The Monetary Authority of Singapore (MAS) said it will maintain the prevailing rate of appreciation of its exchange rate-based policy band known as the Nominal Effective Exchange Rate, or S$NEER.

The width and the level at which the band is centred did not change.

“Barring any further global shocks, the Singapore economy is expected to strengthen in 2024, with growth becoming more broad-based. MAS core inflation is likely to remain elevated in the earlier part of the year, but should decline gradually and step down by Q4, before falling further next year,” MAS said in a statement.

Maybank economist Chua Hak Bin said the central bank is maintaining the current tightening bias as both core and headline inflation gauges are above 3% and historical comfort zones.

Core inflation in December was 3.3% year-on-year, slowing from its peak of 5.5% early last year.

MAS said core inflation is projected to ease to an average of 2.5–3.5% for 2024 after rising in the current quarter because of a 1 percentage point sales tax hike from January that MAS said will have a “transitory impact”.

Gross domestic product (GDP) was up 2.8% on a yearly basis in the fourth quarter of last year, according to advance estimates published by the trade ministry in early January.

GDP for the full year of 2023 was 1.2%, and the trade ministry projects GDP to grow by 1-3% in 2024.

“Prospects for the Singapore economy should continue to improve in 2024,” said the MAS, although both upside and downside risks to the inflation outlook remain.

OCBC economist Selena Ling said that suggests the MAS is on an extended policy pause for now.

“April monetary policy is likely another hold and the earliest window for an easing could only come later in the year when core inflation eases more convincingly,” she said.

The MAS policy decision on Monday was the first under its new review schedule, in which the central bank will make policy announcements every quarter instead of semi-annually.

The central bank left monetary policy unchanged in April and October last year, reflecting growth concerns, having tightened policy at five consecutive reviews prior to that.

As a heavily trade-reliant economy, Singapore uses a unique method of managing monetary policy, tweaking the exchange rate of its dollar against a basket of currencies instead of domestic interest rates like most other countries.

Source: Reuters

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Assessing tail risks to the euro area economy

In Chavleishvili, Kremer and Lund-Thomsen (2023), we develop a novel approach to gauge the potential short- to medium-term costs and benefits of alternative policy actions when monetary policy faces trade-offs between financial and macroeconomic stability. The structural quantile vector autoregressive (QVAR) model – introduced by Chavleishvili and Manganelli (2023) – provides a flexible way of estimating the dynamic interactions between our main variables of interest: real GDP growth, inflation, short-term interest rates and financial stability conditions.^[2] The “flexible” attribute refers to the fact that the estimated interactions can be weaker or stronger in the centre and in the tails of the “joint probability distributions” of the model variables. Financial stability conditions are captured by two summary indicators measuring financial imbalances and system-wide financial stress, respectively. Using quantile regression allows us to uncover non-linearities in the dynamics of the model variables like in the seminal “growth-at-risk” paper by Adrian et al. (2019), which documents a much stronger impact of financial distress on the left tail of the growth distribution. By considering the entire probability distribution of our variables of interest, we can evaluate policy options not just in terms of their most likely outcomes, but also in terms of the tail risks associated with particularly undesirable states such as systemic crises. The quantification of tail risks thus lends itself to a risk management perspective on financial stability considerations in monetary policy (see Kilian and Manganelli, 2008), a perspective that focuses on the balance of upside and downside risks to inflation and economic activity rather than on the mean forecasts of both variables.

To operationalise financial stability, our model includes two measures widely used in ECB analysis. The first one is the Systemic Risk Indicator (SRI), which measures the financial cycle and, by extension, system-wide financial imbalances (see Lang et al., 2019). The second is the Composite Indicator of Systemic Stress (CISS), which quantifies systemic stress in the financial system (see Holló et al., 2012, and Chavleishvili and Kremer, 2023). Conceptually, one may think of the former as systemic risk ex ante, i.e. the risk of a future financial crisis, and of the latter as systemic risk ex post, i.e. materialised systemic risk. A typical financial boom-bust cycle would then see an elevated level of the SRI followed by a steep rise in the CISS as the bubble bursts and the system deleverages, with the Great Financial Crisis being a prominent example. The risk of such a boom-bust pattern poses an intertemporal financial stability trade-off for monetary policy: it can try to curb the financial boom by keeping interest rates higher than they would otherwise be, at the cost of weaker economic growth over the short run and at the benefit of a financial crisis being less likely and less severe over the medium term. In this article, however, we focus on another: the intratemporal financial stability trade-off for monetary policy, in which monetary policy itself may trigger more immediate financial instability.

