities have been so high.

The key indicator for the Sentiment survey was the media reports which took the lead from market pricing and signalled a very confident expectation to the public that a further 50 basis point move was to be expected.

We can congratulate the Board for a courageous decision while pointing out some likely unintended consequences.

Westpac had expected a 25 basis point move until we were obliged to lift our forecast for the terminal federal funds rate by 125 basis points to accommodate a much more aggressive guidance from the FOMC and upside surprises on US inflation.

In lifting our forecast for "global rates" by 125 basis points we lifted our terminal rate for the RBA cash rate by 25 basis points to 3.6%, with the upward adjustment coming in October – a 50 basis point move instead of our earlier preference for 25 basis points.

Because the Australian economy is much more sensitive to the cash rate than is the US economy to the federal funds rate it is not appropriate to follow the full lift in FOMC pricing.

The major adjustment came in our AUD/USD forecast with a US7¢ cut in the likely exchange rate by end 2022 to USD0.65.

With the surprise 25 basis point move the market lowered its terminal cash rate by around 50 basis points. Central banks like to see the markets doing their job for them so a fall in the fixed rates only adds to the task of easing demand pressures.

From our perspective that price response was a surprising reaction to the decision from the RBA and an unintended consequence of the decision.

We observe from the confidence turnaround in the Sentiment survey the RBA decision has provided a short term boost to confidence that is likely to delay the slowdown in demand which will be necessary to constrain demand and inflation pressures.

The key for central banks at this stage of the inflation cycle is to slow demand overall including the demand for labour so that businesses question whether their recent successes in raising their prices, particularly to restore margins, can be sustained or whether they can proceed with plans to increase prices.

Without that hesitation the RBA will fail to wring the inflation pressures out of the system.

Questioning the sustainability of demand will also be consistent with questioning the need to boost employment plans – this is at a time when the labour market is the tightest in 50 years. Currently, labour supply cannot adjust quickly enough to contain wages pressures – thus labour demand needs to slow.

Tight labour market conditions emerged during the pandemic, associated with the national border "closure" – with restrictions on the inflow of people (labour supply) more stringent than those for the outflow. Net immigration averaged around plus 240,000 before Covid and over the two years during the pandemic Australia experienced outflows of around 120,000 – a net loss of around 600,000 people. This was at a time when fiscal and monetary stimulus was boosting demand exacerbating the employment shortfall.

The third unintended consequence of the RBA surprise has been an unexpected further collapse in the AUD to around USD0.625 from USD0.65 before the announcement.

That can be expected to heap further pressure on inflation, adding upside risks to the RBA's current forecast of 7.75% by end 2022 and, potentially, its 2023 forecast.

And the fourth unintended consequence is that a decision to speed up rate increases back to 50 basis points would now be particularly dangerous.

Just as we saw an overreaction in confidence from a positive shock the impact of a larger tightening than expected is likely to be too damaging from the RBA's perspective.

The RBA has not ruled out returning to "50's" should the data so demand although we think the hurdle to going by 50 now will be very high.

At the time of the announcement, we interpreted these likely unintended consequences as justifying no change to our terminal rate of 3.6% but extending the length of the tightening cycle.

We have extended our estimate of the end of the tightening cycle from February to March.

As discussed, that would be consistent with activity holding up for longer given the boost to confidence of the policy pivot.

Consequently, we now expect 25 basis point moves in November; December; February (no meeting in January) and March.

We still expect that achieving a terminal rate of 3.6% will be sufficient to slow growth in the economy from 3.4% for 2022 to 1.0% in 2023.

Activity may hold up a little better in the first half of 2023, given a little more momentum in 2022, resulting from the lower rate profile, to be followed by a more rapid slowdown in the second half.

Any risks of consecutive negative growth quarters would centre on the second half of 2023 rather than the first half, although that "recession" scenario is not our central case.

If our four percentage point down swing in inflation in 2023 does not appear to be materialising (and that has to be a central risk) then we expect that the RBA will have to raise the terminal rate even further – certainly a more likely scenario than trying to fine tune inflation with a more benign rate cycle and a stronger growth outcome.

The Role of the Neutral Rate

Our view has been that the "handbook" for central banking is, when it becomes necessary to contain an inflation shock at the same time policy is clearly stimulatory the strategy is to quickly return the cash rate to "neutral" and then move more slowly.

In previous speeches the RBA Governor has identified "neutral" to be at least zero real, where the nominal component is best assessed as long term inflationary expectations- around the policy target of 2.5%.

The guideline we have been working with is minimum neutral is 2.5%.

