central bank – Sendika12 http://sendika12.org/ Wed, 16 Mar 2022 04:47:20 +0000 en-US hourly 1 https://wordpress.org/?v=5.9.3 https://sendika12.org/wp-content/uploads/2021/10/profile-120x120.png central bank – Sendika12 http://sendika12.org/ 32 32 As the Fed begins raising interest rates, Americans should brace for pain https://sendika12.org/as-the-fed-begins-raising-interest-rates-americans-should-brace-for-pain/ Wed, 16 Mar 2022 00:39:13 +0000 https://sendika12.org/as-the-fed-begins-raising-interest-rates-americans-should-brace-for-pain/ Get the coronavirus nextThe next phase of our pandemic newsletter keeping you up to date with the latest developments as we enter a new normal. The Fed aims to lower inflation by reduce consumer spending and business owners who will find it more expensive to borrow. “The impact of a quarter-point hike is inconsequential, but […]]]>

The Fed aims to lower inflation by reduce consumer spending and business owners who will find it more expensive to borrow.

“The impact of a quarter-point hike is inconsequential, but the cumulative effect of six to ten interest rate hikes is a whole other ball game,” said Greg McBride, financial analyst in head of the financial information site Bankrate.com.

The consumer price index jumped 7.9% in February from a year earlier, the highest rate since 1982, after a spike in oil prices triggered by the invasion of Ukraine by Russia added to already rapidly rising prices caused by pandemic supply chain disruptions, pent up demand and government spending. High inflation is hitting American families and businesses hard, threatening the strong economic recovery from the pandemic.

Inflation is also a major political issue for President Biden, who said in his State of the Union address that “my top priority is to get prices under control.” Half of respondents in a Wall Street Journal poll released on Friday ranked inflation as the most important thing the president and Congress should tackle, double the second place of the war in Ukraine. And 63% of voters registered in the poll said they disapproved of Biden’s handling of inflation.

So there’s a lot at stake economically and politically as the Fed, the federal government’s main inflation fighter, takes its first step in what is going to be a months-long effort to try to rein in soaring oil prices. gas, groceries, cars, rent and other consumer expenses.

The Fed’s task is extremely difficult as it must determine how much to raise rates without slowing the economy to the point of falling into recession. The effort is inherent in the pain of average Americans, whom the Fed is trying to discourage from spending, said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, a global forecasting and analysis firm.

“You don’t want it to be a killer blow, but you definitely want it to pinch consumer spending,” she said of the interest rate hikes. “To slow it down, not turn it off completely.”

When the pandemic hit two years ago, the central bank cut its key federal funds rate to near zero to spur spending. This rate applies directly only to short-term loans between banks. But banks use it as a benchmark for personal and business loans, and it also affects longer-term loans, like mortgages.

In anticipation of Wednesday’s Fed hike, mortgage rates have already risen. The average 30-year fixed-rate loan was 4.42% on Tuesday, up more than 1 percentage point since the start of the year to the highest level since 2019, according to Mortgage News Daily.

Credit card interest rates will adjust within a billing statement or two of the Fed’s rate hike, McBride said. In the past, banks have also increased the interest rate they pay customers on their deposits. But the big banks are teeming with deposits and are unlikely to raise those rates much, if at all, he said. Federally insured online banks, which are more eager for customers, are a better bet to raise their interest rates on savings and checking accounts.

Stock prices are likely to fall because higher interest rates increase borrowing costs for businesses and make stocks a less attractive investment. Major equity indices have already fallen significantly in anticipation of Fed rate hikes, as well as in reaction to the war in Ukraine. McBride said investors should ride out the volatility and avoid panicking as stocks typically rise over the longer term.

“We have already seen this film. After the dotcom meltdown, after the Great Recession and even just after the onset of the pandemic, markets fell by a third in early 2020 and have since rallied and hit new highs after new highs,” did he declare. “Don’t try to guess the market. Play the long game.

Treasury yields have also risen in anticipation of Fed rate hikes, and that’s a problem for the federal government as it must continue to fund its $30 trillion national debt.

Last July, when many economists thought high inflation would only last a few months, the Congressional Budget Office predicted the US government would pay $306 billion in debt interest this year. But that forecast was based on the Fed not raising interest rates until the middle of 2023.

If interest rates rise just 1 percentage point higher than projected over the next decade, Congress will have to find an additional $187 billion a year to pay the extra interest on the debt, according to an analysis by the Committee for a Responsible Federal Budget, a budget watchdog group.

Jason Furman, a Harvard economist who served as chairman of the White House Council of Economic Advisers during the Obama administration, said inflation wasn’t so bad when it came to the national debt. This could help ease the burden over time by reducing the amount of debt relative to the size of the economy.

Overall, Furman said he’s not concerned that gradual interest rate hikes will significantly disrupt the economy or the United States’ ability to service debt. He noted that the Congressional Budget Office expects the main Fed to 2.6% by 2031, which is still historically low.

“The era of super low interest rates is coming to an end, but we could be in the era of super low interest rates for a while,” Furman said.