The intratemporal financial stability trade-off in 2022

The circumstances prevailing in 2022 in the euro area and in many other places in the world, marked a stark turning point in the monetary policy stance. At the time, surging inflation called for a sharp tightening of monetary policy, even though economic growth was slowing after the post-pandemic rebound and financial stress was increasing on the back of the Russian aggression in Ukraine. In addition, the financial system at the time was vulnerable to a policy reversal because after a decade of accommodative monetary policy, the yield curve was flat and risk premia were at historically low levels, implying elevated risks to the profitability of banks and other financial intermediaries from a sharp rise in short-term interest rates.

To quantify the intratemporal financial stability trade-off in the euro area, we forecast the full distribution of our model variables over a period of four years, starting with the fourth quarter of 2022 (Q4 2022). In the baseline scenario, we fix the path of interest rates to the expected short-term market rates from the September 2022 Survey of Monetary Analysts (SMA) conducted by the ECB. In the baseline, we also require the mean forecast of real GDP growth, HICP inflation and commodity prices between Q4 2022 and Q4 2024 to reflect the ECB’s publicly available macroeconomic projections. This approach allows us to replicate the context in which policymakers were deciding on the path forward at the time while still considering macro-financial tail risks.

In addition to the baseline scenario, we also consider two alternative policy scenarios with different paths of short-term interest rates. The first one is “front-loading”, whereby policy rates are hiked more quickly. This helps prevent inflation from becoming entrenched, but it can also hurt systemically relevant banks and other financial intermediaries that have become particularly vulnerable to interest rate risk. The March 2023 banking turmoil in the United States and elsewhere provides a clear example of how monetary tightening may induce, or expose, financial fragility (see, e.g., Jiang et al., 2023, and Acharya et al., 2023). The second scenario considers a gradual monetary tightening. This may alleviate strains on financial stability, but at the cost of making high inflation more persistent, thereby creating the risk of long-term inflation expectations becoming de-anchored from the ECB’s 2% target. All three interest rate paths are illustrated in Chart 1.

Chart 1

Counterfactual paths for short-term interest rates in the euro area

Chart 2 plots the projected paths of the mean as well as the 10^th and 90^th percentiles of the forecast density of real GDP growth and the CISS using the three interest rate paths above. As previously noted, in the case of real GDP growth, the dotted line is restricted to meet the ECB’s growth projections at the time. The 10^th and the 90^th conditional percentiles represent the downside and the upside tail risks around these mean projections, respectively.^[3] Looking at the chart, we see that downside risks to real GDP growth (blue lines, left chart), as well as upside risks to systemic stress (red lines, right chart) are amplified by the interest rate front-loading in the short term compared to the baseline, and that the effects are larger compared to the respective opposite tails. Tightening monetary policy above market expectations increases the probability of realising a high level of systemic stress, in turn feeding into downside risks to growth. In contrast, a more gradual tightening has the opposite effects.

Chart 2

Forecast distributions of euro area real GDP (left) growth and the CISS (right) in the three policy scenarios

Overall, when comparing the short- to medium-term costs and benefits of the scenarios vis-à-vis the baseline forecast, the results generally do not support a more aggressive tightening path than what was expected by market participants in the autumn of 2022. The elevated downside risks to growth may outweigh the only modest gains in lower predicted inflation. That said, a policymaker who is particularly concerned about inflation expectations becoming de-anchored from target inflation may still be inclined to favour tighter policy. On the other hand, if policymakers were more concerned about the risk of causing severe financial distress by front-loading policy, the scenario could be modified to resemble, for example, the so-called “taper tantrum”, an episode of severe financial stress that occurred in 2013 when the Federal Reserve hinted at tapering its bond-buying programme.

Another consideration is that we have modelled monetary policy rather simplistically, with short-term rates being the only instrument. Today, monetary policymakers have several tools available, some of which can be used to separately target price and financial stability concerns, potentially mitigating the intratemporal financial stability trade-off. Still, a policymaker may prefer to avoid sparking financial stress to begin with, even if it can be contained with the right combination of tools.