The cash rate is now 2.6% so policy is just now in the neutral region.

On October 12, RBA Assistant Governor (Economic) Ellis delivered an important speech on measures of neutral.

She nominates a range of "neutral" from negative 0.5% real to positive 2.0% real – with her various models indicating a central tendency of around 1% real, (or 3.5% nominal).

But neutral is described in terms of the long term. It is the rate which is consistent with the economy holding at trend growth and inflation at the inflation target.

Ellis concludes "The neutral rate is an important guide rail for thinking about the effect policy might be having. It is not necessarily a prescription for what policy should do."

This indicates that neutral is a long term concept whereas actual policy will be buffeted by short term shocks.

It is a similar approach to when Chairman Greenspan was asked where he saw neutral. He answered along the lines of "I will tell you when we are there" or even after we have been there.

Nevertheless, it does now seem that the Bank has a concept of neutral that is likely to be around where we are today if not a little higher.

For other reasons we discussed above that points to the shift to 25 basis point moves being the most likely outcome.

Source: Westpac Banking

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Thomas

THE global economy is "dangerously close" to a recession, as inflation remains elevated, interest rates rise, and growing debt burden hits the developing world, World Bank President David Malpass said Thursday.

"We've lowered our 2023 growth forecast from 3 percent to 1,9 percent for the global growth, that's dangerously close to a world recession," Malpass said at a press conference during the IMF and World Bank annual meetings.

"All of the problems that people have taken note of, the inflation problem, the interest rate rises, and the cutoff of capital flow to developing world hit the poor hard," he said, highlighting the buildup of debt for developing countries.

"That's a world recessions could happen under certain circumstances," Malpass said.

In a study published in mid-September, the World Bank warned that 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, with a growth forecast of only 0,5 percent.

The World Bank chief noted at the press conference that world population growth is estimated at 1,1 percent per year. "So if you get much slower in terms of world growth, that means people are going backward," Malpass said in response to a question from Xinhua.

Citing a recent World Bank report, Malpass said that Covid-19 pandemic dealt the biggest setback to global poverty-reduction efforts since 1990, pushing about 70 million people into extreme poverty in 2020, and the war in Ukraine threatens to make matters worse.

According to the Poverty and Shared Prosperity Report, global median income declined by 4 percent in 2020, the first decline since its measurements of median income began in 1990.

"So if we have a world recession now, that would also depress median income, meaning that the people in the lower half of the income scale are going down," Malpass said.

The World Bank chief also noted that he has been concerned about the concentration of capital in the world in the top end of the advanced economies.

"So that's, I think, one of the issues that the world has to deal with to allow capital to flow to new businesses and to developing countries, that would take a change in the direction of fiscal and monetary policies in the advanced economies," said Malpass.

The world is facing very challenging environment from the advanced economies, and that has serious implications, dangers for the developing countries, he said. "My deep concern is that these conditions and trends might persist into 2023 and 2024."

Source: Xinhua

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Owen Li

International Monetary Fund Managing Director Kristalina Georgieva has rebuked the United Kingdom over its planned tax cuts, telling its finance minister and central bank chief that their policies should not be contradictory.

Her comments on Thursday during the IMF and World Bank annual meetings in Washington highlighted concerns about financial market turmoil triggered by the UK's proposed "mini-budget" of increased spending and tax cuts that were threatening to overshadow bigger economic challenges, such as the fight against inflation and the impact of the war in Ukraine.

Georgieva told a news conference that she discussed with British finance minister Kwasi Kwarteng and Bank of England Governor Andrew Bailey the need for "policy coherence and communicating clearly … so in this jittery environment there would be no reasons for more jitters."

"Our message to everybody, not just to the UK, at this time: fiscal policy should not undermine monetary policy because, if it does, the task of monetary policy only becomes harder and it translates into the necessity of even further increases of rates and tightening of financial conditions," Georgieva said. "So don't prolong the pain."

Monetary policy is the policy adopted by the monetary authority of a country to set interest rates and control the money supply, while fiscal policy is the use of government spending and taxation to influence the economy.

The IMF chief said that any recalibration of policies should be led by evidence. And right now, the evidence points to the need for governments to keep up their fight against inflation, even though doing so increases the risk of a global recession.

Avoiding spotlight

Kwarteng has taken a low profile at the first IMF and World Bank in-person meetings in more than three years, and was not present at a G20 finance ministers and central bank governors meeting on Thursday, according to British media reports.

In a BBC television interview on the sidelines of the meetings, Kwarteng said he was focused on delivering the mini-budget and economic growth after media reported that the British government was considering reversing parts of the plan.