But after the federal government doled out trillions of dollars in pandemic aid on top of its massive debt, any hike in interest rates could make it harder for Congress and the White House to fund national priorities and respond. to future emergencies.

“The Great Recession and the pandemic were absolutely times we should have borrowed. It was the right thing to do,” said Maya MacGuineas, chair of the Committee for a Responsible Federal Budget. But the federal government continued to run large budget deficits when the economy was relatively strong between these two efforts.

Now the inflated interest payments on the national debt will prevent Congress and the White House from providing fiscal stimulus if the Fed’s inflation-fighting efforts push the economy to the brink of recession, MacGuineas said.

“There was a kind of senseless naivety about people who were saying in recent years, ‘Don’t worry, we can borrow because interest rates will never go up,'” she said. “Never is a long time. And now, never is here.


Jim Puzzanghera can be contacted at jim.puzzanghera@globe.com. Follow him on Twitter: @JimPuzzanghera.

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Credit bureau backs capping loan interest rates https://sendika12.org/credit-bureau-backs-capping-loan-interest-rates/ Mon, 14 Mar 2022 12:00:13 +0000 https://sendika12.org/credit-bureau-backs-capping-loan-interest-rates/ THE Credit Information Corp. (CIC) announced its support for the introduction of a cap on interest rates and other fees for specific loans offered by loan companies (LCs), finance companies (FCs) and their payment platforms. online loan (OLP). CIC said in a statement on Monday that the cap on interest rates and […]]]>


THE Credit Information Corp. (CIC) announced its support for the introduction of a cap on interest rates and other fees for specific loans offered by loan companies (LCs), finance companies (FCs) and their payment platforms. online loan (OLP).

CIC said in a statement on Monday that the cap on interest rates and other charges will protect the welfare of borrowers against unsustainable interest rates resulting from excessive hedging and risk provisioning during the pandemic.

CIC President and CEO Ben Joshua A. Baltazar also said the cap on interest rates and fees should also improve access to credit.

“For now, putting a cap on interest rates and other fees for these low-value loans will help borrowers manage their repayment schedule and maintain a healthy credit history during this critical time. economic recovery,” Baltazar said. “In the meantime, continued improvements to the CIC database will provide lenders with better information for their credit ‘decision’ and risk management activities, leading to lower overall cost of credit. »

Baltazar, who is also a lawyer, added that capping interest rates and fees, especially for loan companies, finance companies and their PLOs, will also help break the negative stigma surrounding credit.

“One of our goals at CIC is to educate the public about credit as an important financial tool,” Baltazar said. “Specifically, we aim to correct the stigma associated with credit that is synonymous with financial hardship, mismanagement and vulnerability, which should not be the case.”

The Bangko Sentral ng Pilipinas (BSP) originally issued prescribed caps on interest rates and other charges for specific loans offered by LCs, CFs and PLOs, through its Circular Memorandum 1133 (2021 series ).

Loans covered by the caps are general purpose unsecured loans that do not exceed the amount of P10,000 and the loan term of up to four months.

Additionally, earlier this month, the Securities and Exchange Commission issued Circular Memorandum 03 (2022 series) implementing the central bank’s prescribed interest rate cap on LCs, CFs and PLOs. .

According to the 2019 Financial Inclusion Survey published by BSP, of the 33% of adults with outstanding loans, half applied for loans from informal sources such as informal lenders (54%) and the family and friends (41%).



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Bank interest rates may need to rise to fight inflation, experts say https://sendika12.org/bank-interest-rates-may-need-to-rise-to-fight-inflation-experts-say/ Sat, 12 Mar 2022 19:59:13 +0000 https://sendika12.org/bank-interest-rates-may-need-to-rise-to-fight-inflation-experts-say/ The Bank of Uganda (BOU) could gradually undertake a tightening of monetary policy (or an increase in interest rates) to rein in inflationary pressures building up in the economy, experts said. Monetary policy is set by the central bank with a future projection of inflation and the trajectory of economic growth in mind. Ugandan inflation […]]]>

The Bank of Uganda (BOU) could gradually undertake a tightening of monetary policy (or an increase in interest rates) to rein in inflationary pressures building up in the economy, experts said.

Monetary policy is set by the central bank with a future projection of inflation and the trajectory of economic growth in mind.

Ugandan inflation is now at 3.2%, the highest recorded by the Uganda Bureau of Statistics since June 2020.

The upward trend in inflation has largely been linked to global geopolitics in Russia and Ukraine, which has disrupted supply chains, affecting the prices of some food crops, energy and fuel prices.

Despite these events, the BOU says inflation remains below its 5% target but “there could be inflation surprises” in the coming months due to a stronger rise in food crops, prices raw material imports and exchange rate depreciation.

“We expect the BOU to begin its policy tightening cycle as inflationary pressures increase and evidence points to a stronger economic backdrop,” said Jeff Gable, chief economist at Absa Group.

“We expect interest rates to rise. When that will happen and to what extent is a real question mark due to the huge uncertainty created by the global environment in Russia and Ukraine.