Monetary policy from a risk manager’s perspective

In this article, we sketched a novel empirical approach to quantify the macroeconomic costs and benefits of monetary policies which take financial stability considerations explicitly into account. The approach has the distinct advantage that financial stability considerations are not introduced ad hoc or as pure “side effects” of monetary policy. In contrast, financial stability trade-offs enter the policy calculus through their direct effects on future inflation and economic activity. Our approach allows monetary policymakers to adopt a risk management perspective when confronted with elevated macroeconomic tails risks associated with certain risks to financial stability.

Source: ECB Europa

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The weak economic momentum, along with the hope for the Federal Reserve’s rate freeze next month and moderating inflation, may prod South Korea’s central bank to keep its policy rate unchanged again this week.

But the Bank of Korea (BOK) is likely to say that it will keep its restrictive monetary policy stance amid still high inflation and soaring household debts.

On Thursday, the BOK is widely predicted to leave the rate, which currently stands at 3.5 percent, unchanged, which would be the seventh straight rate freeze in the face of a murky growth outlook, according to a survey of 13 economists by Yonhap Infomax, the financial data firm of Yonhap News Agency.

The series of rate freezes comes after the BOK delivered seven consecutive hikes in borrowing costs from April last year to January.

South Korea’s economy has been dogged by slumping exports and sluggish consumer spending. For the year, the central bank had expected Asia’s fourth-largest economy to expand 1.4 percent this year, but it is still unclear whether such a forecast would be achieved in the face of a still murky economic outlook.

Weak global demand, led by China’s slowing economy, and a delay in the recovery of the IT sector have been blamed for a slump in the country’s outbound shipments.

But recently, the country’s exports have shown signs of recovering. South Korea’s exports rebounded for the first time in 13 months in October, driven by robust auto shipments, along with signs of an improvement in the chip sector.

Outbound shipments moved up 5.1 percent on-year to US$55 billion last month and logged a trade surplus of $1.64 billion in October, the fifth straight gain.

This week, the central bank will announce its updated growth outlook for the year and next year as well.

The economy grew 0.3 percent, 0.3 percent and 0.6 percent, respectively, in the first, second and third quarters.

Policymakers have also pinned hopes on easing inflation, helping the central bank take a breather in its rate hike moves.

South Korea’s inflation grew at a faster pace of 3.8 percent in October, staying above 3 percent for the third consecutive month, due to higher prices of energy and farm goods.

It is the third month in a row that the annual price growth has picked up pace.

But oil prices have been stabilizing in the face of the Israel-Hamas war, possibly helping inflation ease down the road, a development that supports the central bank’s rate freeze.

The central bank is also paying keen attention to rising household debts.

Household loans extended by banks in South Korea rose for the seventh straight month in October, led by rising home-backed loans amid high borrowing costs.

Banks’ outstanding household loans reached a record high of 1,086.6 trillion won (US$833.6 billion) at end-October, up 6.8 trillion won from a month earlier, accelerating from a 4.8 trillion-won rise the previous month and marking an on-month increase for the seventh month in a row.

Early this month, the Fed held its benchmark lending rate steady at a 22-year high for the second consecutive time as it keeps striving to bring down inflation to its 2 percent target.

The Fed kept the rate between 5.25 and 5.50 percent. But it left open the possibility of a rate change later to achieve “maximum” employment and its inflation target.

Next month, the Fed is widely expected to stand pat again.

Source : Yonhap News Agency

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The story of Germany in the years after the First World War is a striking reminder of how price stability and democracy go hand in hand.

The historian Gerald Feldman famously called those troubled years “the Great Disorder”. And although the relative contributions of the hyperinflation of the 1920s and the deflation of the 1930s are still debated, there is little doubt that wild swings in prices eroded the economic foundations of democracy.

One of the ways in which price instability does this is by triggering large distributional effects, which often hurt the poorest in society the most. For example, ECB analysis finds that the spike in inflation over the last 18 months has disproportionately affected low-income households as they spend more of their income on necessities like energy and food, which saw surging prices.

These are fundamental reasons why, in most liberal democracies, central banks have been entrusted with mandates to preserve price stability. And at the ECB, we will never compromise on our mandate. That is why, in response to rising inflation, we raised interest rates at the fastest pace in our history, by 450 basis points in just over a year. And we will return inflation to our medium-term target in a timely manner.

