The surge in energy prices this year (particularly gas) will have the biggest impact on Central and Eastern Europe (CEE) and push economies there into recession. There will be an impact in the rest of the emerging world but we expect it to be much smaller …
29th September 2022
The UK financial crisis is a self-inflicted wound, but the sell-off in gilts underlines that there is less fiscal room for manoeuvre than there was when policy rates were close to zero. We think the ECB is likely to resume asset purchases too before …
28th September 2022
The Bank of Thailand (BoT) hiked interest rates today by a further 25bp (to 1.0%) and appears committed to raising interest rates gradually over the coming months. But with inflation elevated and the currency coming under further downward pressure against …
While the market reaction to the Italian election was muted, we think that the worsening economic outlook and concerns about debt sustainability will result in increased risk aversion toward Italian property assets. This means that, after a strong H1, …
With developed market (DM) central banks clearly in hawkish moods, we have revised up our forecasts for the yields of most 10-year DM government bonds. We no longer expect these yields, in general, to fall much over the remainder of this year. But we …
Although the latest sell-off in Gilts has been driven in part by expectations for higher interest rates, the accompanying fall in sterling suggests the risk premia attached to UK assets has risen. In our view, in the absence of a concerted attempt to …
27th September 2022
In response to the government’s loose fiscal plans and the resulting weakening in the pound, we now think that interest rates will rise from 2.25% now to a peak of 5.00% (4.00% previously). Rates at those levels make the housing market look very …
The UK government has not been alone in announcing new fiscal measures in recent days. The French government’s plan to stabilise the budget deficit at 5% of GDP next year looks optimistic, given its overly rosy growth forecasts and continued support for …
After raising its base rate by a larger-than-expected 125bp, to 13.00%, Hungary’s central bank (MNB) announced today that it has now ended its rate hiking cycle and we now forecast the base rate to be left on hold over the coming year. Even so, with …
The rise in market interest rates that has already happened will push up mortgage rates to at least 6% and reduce the size of loans that lenders can offer. The resulting drop in buying power makes a significant drop in house prices inevitable. Many …
The Central Bank of Nigeria (CBN) upped the pace of its tightening cycle today, increasing the benchmark rate by 150bp, to 15.50%, as officials have become increasingly concerned about sky-high inflation and mounting pressure on the currency. We now think …
It is now clear that central banks in advanced economies will raise interest rates even further than our above-consensus forecasts had implied, making the current tightening cycle the most aggressive in three decades. While this may be necessary to tame …
A strong US dollar is a threat to countries with lots of foreign currency debt and/or inflation problems, and is putting pressure on central banks across the region to raise interest rates more aggressively. We recently changed our policy rate …
Long-term fiscal sustainability is governed by what happens to a combination of economic growth, government borrowing costs and the primary budget balance. Since we’re sceptical that the tax cuts announced by Kwasi Kwarteng last week will boost …
The Gulf countries have benefitted enormously from higher energy prices and will run large current account surpluses. But external positions have deteriorated in other parts of the region. That, alongside tighter external financing conditions, has led to …
Investors have revised up how far they expect the Bank of England to raise interest rates as they continue to digest the tax cuts announced on Friday. This Update examines what the impact on the housing market would be, and whether that could prevent …
The surge in bond yields that has accompanied the ratcheting up of rate expectations in the US has soured the outlook for the stock market there in three key ways. First, by raising the required return from equities. Second, by undermining the economic …
23rd September 2022
Another month, another batch of PMIs pointing to Q3 GDP having fallen in major advanced economies. Yet despite the deterioration in real activity, as well as some further signs that pipeline price pressures are easing, September’s PMIs will do little to …
The Chancellor took a rare, targeted approach to Stamp Duty in today’s vast package of tax cuts. The changes will remove the tax altogether for large numbers of buyers while retaining most of the revenue. But the bigger near-term implication of fiscal …