Gable was speaking at the launch of the Absa Africa Financial Markets Index 2021 and Economic Outlook in Kampala.

The event was attended by BOU Deputy Governor Michael Atingi-Ego, Treasury Permanent Secretary Ramathan Ggoobi among other officials from key government agencies.

The conflict between Ukraine and Russia has seen energy prices soar over the past two weeks, triggering inflationary pressures globally.

“The price hike is a temporary shock,” Ggoobi noted in a bid to calm growing fears of rising commodity prices.

Higher inflation affects everyone – from higher prices at the pumping station to tougher choices on your next shopping list.

The central bank has kept the lending rate to financial institutions at a record high of 6.5% since June 2021.

The expected future tightening of monetary policy will move away from the very dovish stance adopted by the regulator over the past two years and intended to stimulate economic activity due to the pandemic.

In his February monetary policy briefing, Atingi-Ego noted that there are considerable uncertainties surrounding the inflation outlook for the country, the biggest being the disruption in global production supply chains.

“If the resumption of global cost-related inflationary pressures proves to be larger or more persistent than currently expected, it could spill over to the domestic economy, particularly if combined with a weaker shilling.

“If the exchange rate were to depreciate significantly, in part due to increased demand for foreign currency and tighter monetary policy in advanced economies, this would increase overall inflationary pressures and foster the need for tighten monetary policy in the future,” he said.

The higher costs of commodities such as fuel in the local market are influenced by global factors that are largely beyond the control of the BOU.

Raising bank interest rates, also known as central bank rates, is one of the many ways the BOU tries to control prices.

If interest rates rise, it can make borrowing more expensive, but it can also give savers a better return on their savings, which could encourage them to save rather than spend.

Encouraging people to save should slow the rise in prices of everyday goods. With fewer buyers in the market, sellers will find it difficult to raise their prices.

“The increase in the BOU loan rate may be positive, but it may not be the case if you have a loan. But it’s positive in the sense that it reflects an economy that has continued to recover from the worst of the pandemic and is approaching the status quo. That’s the message and we’re seeing it happening globally,” Gable said.

However, at the next monetary policy briefing due in April, the BOU monetary policy committee may have to tighten too quickly and slow economic growth projections or tighten too slowly and risk losing medium-term inflation expectations.

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Irish mortgage interest rates double eurozone average https://sendika12.org/irish-mortgage-interest-rates-double-eurozone-average/ Wed, 09 Mar 2022 11:53:33 +0000 https://sendika12.org/irish-mortgage-interest-rates-double-eurozone-average/ Average Irish mortgage interest rates are double the Eurozone average. Central Bank figures show the rate was 2.76% in Ireland in January, compared to 1.31% in the euro zone. The number of first-time buyers opting for variable rate mortgages has declined. Bonkers.ie analysis suggests they are opting for more expensive long-term fixed rates, due to […]]]>

Average Irish mortgage interest rates are double the Eurozone average.

Central Bank figures show the rate was 2.76% in Ireland in January, compared to 1.31% in the euro zone.

The number of first-time buyers opting for variable rate mortgages has declined.

Bonkers.ie analysis suggests they are opting for more expensive long-term fixed rates, due to recent speculation that the European Central Bank may start raising rates.

The website’s Darragh Cassidy tried to explain the change and said:

“Mortgage rates have been falling slowly but steadily in Ireland over the past few years. And they are still falling – for now at least. Today’s news that the average rate has risen suggests that more first-time buyers could opt for longer-term loans, more expensive fixed rates than before, which is not surprising since there has been talk in recent months of a rate hike by the ECB.

“Rapidly rising property prices could also have an effect.

“Lenders assess their mortgage rates based on the equity in the home or the size of the down payment they have against the loan. This is commonly referred to as the loan-to-value (LTV) ratio. The larger the deposit a home buyer has, the better the rate they will be offered by most lenders.

“However, rapidly rising property prices mean that buyers who previously could qualify for a cheaper rate for those with an LTV of less than 80% are now being pushed into a higher LTV bracket.”

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Higher interest rates could put some Canadian businesses at risk, poll finds https://sendika12.org/higher-interest-rates-could-put-some-canadian-businesses-at-risk-poll-finds/ Mon, 07 Mar 2022 18:37:50 +0000 https://sendika12.org/higher-interest-rates-could-put-some-canadian-businesses-at-risk-poll-finds/ According to a new survey of middle-sized companies. The poll, conducted by accounting firm KPMG, highlights the tightrope the Bank of Canada must walk on as it tries to rein in rising consumer prices without strangling the recovery, especially more than the central bank said a robust recovery in business investment would be essential to […]]]>

According to a new survey of middle-sized companies.

The poll, conducted by accounting firm KPMG, highlights the tightrope the Bank of Canada must walk on as it tries to rein in rising consumer prices without strangling the recovery, especially more than the central bank said a robust recovery in business investment would be essential to support Canada’s economy as the COVID-19 pandemic recedes.

Fifty-five percent of businesses said a one-percentage-point increase in the prime rate would put “significant, substantial, or significant pressure on their business and cash flow,” according to the survey of early February business owners. CEOs of over 500 companies.