However, having made such a large and fast adjustment, we are in a phase of our policy cycle which I would characterise as being “attentive and focused”.

We need to be attentive to the different forces affecting inflation: the unwinding of past energy shocks, the strength of monetary policy transmission, the dynamics of wages and the evolution of inflation expectations. And we need to remain focused on bringing inflation back to our target, and not rush to premature conclusions based on short-term developments.

The forces pushing down inflation

There are two main forces pushing down inflation today.

First, the energy and supply chain shocks which played a substantial role in last year’s inflation surge are now unwinding.

At its peak, energy and food accounted for more than two-thirds of headline inflation in the euro area, despite representing less than one-third of the consumption basket. And together with supply chain disruptions, this also had a sizeable effect on core inflation – inflation excluding food and energy – as input costs rose for firms across the economy.

So, it is not surprising that as supply chains heal and energy prices fall, we are seeing the reverse effect, and both headline and core inflation are coming down.

We expect headline inflation to rise again slightly in the coming months, mainly owing to some base effects. This reflects the sizeable drops in energy costs observed around the turn of last year, and the reversal of some of the fiscal measures that were put in place to fight the energy crisis. But we should see a further weakening of overall inflationary pressures.

The second force is the impact of our monetary policy tightening.

We had to tighten monetary policy forcefully to bring demand into line with supply and keep inflation expectations anchored while inflation surged. And this policy adjustment has fed quickly into financing conditions. But its peak impact on inflation will only materialise with a lag – and given the unprecedented scale and speed of our tightening, there is some uncertainty about how strong this effect will be.

So, we need to be attentive to how these forces are working through the economy. But given the scale of our policy adjustment, we can now allow some time for them to unfold.

That is why, at our last meeting, we held interest rates at their present levels. And based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to returning inflation to our medium-term target in a timely manner.

Avoiding persistent inflation

But this is not the time to start declaring victory. The nature of the inflation process in the euro area means that we will need to remain attentive to the risks of persistent inflation as well.

As wage-setting in the euro area is multi-annual and staggered, the high inflation rates that are now behind us are still having a significant influence on wage agreements today. For example, the annual growth rate of compensation per employee was 5.6% in the second quarter of 2023, a 1.2 percentage point increase compared with the average for 2022.

And the ability of workers to obtain higher wages is being supported by a tight labour market and strong demand for labour, which has proven surprisingly resilient to a slowing economy since the end of 2022.

For now, our assessment is that strong wage growth mainly reflects “catch-up” effects related to past inflation, rather than a self-fulfilling dynamic where people expect higher inflation in the future. But to assess how wages are evolving and whether they pose a risk to price stability, we will be closely monitoring a number of developments.

First, whether firms absorb rising wages in their profit margins, which would allow real wages to recover some of their past losses without the increase being fully passed through to inflation.

Second, whether there is some easing of labour market tightness, which would prevent excess demand for labour from becoming a driver of persistently high wage demands.

And third, that inflation expectations remain anchored, which ensures that, when the current shock passes, wage and price-setting will be guided by our 2% inflation target.

In other words, we will need to remain attentive until we have firm evidence that the conditions are in place for inflation to return sustainably to our goal.

That is why we have said our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary. And we have made those future decisions conditional on the incoming data, meaning that we can act again if we see rising risks of missing our inflation target.

Source : ECB

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Time can make a huge difference. This is certainly true of the US’ stance on industrial policy. Just a few years ago, “industrial policy” was a derogatory term that Washington reserved almost exclusively for China as if it had forgotten that it was a pioneer of the practice.

In the 1980s, the Reagan administration set annual ceilings for Japan’s car exports to the US, and forced Tokyo to accept rules that limited Japanese chip exports while extracting improved US access to the Japanese market.

With the US emerging victorious from the Cold War, Washington saw a reduced need for industrial policy. Meanwhile, it frowned on the countries that adopted the practice, blasting China’s industrial policy as “non-market”.

Some 30 years on, industrial policy is back in fashion in the US. While continuing to censure China, Washington passed the Inflation Reduction Act and the Chips and Science Act in 2022.

