Central Banks See Little Alternative but to React to Elevated Inflation

August 18, 2022

The reinforcing cycle of high inflation and rising central bank interest rates has made a favorable environment for the dollar, which rose another 0.2% overnight against the yen, euro, yuan, peso and on a DXY weighted basis. The U.S. currency also climbed 0.4% versus the kiwi and 0.3% relative to the Swiss franc but is unchanged versus sterling and the Canadian dollar.

Hardly a day goes by now without some central bank announcing a hike in interest rates. This happened today in Norway, Ghana, and the Philippines. And in Sri Lanka, whose policy interest rate had earlier this year been jacked up 950 basis points including a 100-basis point move last month, central bank officials kept the rate at a record high of 14.5%.

FOMC minutes released Wednesday afternoon did not deviate from the hawkish tone of Federal Reserve officials in recent months. Rate hikes will continue even if growth slows sharply. The minutes express an urgency to get to a restrictive monetary stance before medium-term price expectations break decisively upward. But the minutes also steer clear from pre-announcing the size of rate hikes at upcoming meetings, which will be decided on the basis of incoming information when officials meet.

Ten-year sovereign debt yields rose overnight by four, three, and two basis points in Germany, Britain, and Japan but dipped a basis point in the U.S. instance.

In stock market action, share prices closed down 1.0% in Japan, 0.8% in Hong Kong, 0.7% in Indonesia, 0.5% in China and 0.2% in Australia. The German Dax and Paris Cac so far show modest gains, while U.S. futures are unchanged.

Prices for WTI oil, Bitcoin, and gold are up 1.2%, 0.7%, and 0.2%.

The monthly rise of consumer prices in the euro area last months was left unchanged from the preliminary estimate of +0.1% on month and a record high of 8.9% year-on-year. The energy component backed off from June’s 42.0% 12-month rate of increase to 39.6%, but food costs continued to accelerate, reaching 9.8% from 8.9% in the prior month, 5.0% as recently as March and just 1.6% in July 2021. Core CPI inflation of 4.0% also matched its original estimate versus 0.7% in July 2021. The services component has risen from 0.9% in July 2021 to 3.7% as of last month.

Within the euro area, CPI inflation last month compared to a year earlier climbed to 9.4% in Austria from 2.9%, 10.7% in Spain from 2.9%, 8.4% in Italy from 1.0%, 8.5% in Germany from 3.1%, and 6.8% in France from 1.5%.

One place where inflationary pressure has subside discernibly has been Russia, where producer prices fell 2.2% month in July and to a 19-month low year-on-year pace of 6.1%. That’s down from 31.5% in April and a peak in May 2021 of 35.3%. One’s got to wonder how effective western economic sanctions have been.

Construction output in the euro area posted a fourth straight month-on-month drop in June, and the 1.3% slide was the biggest of that streak. It resulted in the smallest year-on-year increase (just 0.1%) since last December and a 1.3% 2Q-over-1Q average decline.

Irish consumer confidence sank further to a 22-month low in August, with a reading of 53.4 versus 86.5 in August 2021.

Norwegian GDP growth rebounded 0.7% last quarter after dropping 0.9% in 1Q and slowing to 0.1% in the final quarter of 2021. GDP was 3.9% above its year-earlier level.

Australia reported a mixed batch of labor market figures. While the jobless rate fell unexpectedly to a record low of 3.4% in July, employment contracted by 40.9 thousand workers, and the labor participation rate dropped 0.4 percentage points to 66.4%.

The Filipino policy interest rate was increased by another 50 basis points to 3.75%. May had seen the first increase since November 2018, a hike of 25 basis points. Another 25-bp hike was agreed at the June central bank monetary board meeting, followed by a 75-basis point increase in July. The total increase of 175 basis points since May reverses almost all of the 200 basis points of reduction done in five steps during 2020. “The Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon.” Officials project inflation this year to average almost twice the mid-point of their 2-4% target, and the 6.4% on-year rise of consumer prices in July was the most since late 2018.

CPI inflation in Ghana has climbed to a 223-month high of 31.7% from 9.0% a year earlier and well above the Bank of Ghana‘s 6-10% medium-term target. Currency depreciation has become an additional concern to monetary officials. From a policy rate of 13.5% up to November 2021, officials raised such by 100 basis points that month, 250 basis points in March of this year, then 200 bps in May and now by 300 basis points more to a five-plus year high of 22.0%. This latest increase was announced after an unscheduled meeting.

In Norway, CPI inflation has climbed from 3.0% in July 2021 to a 34-year high of 6.8% last month. Core CPI inflation of 4.5% constitutes a record high. After the pandemic hit, officials had slashed Norway’s central bank policy rate from 1.50% to 0.50% between March and May of 2020. Rate normalization at the Bank of Norway began with a 25-basis point hike last September, followed by another 25 basis points this past March, a 50-basis point advance in June and now another 50 basis point increase that lifts the rate to 1.75% and above its pre-pandemic level. “A markedly higher policy rate is needed to ease the pressures in the Norwegian economy and to bring inflation down towards the target”, says Governor Ida Wolden Bache. The released statement concedes that inflation has lately become more widely based and has exceeded what they were anticipating around mid-year.

The U.S. data menu this Thursday will include existing home sales, the Philly Fed manufacturing index, the Conference Board’s index of leading economic indicators and, like every Thursday, last week’s change in new jobless insurance claims.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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