Companies in the consumer and retail sector were the most vulnerable, with 62% saying their cash flow would be under pressure, while only 27% of business leaders in the manufacturing sector shared this concern .

Investors should consider our abnormal world when preparing for the future

Rate hikes will hit Canada’s main growth engine the hardest. Will other sectors take over?

When business leaders were asked what level of increase in borrowing rates would jeopardize their growth or investment plans, 11% said a one percentage point increase would mark a tipping point for them, with that share rising to 33% if their borrowing costs increase by two percentage points.

“It’s surprising when you look at people’s stress levels with a 1.5 to two [percentage point] rate increases, but we have lived in a world of low interest rates for so long,” said Paul van Eyk, national head of restructuring and turnaround services at KPMG in Canada.

The Bank of Canada raised its benchmark rate by 0.25 percentage points earlier this month to 0.5%, its first rate hike since 2018. Many forecasters expect rate hikes to continue. continue, despite the uncertainty caused by the war in Ukraine, since inflation has shown few signs of slowing down. Scotiabank economists expect Canada’s key rate to hit 2% by the end of the year, rising to 2.5% next year.

Unlike previous cycles of rate hikes, companies have fewer levers to pull to relieve pressure on their bottom line, van Eyk said.

“You can’t fire people because you’re just trying to retain the people you have, your supply chain is in chaos, and then you add all the geopolitical events and the pandemic,” he said.

“You’ve got this perfect storm brewing where historically companies haven’t faced this level of chaos in the markets when rates go up.”

Corporate debt is one of the concerns facing the Canadian economy as interest rates rise. Canadian businesses were already heavily indebted before COVID-19 and have borrowed heavily throughout the pandemic.

This is offset by the ample cash that companies have accumulated, thanks to the cheap cost of debt and strong corporate earnings during the pandemic.

Mr van Eyk said it is too early to tell whether headwinds from rising rates, supply chain disruptions and geopolitical uncertainty will cause companies to struggle with their debt, but signs will first appear in the loan loss reserves of the major Canadian banks.

In a note on Friday, debt rating agency Fitch Ratings said banks’ loan loss provisions rose in their first fiscal quarter of 2022, but remained well below historical averages. Bad loans were more than 25% below pre-pandemic levels, Fitch said.

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Can rising interest rates really control inflation? https://sendika12.org/can-rising-interest-rates-really-control-inflation/ Sat, 05 Mar 2022 18:00:00 +0000 https://sendika12.org/can-rising-interest-rates-really-control-inflation/ Sun, Mar 6, 2022 12:00 a.m. Last updated on: Sun, Mar 6, 2022, 12:00 a.m. Treating inflation with high interest rates is like treating cancer with chemotherapy. You have to kill swathes of the economy to slow things down. Illustration: Collected “> Treating inflation with high interest rates is like treating cancer with chemotherapy. You […]]]>

Treating inflation with high interest rates is like treating cancer with chemotherapy. You have to kill swathes of the economy to slow things down. Illustration: Collected

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Treating inflation with high interest rates is like treating cancer with chemotherapy. You have to kill swaths of the economy to slow things down. Illustration: Collected

Russia’s military attack on Ukraine has unquestionably unbalanced the global economy. The newspapers are full of stories about the long-term impact of this war. Obviously, I share many of the dire predictions being made, but for this article I have chosen to address another equally burning and long-term issue: the role of rising interest rates. In simple terms, it revolves around the question, “How high should the interest rate rise to curb inflation?”

We know that the rate of interest determines the price of holding or lending money. Banks pay an interest rate on savings to attract depositors. Banks also receive an interest rate for money lent from their deposits. When interest rates are low, individuals and businesses tend to borrow more from banks, thereby increasing the money supply. As a result, inflation rises. On the other hand, higher interest rates tend to lower inflation.

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Although this is a very simplified version of the relationship, it highlights why interest rates and inflation tend to be inversely correlated.

Economists are increasingly concerned that the interest rate borrowers are paying will soon skyrocket and short-circuit the post-pandemic economic recovery. So why is the interest rate going up? How does it affect other macroeconomic variables, notably the price level? Can rising interest rates really curb inflation? I cannot answer all of these questions here for lack of space, but I hope to pique the interest of readers so that they can delve deeper into the puzzle over time.

A central bank can use changes in interest rates as a tool to fight inflation. It does this by fixing the commercial banks’ short-term borrowing rate – known as the repo rate in Bangladesh – and then these banks pass it on to consumers and businesses. This rate influences everything from credit card interest to mortgages and auto loans, making borrowing more expensive. On the other hand, it also increases savings and certificate of deposit (CD) rates and encourages saving.

In times of inflation, a central bank aims to make borrowing more expensive so that consumers delay their purchases, which dampens demand and controls prices. The biggest challenge is finding the right level so as not to raise it too high, which will stifle investment and hurt the poor.