Industrial policy is commonly defined as measures taken by a government to shape the economy by targeting specific industries, firms or economic activities through tax incentives, subsidies, protective regulations and research and development support.

China was a latecomer on the scene. Taking its cue from the East Asian countries that transformed their economies through industrial policy, Beijing put in place something of its own in 1986.

China’s industrial policy is similar to that of Japan, South Korea and the European Union, albeit more pervasive. For this reason, it has withstood challenges the US brought before the World Trade Organization.

In contrast, US industrial policy is one of a kind. What sets it apart from the pack is, first and foremost, its purpose. Conventional industrial policy is internally focused, aimed at developing national capacity. However, US industrial policy has, as well as investing in American workers and science, an important additional goal: suppressing competitors, especially those perceived to be narrowing the gap with the US.

The Reagan administration’s “managed trade”, since outlawed, was intended to clamp down on Japanese automobile and semiconductor industries. The exercise was hugely successful, and contributed in no small part to Japan’s three lost decades.

Washington’s industrial policy for semiconductors today is designed to cripple Chinese competition or to ensure the US maintains, as National Security Adviser Jake Sullivan put it, “as large of a lead as possible”.

US industry policy distinguishes itself in another important aspect: approach. The Biden administration says its industrial policy is rooted in national security concerns, and maintains that there is no room for compromise on such matters.

It is easy to see why Washington links its industrial policy with national security: to justify the measures it wishes to take. Consequently, US industrial policy includes extreme measures outside the realm of conventional industrial policy.

The US’ “high fence” around its semiconductor sector, for example, includes export bans, investment curbs and blacklists of competing companies.

On top of an arsenal already swollen with trade, the Swift global payments system and the dollar, Washington is now using industry policy as a weapon to achieve its geopolitical objectives – not unlike an unscrupulous sportsman tripping up a competitor to win a race.

While conventional industrial policy operates behind the border, America’s industrial policy extends its reach beyond US territory, adversely affecting foreign governments and companies. Foreign companies deemed to have violated US sanctions are subject to heavy fines, while foreign nationals on the wrong side of US rules face prison terms.

In an aberration from conventional industrial policy, the US calls for allies and like-minded economies to align against its competitors. The Biden administration has formed a “ Chip 4” alliance with South Korea, Japan and Taiwan, and seeks to set up a “critical minerals buyers club” with the European Union and the Group of 7.

It pressured Japan and the Netherlands into enforcing semiconductor export curbs against China, while prohibiting funding recipients under the Chips and Science Act from expanding capacity there. Moreover, the US is pushing “friend-shoring” to isolate China.

In addition, US industrial policy is likely to have contravened global trade rules. China has filed a suit with the WTO over the US’ chip export bans. Some in the EU have threatened WTO action against the US over an Inflation Reduction Act subsidy scheme that excludes electric vehicles made outside North America.

To allay similar Japanese concerns about the implementation of the Inflation Reduction Act, the Biden administration concluded an agreement with Tokyo on critical minerals for electric vehicle batteries, which was presented as a sort of free-trade agreement. But such narrow sectors “do not count as a free trade area”, according to Inu Manak, a trade policy expert at the Council on Foreign Relations.

Washington’s industrial policy has serious consequences for the world. It is creating new trade barriers. Market distortion at its worst, it threatens to dismantle the current global supply chains, which would lead to substantial inefficiency and loss of economic output.

Some of the effects of US industrial policy are already evident in the semiconductor sector, where it is no longer possible to freely source or sell raw materials, products, manufacturing machines or technology. As Taiwan Semiconductor Manufacturing Company (TSMC) founder Morris Chang put it, “in the chip sector, globalisation is dead”.

President Joe Biden has stressed on numerous occasions the necessity of US global leadership. However, on industrial policy at least, the world would be much better off without it.

Source : SCMP

The post How the US’ Exceptional Industrial Policy is Killing Globalisation appeared first on Policy Print.

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has announced that it will use all available monetary policy tools to maintain restrictive monetary conditions and reach the desired inflation rates. The MPC also stated that its key interest rates depend on expected inflation rates, not current inflation rates and that it will monitor the economic developments and the risks surrounding inflation expectations.

The CBE has set its inflation targets at 7% (±2%) on average in the fourth quarter of 2024 and 5% (±2%) on average in the fourth quarter of 2026.