"Our position hasn't changed. I will come up with the medium-term fiscal plan on the 31st of October, as I said earlier in the week, and there will be more detail then," Kwarteng told the BBC.

Asked repeatedly about the reports of a possible U-turn on his plan to freeze the corporate tax rate – rather than allow it to increase, as planned by his predecessor Rishi Sunak – Kwarteng repeated that he was focused on his growth plan and added that he expected to continue as finance minister.

But Georgieva said the Bank of England's decision to intervene in sovereign debt markets "was appropriate" to preserve financial stability and does not interfere with the bank's main monetary policy objectives of price stability.

Georgieva said the chance of a global recession was now about 25 percent, citing diminished IMF forecasts driven by increased pressures from inflation, rising interest rates and war-driven spikes in energy and food prices.

Her comments came as new US data showed that consumer price inflation in September rose by a stronger-than-expected, 0.4 percent – an annual rate of 8.2 percent – reinforcing expectations that the Federal Reserve would increase interest rates by another three-quarters of a percentage point next month.

Georgieva said the IMF is still urging central banks to keep tightening monetary policy, "because inflation has been quite stubborn and the risk of inflation expectations de-anchoring has become more visible."

"We cannot possibly allow inflation to become a runaway train," Georgieva added.

Asked whether inflation could be tamed while the war in Ukraine is still raging, Georgieva said that monetary tightening would help control prices because it would cool demand and reduce energy, food and other commodity prices "independent of whether the war goes on or not".

But more study was needed, she said, to understand the effect of supply chain restructurings and geopolitical fragmentation of the global economy on longer-term price movements.

SOURCE: AL JAZEERA, REUTERS

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Devin

The euro zone posted in August its largest trade deficit since it expanded to 19 countries in 2015, as high energy prices boosted its import bill, official estimates released on Friday showed.

The European Union's statistics office Eurostat said that the euro zone's balance for trade in goods with the rest of the world in August was in the red by nearly 51 billion euros ($49.7 billion), the highest deficit ever recorded by the bloc since Lithuania joined it in January 2015 to become its 19th member.

The deficit ballooned from July when it stood at 34 billion euros, marking the tenth consecutive month of a negative balance, in what is a major shift for the trade bloc which has historically recorded large surpluses.

The switch from surplus to deficit is largely the result of the bloc's soaring bill for imports of energy.

In August, the euro zone increased its exports of goods by 24% compared to the previous year, totalling 231.1 billion euros, roughly in line with the volume of exports in July.

But the rise in exports was lower than the import bill which rose by 53.6% on the year to 282.1 billion euros.

For the wider 27-nation European Union, payments for energy imports have risen by 154% in the period between January and August to 543.8 billion euros, contributing to an overall trade deficit of 309.6 billion euros.

Russia has been one of the chief beneficiaries, despite EU efforts to wean itself off Russian supplies over Moscow's invasion of Ukraine. Imports from Norway, which is also a major gas supplier to the EU, have also increased sharply.

($1 = 1.0254 euros)

Source: Reuters

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Cohen

Not letting up the fight against inflation, Singapore's central bank on Friday (Oct 14) tightened monetary policy for the fifth time in 12 months.

The Monetary Authority of Singapore (MAS) said at a scheduled policy meeting that it will re-centre the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band "up to its prevailing level".

The slope and width of the band – two other levers in the MAS' policy toolkit – were left unchanged.

Unlike most central banks that manage monetary policy through the interest rate, MAS uses the exchange rate as its main policy tool.

It lets the exchange rate float within an unspecified policy band, and changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the Singapore dollar.

In general, by tightening monetary policy, MAS is effectively allowing the Sing dollar to appreciate. This makes imports cheaper and in turn, helps to put a lid on the rise in prices of goods and services here.

Friday's policy decision marks the third consecutive re-centring move by the MAS – a tool generally reserved for "drastic" situations such as recessions, when the outlook for growth and inflation sees an abrupt and rapid change.

Economists were expecting a more aggressive "double-barrelled" tightening move, in which the policy band will see its mid-point re-centred higher and its slope steepened.

"I had expected a more aggressive stance from the MAS today due to inflation and the outlook for price pressures," said ING's senior economist Nicholas Mapa.

"The only reason that could have stayed the MAS's hand from doing more would be expectations of slower growth, thus the decision to do only the upward adjustment in the midpoint."

Echoing that, RHB's senior economist Barnabas Gan said the latest policy statement had a "markedly more bearish" tone compared to the central bank's off-cycle policy statement in July, suggesting that policymakers are increasingly worried about growth uncertainties in 2023.