As we see now, interest rates in countries around the world are rising after a lull in recent years. The Bank of England has started raising interest rates from historic pandemic lows and is under increasing pressure to raise the bank rate again. The US Federal Reserve is expected to begin raising the benchmark rate, known as the funds rate, at the next Board of Governors meeting on March 15-16. The European Common Bank may selectively raise rates, and there is no doubt that Asian countries will follow, although there may be a slight lag.

The novelty of this upward trend is that many central banks in North America and Europe have cut their respective interest rates to near-zero levels in an effort to meet the maximum stability targets for the economy. employment and prices. Unfortunately, inflation has recently spiked due to rising demand and supply chain bottlenecks. Central banks have now decided to curb aggregate demand and money supply to ease inflationary pressures.

The crucial question here is whether the observed movement in the two variables – interest rate and inflation – exhibits causality, or is it just coincidence? The question is immediately relevant: will the simple increase in the interest rate bring down the rate of inflation? Also, how high and how fast must the interest rate rise to have an impact on inflation? For example, if necessary, can the Fed raise interest rates to 5%, 10% or, as in the 1980s, 20%? Is it even calculable or predictable in advance? The answer to these questions is no.

Raghuram Rajan, former chief economist of the IMF and governor of the Reserve Bank of India, called interest rates a “brutal” tool in a situation where the real culprit is the creaky supply chain. The interest rate is a blunt tool also because aggregate price indices do not tell us precisely what prices are changing, for what reasons or to what effect.

“The government should take steps to protect the poorest through tougher price caps and direct financial support, while increasing investment in green projects to end our exposure to fossil fuel price volatility. and curbing demand from those who can afford it through wealth taxes,” Rajan said. adds.

Of course, it will take some time before any action taken by a central bank will have an impact on the economy and curb inflation. That’s why policymaking groups need to watch economic data carefully to decide how much and how often to raise rates.

And the biggest challenge is finding the optimal level of interest rate increases without plunging the economy into a slump. Treating inflation is like treating cancer with chemotherapy, as one expert once said. “You have to kill chunks of the economy to slow things down. It’s not nice treatment.”

Dr Abdullah Shibli is a senior research fellow at the US-based International Institute for Sustainable Development (ISDI).

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Sri Lanka raises interest rates as inflation concerns rise https://sendika12.org/sri-lanka-raises-interest-rates-as-inflation-concerns-rise/ Fri, 04 Mar 2022 03:46:00 +0000 https://sendika12.org/sri-lanka-raises-interest-rates-as-inflation-concerns-rise/ COLOMBO, March 4 (Reuters) – Sri Lanka’s central bank raised rates as expected to curb growing inflationary pressures and urged the government to consider measures such as cutting non-essential imports and raising oil prices. fuel to overcome the economic difficulties encountered. The Central Bank of Sri Lanka (CBSL) raised the standing deposit facility rate and […]]]>

COLOMBO, March 4 (Reuters) – Sri Lanka’s central bank raised rates as expected to curb growing inflationary pressures and urged the government to consider measures such as cutting non-essential imports and raising oil prices. fuel to overcome the economic difficulties encountered.

The Central Bank of Sri Lanka (CBSL) raised the standing deposit facility rate and the standing lending facility rate by 100 basis points each, to 6.50% and 7.50%, respectively.

The median estimate from a Reuters poll of 13 economists called for both rates to rise by 50 basis points each. But the 10 who said rates would increase were evenly split on the quantum of increase between 50 and 100. read more

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“While inflationary pressures are expected to remain elevated in the near term, pressures emanating from aggregate demand buildup necessitate proactive measures to anchor inflation expectations and bring inflation back to desired levels over the medium term,” he said. CBSL in a press release. .

He said national economic activity has been affected by recent adverse global developments and soaring commodity prices which have disrupted supply chains and power supply.

With dwindling foreign exchange reserves, Sri Lanka has been unable to afford enough fuel to power its power plants, and the country has implemented power outages of over 7 hours across the country.

“These disruptions must be addressed immediately to ensure continued uninterrupted domestic production and export momentum,” he said.

Retail price inflation in February, however, reached 15.1% while food inflation reached 25.7%, the highest in a decade. CBSL aims to keep inflation within a range of 4-6% over the medium term.

CBSL made a list of recommendations to the government asking it to encourage more remittances and investments, reduce non-emergency imports, increase fuel and electricity tariffs, monetize non-strategic assets and underutilized, among others.

The International Monetary Fund said earlier this week that Sri Lanka needed to tighten monetary policy to contain rising inflation, get its high debt repayments back on track and reverse one of the country’s worst financial crises. have known for years.

Sri Lanka’s reserves have fallen 70% since 2020, falling to $2.36 billion at the end of January. But the island has debt repayments of about $4 billion this year. The scarcity of the dollar prompted some analysts and rating agencies to warn of a potential default. Read more

“CBSL should maintain this monetary policy tightening momentum and allow the currency to float,” said Udeeshan Jonas, chief strategist at CAL Group.

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Reporting by Swati Bhat and Uditha Jayasinghe; Editing by Simon Cameron-Moore

Our standards: The Thomson Reuters Trust Principles.

