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Central banks set policy for war-torn countries

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(Bloomberg) — This week, global central banks will deliver the biggest collective assessment of a changed world since Russia’s invasion of Ukraine, new supply disruptions and a sudden inflationary shock to many economies.

Among the eight G20 members whose monetary officials will meet, the Federal Reserve’s impending interest rate hike is likely to command the spotlight.

The others will show a mosaic of policies reflecting the different impacts of the conflict on a world economy that is already adjusting to rising prices. Decisions will range from another possible rate hike at the Bank of England’s hawkish tone, to the likely result at the Bank of Japan insisting on a continued easing stance.

It is then announced that last week’s surprise decision by the European Central Bank to accelerate the reduction of stimuli. Investors are wondering what other changes might be to come.

China

The first is the People’s Bank of China (Tuesday). Analysts will watch closely if they cut a key rate for a second time.

While activity data for January and February likely showed a slight improvement, risks loom as geopolitical tensions worsen and oil prices rise. Beijing’s new growth target of around 5.5% this year may also imply a need for central bank support.

Adding to the case for monetary easing, China’s credit expansion slowed in February due to a long holiday and a housing market slump meant people and businesses took on less debt.

Federal Reserve

The Fed takes center stage on Wednesday. An expected quarter-point increase in the benchmark rate would be the first since 2018. President Jerome Powell has to balance the highest inflation in four decades and uncertainty linked to the war.

Data last week showed consumer prices soared 7.9% in February from a year earlier, and inflation is poised to rise further as commodity costs rise. On the eve of the Fed’s decision, investors will get another key piece of information, with a sizeable rise in the producer price index likely.

In a context of inflation above the Fed’s 2% target, it is calculated in the labor market that increases sales revenue, and then on the other side the price of prizes.

In addition to raising rates, the Fed plans to reduce its balance sheet by nearly $9 trillion later in 2022 after completing purchases this month that are aimed at supporting the economy during the pandemic.

Brazil

Following the Fed on Wednesday, Brazil’s central bank is expected to raise its key rate for the ninth meeting in a row, to 11.75%. That’s up from just 2% a year ago.

The driving force behind the aggressive tightening cycle is an increase in consumer prices. The central bank’s leader, Roberto Campos Neto, faces inflation that is already above 10%, three times the official target.

Just a month ago, traders and analysts in Brazil forecast the surge cycle to peak at about 12.25%, but now it is seen reaching 13.75%. For an economy forecast to barely expand this year, it’s a tough pain to process.

Indonesia

On Thursday the focus shifts to Bank Indonesia, which will consider food and commodity cost risks in a decision that is expected to keep rates unchanged.

The central bank recently said it is watching for a significant inflation buildup, though it sees consumer prices as relatively manageable. Both headline and basic indicators in February remained at the lower end of their 2%-4% target, while the government promised to keep a cap on volatile food costs.

Turkey

Later on Thursday, Turkey’s central bank is likely to keep its rate at 14%, in keeping with President Recep Tayyip Erdogan’s unorthodox approach favoring looser policy rather than enduring closure to stifle raging inflation. highest in 20 years.

The annual rate of increase in consumer prices reached 54% in February, driven by energy and food, and the global impact of the war could further fuel those pressures.

That would threaten to prolong the cost-of-living decline faced by Turkish households, a narrative that may become more compelling as the country approaches the 2023 election.

Bank of England

Shortly after Turkey’s decision, the Bank of England seems almost certain to bring its key interest rate back to its pre-Covid level, the first major central bank to achieve that milestone.

Facing a worsening outlook for inflation that Bloomberg Economics says could push inflation to 10% by the end of this year, officials are expected to raise their benchmark to 0.75%. With the UK also mired in a cost of living crisis, some economists expect a minority of officials to push again for an unprecedented 50 basis point hike.

A rise of any kind would mark the third consecutive rise, a pace not seen this century. Markets are also expecting policymakers, led by Gov. Andrew Bailey, that more Indian moves are coming. Investors are currently pricing in rates as high as 2% by the end of the year.

Japan

With inflation still well behind accelerating levels in much of the world, the Bank of Japan is expected to keep all settings unchanged on Friday and maintain the message that domestic price growth is still too weak.

However, the task of communication is becoming more and more difficult. Governor Haruhiko Kuroda and his colleagues have recently emphasized the importance of stronger wage growth to ensure that inflation is part of a virtuous cycle of growth. The bottom line is that monetary easing needs to continue for longer.

But even this central bank acknowledges that higher oil prices are already pushing inflation beyond its forecasts, according to people familiar with the matter.

Russia

The week ends with the Bank of Russia’s first regular interest rate meeting since the invasion of Ukraine led to tough sanctions and the seizure of a large chunk of its more than $640 billion in foreign exchange reserves.

It makes sense for officials to keep monetary settings unchanged and monitor developments after they already more than doubled the key rate to 20% on February 28. That was one of a series of defensive measures intended to limit the panic selling of Russian assets, including the ruble, which has fallen more than 35% in less than a month.

The country’s falling currency and disrupted business prospects are pushing consumer prices toward one of the biggest spikes of this century. In the first half of the full invasion of Russia, the inflation rate is 2.2%. It is the name of the mayor that comes from a trace of the data in 2008, and more than double from an earlier record.

original note:

World’s central banks set policy for war-torn economies

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