The MPC decided to keep the CBE’s basic interest rates unchanged at 19.25% for deposits, 20.25% for lending, and 19.75% for the credit and discount rates and the main operation of the CBE. The decision was made last Thursday, amid rising global commodity prices, especially energy prices, due to the geopolitical tensions in the region. The MPC noted that global inflationary pressures have decreased recently as a result of the tight monetary policies adopted by many major economies, as well as the positive impact of the base year. However, global inflation expectations remained above the target rates for those countries.

The MPC also pointed out that the restrictive monetary policies, along with the high degree of uncertainty caused by the recent geopolitical tensions, contributed to lower global economic growth expectations compared to the previous MPC meeting.

On the domestic front, the MPC said that the real GDP growth rate stayed at 3.9% in the first quarter of 2023, the same as the fourth quarter of 2022. The MPC explained that the economic activity in the first quarter of 2023 was driven by the positive contribution of consumption and net exports. The MPC added that net exports have been the main support for growth since the first quarter of 2022, in line with the exchange rate developments. The MPC expects the GDP growth rate to slow down in the fiscal year 2022/2023 compared to the previous fiscal year, which recorded 6.7%.

“Preliminary indicators for the third quarter of 2023 reflect general stability in economic activity compared to the second quarter of 2023,” it added.

The MPC also said that the unemployment rate decreased to 7.0% in the second quarter of 2023, compared to 7.1% in the previous quarter, mainly due to the increase in the number of workers at a faster pace than the increase in the labor force.

The MPC said that, as expected, the annual urban inflation rate continued to rise, reaching 38% in September 2023, driven by an increase in food inflation, while non-food inflation slowed down. The MPC attributed the rise in food inflation for the third month in a row to the continued increase in the prices of fresh vegetables and fruits, unlike the previous months, which were affected by the increase in the prices of basic food commodities.

According to the committee, the monthly changes for each of the previous three months ending in September 2023 reflected the impact of unfavourable climatic conditions that contributed to an increase in the amount of seasonal rise in prices of agricultural products, noting that the annual rate of core inflation witnessed a slowdown for the third month in a row to record 39.7% in September 2023, compared to 40.4% in August 2023.

The MPC explained that in light of the above, it decided to keep the CBE’s basic interest rates unchanged, stressing that it will continue to evaluate the impact of the restrictive monetary policy that was taken and its impact on the economy, according to the data to be received during the coming period.

Source : Daily News Egypt

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The Inflation Reduction Act of 2022 (IRA) is widely considered to be the most ambitious climate policy action in U.S. history. Over the next decade and beyond, a broad array of new tax credits and direct government expenditures will provide substantial support for clean technologies and industries, as well as direct incentives for U.S. households and firms to invest in the equipment and capital needed to reduce their carbon emissions.

The financial sector will play a key role in financing this green transition, and forward-looking financial markets can provide a useful early indication of the IRA’s success. We take a climate finance perspective to investigate the financial market responses to the IRA.

We study U.S. stock market movements following two key climate policy news events. First, on July 14, 2022, the withdrawal of support for new climate spending by Senator Joe Manchin pushed the probability of any near-term climate policy action to almost zero. Then, on July 27, 2022, the IRA was unveiled, and it became obvious that sizable climate policy legislation would be enacted. The stock market strongly reacted to these two events but in very different ways across industries and firms. In particular, firm-level financial responses to these events differed across measures of greenness such as environmental scores and emission intensities. After the first event, which signaled no climate policy action in the near term, the stock market values of green firms—those with relatively low emission intensities and superior environmental scores—fell, and the values of brown firms rose. By contrast, with the announcement of a near-certain IRA, green firms benefited, and brown firms did not. The heterogeneous stock market responses across these measures of greenness are statistically and economically significant and support the use of such metrics in identifying climate policy exposure.

Our results also contribute to a growing literature on the pricing of climate risks in financial markets. The two events studied represent major realizations of climate policy transition risk. Such transition risks are of keen interest to central banks and other financial supervisory authorities that have started to quantify them through climate scenario analyses. The chief concern is that if investor expectations were to adjust precipitously to new climate policies, the resulting adverse revaluations of carbon-dependent assets could have severe implications for financial solvency and stability. While the financial market response to the IRA was economically significant, it did not lead to instability or financial stress, suggesting that transition risks posed by climate policies as ambitious as the IRA may be manageable.