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As the Reserve Bank raises interest rates, vodka could be the answer https://sendika12.org/as-the-reserve-bank-raises-interest-rates-vodka-could-be-the-answer/ Sat, 26 Feb 2022 16:00:00 +0000 https://sendika12.org/as-the-reserve-bank-raises-interest-rates-vodka-could-be-the-answer/ Damien Grant is an Auckland business owner, member of the Taxpayers Union and regular opinion contributor for Stuff. OPINION: Imagine that you are the vodka commissar of the People’s Republic of Donbass. Your task is to ensure the distribution of vodka to the citizens of the nation. Your mandate is to reach an average level […]]]>

Damien Grant is an Auckland business owner, member of the Taxpayers Union and regular opinion contributor for Stuff.

OPINION: Imagine that you are the vodka commissar of the People’s Republic of Donbass.

Your task is to ensure the distribution of vodka to the citizens of the nation. Your mandate is to reach an average level of vodka consumption between 1 and 3 liters per adult annually.

Over the past year, however, there has been a malaise in the national psyche. In response, you decided to increase the availability of vodka to boost national morale. Voluntary pun.

Subsidized vodka for everyone! Consumption has increased and is now at 6 liters per person. It certainly lifted the nation’s mood, but the resulting rational exuberance proves disruptive. It’s time to bring down the level of consumption.

READ MORE:
* Adrian Orr suggests the Reserve Bank is ‘incredibly worried’ about inflation
* The Reserve Bank raises the official exchange rate by 25 basis points and now sees the rate climbing to around 3.4%
* Adrian Orr says Reserve Bank has ‘small role’ in unsustainable house prices

Alas, you discover a problem. In the past, vodka consumption was evenly distributed. Today, most consumption is concentrated among a small percentage of the population, as some citizens have reacted aggressively to the supply of cheap alcohol.

You accelerate a resolution by liquidating those who have consumed too much. It’s a bit drastic, and as a result, you can expect to be fired as the state seeks to restore faith in the vodka market.

Reserve Bank Governor Adrian Orr.  Reserve Bank Governor Adrian Orr's approach to monetary policy leaves him no leeway now that we are facing a crisis, says Damien Grant.

Robert Kitchin / Stuff

Reserve Bank Governor Adrian Orr. Reserve Bank Governor Adrian Orr’s approach to monetary policy leaves him no leeway now that we are facing a crisis, says Damien Grant.

Now you might be wondering, that was a great story, but what does that have to do with Adrian Orr?

When Don Brash – not to be confused with Donbass, but the literary allusion was too tempting – was tasked with reducing inflation, nearly 74% of the population owned their homes. Today, that figure is at least 10% lower.

Brash managed to defeat inflation by reducing the purchasing power of those with floating mortgages. This pain was spread over no less than half of all households. A drop in demand followed and reduced spending put downward pressure on prices.

Orr faces a different set of facts.

Someone who bought a house before 2016 enjoyed at least a doubling of the value of their property and, thanks to historically low interest rates, a large part of the repayments would have gone to reducing the principal.

Those who have bought in the past few years will have paid dearly and borrowed so much that many of them are now walking stooping. As Orr increases the cost of borrowing, it’s those unfortunate few who are going to be liquidated, while the rest of us are largely unaffected.

It is possible that the rise in interest rates will not have a short-term effect on businesses either. For most companies, servicing debt is only a small part of their total expenses and although a rise in rates will reduce new investment, this effect will take years to trickle down to demand.

The era of cheap interest rates is about to end and with it the fortunes of those who once enjoyed “cheap rates”.

Kavinda Herath/Stuff

The era of cheap interest rates is about to end and with it the fortunes of those who once enjoyed “cheap rates”.

Perhaps the Reserve Bank understands this and can explain why the OCR hike was only a nominal 0.25% instead of the 0.5% some were expecting. Or maybe it was another misstep in a long series of missteps.

More importantly, the bank announced that it would not renew the large-scale asset purchases it made at the start of the pandemic.

The assumption, at least mine, was that these debts would be rolled over, meaning they were never to be repaid until inflation reduced their face value to the price of a single Ukrainian hryvnia.

Orr put the Treasury under pressure. The maturities of these loans are staggered over the coming decades, with the tail ending in 2041. However, seven and a half billion are due in April next year and five billion in May 2024.

In order to meet these repayments, Grant Robertson, and perhaps Simon Bridges after him, will have to either raise taxes, cut spending, or borrow on the open market. This is a problem because large budget deficits are expected in the years to come.

This means that the Crown will have to borrow not only to cover its current deficit, but also for the $53 billion owed to the central bank.

As the Treasury seeks funding, it will pay market rates for its sovereign debt. As a result, New Zealand is going to experience higher interest rates for longer and the cost of this is going to be spread unevenly among those who responded to the incentives created by the bank.

Asked last Thursday by Epsom MP David Seymour, Orr blithely replied that “we don’t target house prices, we target consumer price inflation”.

“We lowered interest rates to achieve what we had done. Whether people want to use this to buy and sell assets is the choice between them and the financial institutions.