Yet, with inflation remaining on an uptrend, MAS needed a "more effective" way to give the Sing dollar a jolt, said MUFG Bank's senior currency analyst Jeff Ng.

In this case - a re-centring of the band's mid-point, versus a steepening in the slope of the policy band which allows for a more gradual appreciation of the currency.

"The effects of policy adjustments generally take time to filter down (to the real economy) so to re-centre the mid-point, which immediately resets the S$NEER, will provide a faster response at this stage and curb some of the policy lag time," Mr. Ng said.

Mr. Mapa said: "Given how aggressive the MAS has been in tightening, we do expect the impact to be felt over the next few quarters with the MAS indicating that the string of recent moves should dampen inflation 'in the near term and ensure medium-term price stability'."

Tightening May Not Be Over Amid Elevated Inflation

But the fight against rising prices – caused by a confluence of external and domestic factors such as supply disruptions pushing up imported food costs, higher energy prices and a tight labour market – is not over, as seen from the latest adjustments in the central bank's inflation forecasts.

The MAS said on Friday that it now expects full-year core inflation for 2022 to average around 4 per cent, while headline inflation is projected to be around 6 per cent.

These are at the upper end of its earlier estimates, which predicted core inflation to be between 3 to 4 per cent and headline inflation to be at 5 to 6 per cent.

Moving into next year, core inflation is seen at 3.5 to 4.5 per cent and headline inflation is estimated to be at 5.5 to 6.5 per cent, after taking into account the impact of the scheduled Goods and Services Tax (GST) hike.

The central bank warned of "upside risks" to these forecasts, including fresh shocks to global commodity prices and second-round effects associated with a prolonged period of high inflation.

In addition, the central bank said it expects core inflation to "remain high" in the first half of 2023 before a slowdown in the later part of the year

This, said OCBC's chief economist Selena Ling, is "a far cry" from earlier expectations that inflationary pressures would peak in the second half of this year and stabilise.

With that, economists said the MAS has left the door open to further tightening.

Ms Ling, who is also the bank's head of treasury research and strategy, said MAS' decision on Friday to "not do a slope steepening could be interpreted as reserving some ammunition on the table" for its next scheduled meeting in April.

Agreeing, Mr. Gan said: "With inflation likely to stay elevated in the quarters ahead, we do not discount another possible policy tightening in April 2023."

Barclays Bank's senior regional economist Brian Tan said while he does not expect the MAS to further tighten monetary policy next year, the risk of doing so "remains significant if inflation expectations rise further" due to the GST hike.

Outlook For Sing Dollar and Local Interest Rates

With the MAS' latest move, the Sing dollar is set to remain one of the top-performing currencies in the region.

So far this year, the local currency has strengthened and hit record levels against several of its regional peers, including the Malaysian ringgit, Japanese yen and the Korean won.

But against the US dollar, which has been on a turbo-charged rally as the US Federal Reserve stays on an aggressive rate-hike trajectory, the local currency will remain on the back foot, analysts said.

Year to date, the Sing dollar has depreciated about 5 per cent against the greenback. As a knee-jerk reaction to the MAS decision on Friday morning, the Sing dollar rose about 0.6 per cent to 1.4213.

Mr. Ng expects the Sing dollar to hit 1.4550 against the US dollar by the year-end due to "overwhelming dollar strength".

"We revise our USD/SGD forecasts slightly lower in the light of recent developments, but still see US dollar strength threatening expected gains in the S$NEER," he said.

Likewise, the MAS' policy tightening moves will help to moderate the increases in local interest rates, albeit only "slightly", said Mr. Ng.

With the use of an exchange-rate policy and an open capital market, Singapore's interest rates are largely determined by global interest rates, especially that in the US which is the world's biggest economy.

With that, benchmark interest rates in Singapore are set to go up further, meaning even more pain for borrowers.

Already, banks have been making swift adjustments to their mortgage rates. Earlier this month, the three local lenders – DBS, OCBC and UOB – raised their fixed rate home loans to as high as 3.85 per cent.

Mr. Ng sees the three-month compounded Singapore overnight rate average (SORA) – used by banks to price floating home loans – hitting 3.5 per cent by the year-end. This benchmark rate has gone up rapidly from 0.1949 in January to 2.2353 as at Oct 14.

Ms Ling agreed: "While the stronger S$NEER policy could theoretically dampen the pass-through from higher USD interest rates to SGD interest rates, nevertheless SGD rates may track USD rates more closely from here."

Source: CNA

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