Source : Brookings

The post The Effect of US Climate Policy on Financial Markets: an Event Study of the Inflation Reduction Act appeared first on Policy Print.

Inflation has remained stubbornly high, exceeding central banks’ targets in most Caucasus and Central Asia (CCA) countries. Inflation rates are volatile, due to the large share of food and imported products in the consumption basket. The surge in the price of these products in 2022 and currency depreciations had strong effects in some CCA countries, but even excluding energy and food prices, inflation remains high in the region. Other factors, such as persistent supply-chain bottlenecks, have also played a role.

Monetary Policy Impact

Central banks’ ability to secure price stability hinges in large part on the credibility and effectiveness of their monetary policy. Several CCA central banks have a mandate to achieve a specific inflation rate, under inflation-targeting regimes, supported by a flexible, market-determined exchange rate. For instance, since the mid-2000s, Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, and most recently Uzbekistan have transitioned to inflation-targeting regimes.

Our analyses in the CCA show that changes in the central bank’s interest rate do have an impact on inflation: an increase in the policy rate by 1 percentage point results in a decrease in the rate of inflation by 0.5 percentage point in the first year. Changes in the exchange rate are also shown to matter for inflation. A 1 percentage point exchange rate appreciation results in a 0.3 percentage point decrease in inflation in the first year.

Although most CCA central banks have raised interest rates during this inflation episode, the region still faces persistent inflationary pressures. This is because several structural factors also hamper the effectiveness of monetary policy, limiting the impact of interest rate changes on the economy:

• Shallow financial markets in the CCA, which weaken the impact of monetary policy on interest rates, bank lending, asset prices, balance sheets, and inflation expectations.
• Continuous reliance on exchange rate management and foreign exchange interventions that may offset some of the effects of interest rate changes.
• The still elevated use of the US dollar in the economy, or dollarization – despite its gradual decline over the last decade.
• Limited central bank credibility and communications, in environments with low trust in public institutions and low financial literacy.

Policy priorities

The paper highlights three main priorities for policymakers in the region:

1. Expanding central banks’ operational independence. Government influence over central banks’ decisions and operations can make it more difficult for them to do what is needed to contain inflation. Specific priorities include ensuring that fiscal policy supports disinflation and that most central bank board members do not have executive responsibilities and eliminating subsidized lending and other off-budget government spending mandates by central banks.
   
2. Increasing exchange rate flexibility to cushion external shocks and help focus monetary policy on domestic needs. It requires limiting foreign exchange interventions to only address excessive volatility in exchange rates and making foreign exchange purchases and sales equally balanced.
3. Enhancing central bank credibility by strengthening communication and transparency. Clear communication remains challenging despite recent progress on central bank transparency. CCA central banks should pursue further efforts toward a clear and forward-looking approach in explaining how their policy decisions help achieve their policy targets.

Source: International Monetary Fund

The post How More Effective Monetary Policy Can Tame Inflation in the Caucasus and Central Asia appeared first on Policy Print.

As Canadians grow more concerned about rising inflation, competition across different sectors of the economy has become a “kitchen-table issue” at a time when the federal government is reviewing its competition law.

The country’s two largest newspaper chains, Postmedia and the owners of the Toronto Star, recently confirmed talks about a potential merger, signalling more consolidation in an industry that already has a limited number of players.

In a highly anticipated report about food inflation last week, the Competition Bureau called for more competition in the grocery sector, tying the higher prices to the limited options for consumers.

All of that builds on the mounting scrutiny of several sectors, with the telecommunications industry being the prime example.

The head of the competition watchdog recently said that scrutiny is creating a window of opportunity for action, as the federal government undertakes a review of the Competition Act.

“Competition issues are grabbing headlines across the country,” competition commissioner Matthew Boswell said during a speech last month in Ottawa.

And as Canadians struggle with high inflation, Boswell said it’s easy to see how competition policy “has gone from being a podium topic to a kitchen table issue across the country.”

Keldon Bester, co-founder of the Canadian Anti-Monopoly Project, said inflation and a global conversation about corporate power have made people more aware of the role competition plays in their day-to-day lives.