The problem, Governor, is that these individuals responded to the incentives created by your institution and now they are the ones who will pay the price for what is widely perceived as a massive mistake.

National revenue spokesman Andrew Bayly suggested the RBNZ's approach to quantitative easing was among the most aggressive in the OECD.

ROBERT KITCHIN/Stuff

National revenue spokesman Andrew Bayly suggested the RBNZ’s approach to quantitative easing was among the most aggressive in the OECD.

Opposition spokesman Andrew Bayly quizzed the governor on how we appear to be the second most aggressive country in the OECD on quantitative easing, but again Orr dodged responsibility , highlighting the dire economic situation he faced in March 2020.

It does not make sense. Orr began easing monetary conditions in May 2019, nearly a year before the pandemic hit, leaving him with little room to react in a crisis. There is near consensus that he overreacted when the crisis hit.

Economic consultancy Infometrics echoes the views of most commentators when advising its corporate clients: “Our view is that the Reserve Bank has lost control of inflation, with real costs climbing. soaring (and) rising inflation expectations…”

In his monetary policy statement, Orr did not even acknowledge that his quantitative easing policy is responsible for the price spike in the non-tradable sector; goods and services produced and sold in New Zealand.

An effective central bank is a credible bank that has the confidence of the market.

This governor appears unable or unwilling to admit past mistakes and hampers the bank’s ability to fulfill its regulatory function. He should resign.

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When did Australia last raise interest rates? https://sendika12.org/when-did-australia-last-raise-interest-rates/ Fri, 25 Feb 2022 02:37:26 +0000 https://sendika12.org/when-did-australia-last-raise-interest-rates/ Australia’s interest rate saga is likely to be etched forever in its economic history. The country has had one of the longest periods of historically low interest rates among its contemporaries, excluding countries that have kept interest rates at zero percent. While having near-zero interest rates isn’t necessarily bad, economies with such an expansionary monetary […]]]>

Australia’s interest rate saga is likely to be etched forever in its economic history. The country has had one of the longest periods of historically low interest rates among its contemporaries, excluding countries that have kept interest rates at zero percent.

While having near-zero interest rates isn’t necessarily bad, economies with such an expansionary monetary setup have often been criticized. However, the pandemic demanded such an extreme stance, even from countries that had never implemented it before.

Although most other countries have already embraced monetary contraction, Australia appears to be an exception waiting to meet its inflation and wage growth targets. It should be noted that Australia has not raised interest rates for about 12 years. So, a rate hike will be a fairly new feat for the country if executed.

It is widely believed that low interest rates stimulate spending in the economy. As loans become cheaper, households and businesses generally take out more loans and invest the money. Thus, the policy is seen as an ideal solution to a contraction in consumer demand, as seen during the pandemic. However, after operating at ten basis points for almost 14 months, interest rates should soon be boosted to combat inflationary pressures.

READ ALSO : What does the Russian-Ukrainian conflict mean for the global economy?

Brief history of interest rates

Interest rates have followed a gradual but steady downward trajectory over the past few decades. In the early 1980s, interest rates reached 10%, or even more in some cases. Moreover, during the recession of the 1980s, interest rates soared and even reached more than 20% in Australia. Interest rates fell below 10% in the 1990s; however, they remained as high as 7.5% in 1996.

Which sectors will benefit from the rise in interest rates?

After hitting 7.5% in July 1996, interest rates were lowered for a time, then finally stabilized at 4.75% in the early 2000s. However, the real factor that changed the given was the global financial crisis which shook financial systems to the core and caused major upheavals. Many countries embraced the monetarist idea of ​​monetary easing to combat slow economic growth during the post-GFC era.

Monetarist economic theory advocated the use of the money supply to control employment, consumption, and production in the economy. A quick way to control the money supply is to use tightening and easing monetary policy, which means raising or lowering interest rates respectively.

When countries embraced monetary easing, they successfully emerged from the GFC-induced slowdown in the years after 2008. So when the pandemic hit, central banks around the world knew which strategy to fall back on to boost spending.

RELATED READING: How well does the Keynesian framework fit into the Australian economy?

What is the next step for the financial sector?

Industries are ready for a rise in interest rates in the country. While economic data shows significant improvements in 2022, speculation of an interest rate hike this year is rife. Unemployment has already hit a 13-year low of 4.2% in January 2022. Experts predict that the jobless rate could drop further to 3.75% later this year.

Australia's economic performance since late 2021 has been excellent.

Meanwhile, as workers return to the workforce, employers are offering incentive programs to attract qualified staff, along with higher pay. Consequently, wages in the December 2021 quarter increased by 0.7% quarter on quarter. For the quarter, annual wage growth was 2.3%, reflecting a significant jump from wage growth of 1.4% in the previous corresponding period.

While this may bring the central bank closer to an interest rate hike, the wage growth data did not raise expectations of a rate hike in the immediate future.

Market experts expect interest rate hikes to occur as soon as the RBA takes the first step in this direction. Essentially, this means that there could be a wave of rate hikes in a short period of time, which the market may not be prepared for.

