G7 Summit and a Greater-than-Expected Interest Rate Hike in Russia

June 11, 2021

Leaders of the Group of Seven (U.S., Japan, Germany, France, Italy, U.K., and Canada) are holding their annual summit in Cornwall, England.

A third successive hike of the Central Bank of Russia has been engineered, and its 50-basis point increase to 5.5% exceeded forecasts of a 25-basis point move. The rate had been raised by 50 basis points in April and 75 bps in May. A statement from the Board of Directors after the scheduled policy review affirms that “inflation is developing above the Bank of Russia’s forecast” and implies that more tightening may yet be needed: “Increased inflationary pressure in the context of the completing economic recovery can lead to a more substantial and prolonged deviation of inflation upward from the target. This creates the necessity of further increases in the key rate at upcoming meetings.” CPI inflation accelerated half a percentage point in May to 6.0%, and officials seek to bring such down to 4% by the second half of next year.

A separate monetary policy review yesterday by the Central Reserve Bank of Peru  resulted in no change in its policy interest rate, which has been 0.25% since a full percentage point reduction in April 2020. Peruvian inflation is hovering marginally below 2.5%. Core CPI is only 1.8%, and officials expect total inflation to settle back into the lower half of its target range next year.

Friday has been an inconsequential day from the standpoints of both market movement and data releases.

The dollar is narrowly mixed. Ten-year sovereign debt yields are up one basis point in the United States but lower in Europe and Japan. Stock markets fell in China, Indonesia, and Singapore but advanced in South Korea, Hong Kong, and Europe. U.S. stock futures have firmed 0.2%. WTI oil is up 0.5%, while the price of gold has fallen 0.3%.

German wholesale prices recorded a fifth straight monthly increase of more than 1.0%, lifting the 12-month rate of rise to 9.7% in May from -1.2% last December.

With a boost in service sector activity, British monthly GDP climbed 2.3% in April, their biggest monthly increase in nine months, but still hadn’t returned to its pre-pandemic level. Also in April, British industrial production unexpectedly fell 1.3% but was 27.5% greater than in the same month a year earlier. Construction output fell 2.0% on month but registered a record year-on-year rise of 77.9% in April. The goods-only trade deficit slipped to GBP 10.96 billion in April from GBP 11.7 billion in March. The broader U.K. goods and services trade gap in April was GBP 935 million after a deficit of GBP 1.966 billion in March.

Japan’s Ministry of Finance’s quarterly business outlook survey revealed little change in the negative confidence of large firms this quarter but expectations of a strong improvement in the second half of 2021.

Turkish retail sales and industrial production posted monthly declines in April of 6.3% and 0.9% but increases against April 2020 levels of 41.7% and 66.0%, respectively.

In Malaysia, retail sales and industrial production were 56.4% and 50.1% higher than a year earlier.

Spanish consumer price inflation in May was confirmed at the preliminary estimate of 2.7%, representing an acceleration from zero percent in February.

Consumer prices in Romania, as in Spain, recorded a monthly 0.5% rise in May, which lifted the year-on-year inflation rate there to 3.75%.

Import price inflation in South Korea slipped back 1.5 percentage points to 13.8% in May.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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