“When Canadians are pushed and their budgets are stressed, they work harder to find alternatives to make ends meet. I think that brings forward a lack of options that we have in a lot of areas of our lives that we can kind of afford to ignore in the good times,” Bester said.

“(And) internationally, we’re seeing a real change in how governments and citizens interact with the corporations that make up our daily lives.”

The rapid rise of grocery prices alongside growing profits in the industry have some to argue that firms were profiteering off of inflation.

The Competition Bureau’s report last week found grocery margins have grown modestly yet meaningfully over the last five years, though the trend predates the current bout of high inflation.

“The fact that Canada’s largest grocers have generally been able to increase these margins — however modestly — is a sign that there is room for more competition in Canada’s grocery industry,” the report said.

The bureau laid out the history of consolidation in the industry, arguing that has hurt consumers.

When the Competition Act came into place in 1986, there were at least eight major grocers in Canada. Fast-forward to 2023, and that number has dwindled to just five.

The bureau made a set of recommendations in its report, urging governments to make it easier for more players to enter the market.

A spokesperson for Industry Minister François-Philippe Champagne called the report a good first step, and said the federal government would be reviewing the recommendations to see how it can make Canadians’ lives more affordable.

The dangers of poor competition go beyond prices, experts warn. A study published in the fall by researchers at the HEC Montreal Centre for Productivity and Prosperity found a lack of competition is hurting productivity, too.

The Competition Bureau acknowledged in its report that it hasn’t done enough to protect and promote competition, noting the Competition Act needs to be reformed.

The federal government launched a review of the act last fall and finished public consultations on the changes earlier this year, with the findings set to be released in the near future.

Bester is a loud critic of the law, and wants to see reforms that make it harder for mergers that would hurt consumers to be approved.

The Competition Bureau also needs to be better quipped to handle collusion and cartel conduct, he said, noting it has taken it years to investigate the bread price-fixing scandal.

Bester warned that reform will require politicians to stand up to major companies that aren’t interested in such changes.

“It’s going to take a lot of courage to make the right decision for Canadians,” Bester said.

Source: CP24 News

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The 225-issue Nikkei Stock Average gained 398.76 points, or 1.40 percent, from Thursday to close the day at 28,856.44, marking its highest closing level since Aug. 19, 2022.

The broader Topix index, meanwhile, gained 24.97 points, or 1.23 percent, to finish at 2,057.48.

Dealers here highlighted the BOJ at the conclusion of its two-day policy-setting meeting on Friday opted to set short-term interest rates at minus 0.1 percent while guiding 10-year Japanese government bond yields to around zero percent, under its yield curve control program, in a widely expected move.

They added however the central bank saying that Japan’s core consumer prices in fiscal 2025 are now forecast to rise 1.6 percent from a year earlier, led to the yen’s retreat against its counterparts, as the bank is struggling to reach its long-held 2 percent inflation target in a stable manner.

“The core consumer price outlook was weaker than the market consensus, leading to yen selling. It seems difficult to find a way to end the ultra-loose policy,” Yukio Ishizuki, senior foreign exchange strategist at Daiwa Securities Co. was quoted as saying.

Japan’s central bank also said it will conduct a review of its monetary policy framework over the past decades from a “broad perspective” and it will spend the next year or so on completing the assessment.

From this perspective, some analysts said that it could be inferred the Japanese central bank was in no hurry to shift from its ultra-loose policy to lift its interest rates in line with its global peers.

They said the BOJ, under new chief new governor Kazuo Ueda, has maintained that the current inflationary pressure hammering the economy is transitory.

“The main message is that, of course, the BOJ will consider a change in monetary policy, but it will take a longer time. That has created some volatility in financial markets,” Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management, was quoted as saying.

But the yen’s retreat was a boon for exporters who rely on a weaker yen to boost profits.

Export and technology issues finding favor on the yen’s decline included automakers Toyota Motor and Nissan Motor accelerating 1.8 and 2.4 percent, respectively.

Technology startup investor and Nikkei heavyweight Softbank Group climbed 3.0 percent, helping buoy the broader market, while consumer electronics giant Sony Group added 2.1 percent.

By the close of play, electric power and gas, machinery, and transportation equipment-oriented issues comprised those that gained the most.

The turnover on the Prime Market on the final trading day of the week came to 3,775.14 billion yen (27.82 billion U.S. dollars).

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