In a nutshell, the RBA still has crucial decisions to make in the months ahead. The real effects of government policies should be felt in the period following a rate hike. Until then, households can enjoy the benefits of historically low mortgage rates.

GOOD READING: Is Australia facing a ‘big drop’ in a workforce like the US?

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Low real interest rates support asset prices, but rising risks https://sendika12.org/low-real-interest-rates-support-asset-prices-but-rising-risks/ Sun, 20 Feb 2022 04:18:08 +0000 https://sendika12.org/low-real-interest-rates-support-asset-prices-but-rising-risks/ Supply disruptions coupled with strong demand for goods, rising wages and rising commodity prices continue to challenge economies around the world, pushing inflation above central bank targets . To contain price pressures, many economies began to tighten monetary policy, causing nominal interest rates to rise sharply, with long-term bond yields, often an indicator of investor […]]]>

Supply disruptions coupled with strong demand for goods, rising wages and rising commodity prices continue to challenge economies around the world, pushing inflation above central bank targets .

To contain price pressures, many economies began to tighten monetary policy, causing nominal interest rates to rise sharply, with long-term bond yields, often an indicator of investor sentiment, returning to pre- pandemic in certain regions such as the United States. states.

Investors often look beyond nominal tariffs and base their decisions on real rates, i.e. inflation-adjusted rates, which help them determine the return on assets. Low real interest rates encourage investors to take more risk.

Despite somewhat tighter monetary conditions and the recent uptrend, longer-term real rates remain deeply negative in many regions, supporting higher prices for riskier assets. Further tightening may still be needed to bring inflation under control, but this puts asset prices at risk. More and more investors could decide to sell risky assets because these would become less attractive.

Different perspectives

While short-term market rates have risen since central banks’ hawkish turn in advanced economies and some emerging markets, there is still a clear difference between policy makers’ expectations about when their benchmark rates will rise and where investors expect the crunch to end.

This is particularly evident in the United States, where Federal Reserve officials expect their main interest rate to hit 2.5%. That’s more than half a point higher than 10-year Treasury yields indicate.

This divergence between the views of markets and policymakers on the most likely path for borrowing costs is important because it means that investors can adjust their expectations of upward Fed tightening at a time more far and faster.

In addition, central banks could tighten more than they currently expect due to the persistence of inflation. For the Fed, this means that the main interest rate at the end of the tightening cycle could exceed 2.5%.

Implications of Debit Path Splitting

The path of policy rates has important implications for financial markets and the economy. Due to high inflation, real rates are historically low, despite the recent rebound in nominal interest rates, and are expected to remain so. In the United States, long-term rates are hovering around zero while short-term yields are deeply negative. In Germany and the United Kingdom, real rates remain extremely negative on all maturities.

interest rate

These very low real interest rates reflect pessimism about economic growth in the years to come, the global glut of savings due to aging societies and the demand for safe assets in a context of heightened uncertainty exacerbated by the pandemic and recent geopolitical concerns.

Unprecedented low real interest rates continue to boost riskier assets, despite the recent uptrend. Low real long-term rates are associated with historically high price-to-earnings ratios in equity markets, as they are used to discount expected future growth in earnings and cash flow. All other things being equal, the tightening of monetary policy should trigger an adjustment in real interest rates and lead to a rise in the discount rate, leading to a decline in stock prices.

Despite the recent tightening of financial conditions and worries about the virus and inflation, global asset valuations remain stretched. In credit markets, spreads are also still below pre-pandemic levels despite a slight recent widening.

After a banner year supported by strong earnings, the US stock market entered 2022 with a steep decline amid high inflation, growth uncertainty and a weaker earnings outlook. Therefore, we anticipate that a sudden and substantial rise in real rates could lead to a significant decline in US equities, especially in highly valued sectors like technology.

Already this year, the real 10-year yield has risen by almost half a percentage point. Stock volatility soared on heightened investor jitters, with the S&P 500 falling more than 9% for the year and the Nasdaq Composite measure dropping 14%.

Impact on economic growth

Our growth at risk estimates, which link downside risks to future economic growth to macro-financial conditions, could rise significantly if real rates suddenly rise and financial conditions tighten. Easy conditions have helped governments, consumers and businesses around the world weather the pandemic, but that could reverse as monetary policy tightens to curb inflation, moderating economic expansions.

In addition, capital flows to emerging markets could be threatened. Equity and bond investments in these economies are generally considered less safe, and tighter global financial conditions may lead to capital outflows, particularly for countries with weaker fundamentals.

Going forward, with persistent inflation, central banks are faced with a balancing act. Meanwhile, real interest rates remain very low in many countries. The tightening of monetary policy must be accompanied by some tightening of financial conditions. But there could be unintended consequences if global financial conditions tighten significantly.

A larger and sudden increase in real interest rates could lead to a disruptive revaluation of prices and an even larger sell-off in equities. Given that financial vulnerabilities remain elevated in several sectors, monetary authorities should provide clear guidance on the future direction of policy to avoid unnecessary volatility and preserve financial stability.

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