Capital inflows into EMs have dropped sharply over the past few weeks as the US dollar has been on a tear. External financing is likely to remain challenging in this environment, posing a threat to EMs whose current account deficits have widened sharply, …
The Chancellor claimed that this was a plan for growth. But unless the Chancellor’s gamble pays off and the government’s fiscal policy boosts GDP growth by 0.5-1.0ppts per annum, the risk is that once the near-term boost to GDP fades, the legacy of the …
With the Fed still clearly in a hawkish mood, we have revised up our forecasts for the 10-year Treasury yield. We now expect it to be around its current level at the end of this year, in contrast with our previous forecast of a decline. But we still …
The latest data out of Nigeria suggest that economic pain is mounting under the weight of troubles in the key oil sector as well as the country’s unorthodox FX policies. With little reprieve on the horizon, we expect GDP growth of 2.3% this year, well …
With Italy’s general election scheduled to take place this weekend, this Update answers six key questions about what to expect in the days and months following the vote. 1. When will we know the election results? The first exit polls will be released …
22nd September 2022
Direct FX intervention by the ECB to support the euro is not out of the question, but we think that it would take a much bigger depreciation of the single currency to force policymakers to act. The news today that policymakers in Japan have intervened …
The improvement in government budget positions across Latin America over the past year or so has been driven in large part by temporary factors and is likely to reverse before long. As things stand, this is not a major concern for public finances in …
The strength and breadth of inflationary pressure in the euro-zone, together with policymakers’ determination to bring inflation down, has prompted us to revise our interest rate forecasts up. We now forecast the ECB’s deposit rate to peak at 3% even …
The hawkish 50 basis point (bps) hike in interest rates today, from 1.75% to 2.25%, was partly driven by the government’s plans to dramatically loosen fiscal policy and supports our view that the Bank of England will raise rates to a peak of 4.00% and …
Bank Indonesia (BI) today raised interest rates by a further 50bp (to 4.25%) and signalled that more tightening was likely as it aims to support the currency and clamp down on rising inflation. We are changing our policy rate forecasts, and now …
Following today’s 50bp increase, we think the Norges Bank is most likely to hike by 50bp again in November. But its tightening cycle will soon be over, with the policy rate peaking at around 3%. Today’s 50bp rate hike, taking the policy rate to a …
The Swiss National Bank is likely to follow today’s 75bp rate rise with further increases at its next couple of meetings to keep a lid on inflationary pressure. But we still think investors have got ahead of themselves in expecting the rate to peak at …
The central bank of the Philippines (BSP) today raised its main policy rate by another 50bp (to 4.25%), and signalled that more hikes were likely in the near term. While further tightening is likely over the coming months, with inflation having peaked …
The Bank of Japan kept policy loose and retained its easing bias today and we think it won’t tighten policy even as underlying inflation reaches its 2% target. As was widely anticipated, the Bank kept its short-term policy rate at -0.1% and its target for …
The Fed stuck to the script in delivering a 75bp rate hike at its September meeting, but in our view still managed to deliver a hawkish message with the accompanying projections , which imply an additional 75bp hike in November and a 50bp move in …
21st September 2022
A key prong to the new PM’s economic policy is to increase the size of the economic pie, rather than redistributing it, seemingly funded by higher public borrowing. If the new government’s gamble on GDP growth pays off and it hits its 2.5% real GDP growth …
The upward revision to our Bank Rate forecast means that mortgage rates will rise further and faster than we previously envisaged, to a peak of 4.7% in March. The resulting higher cost of mortgage repayments will make the fall in buyer demand that has …
Despite incurring a record loss last year and now having to operate with negative equity, the RBA has not requested a recapitalisation from the government. But given that it did receive a capital injection in 2013 and that it may well record further …
The strong dollar environment is particularly worrying for those EMs with large dollar debts, including parts of Latin America, Turkey and many frontier markets. But it’s also a concern for countries with large current account deficits (including parts of …
20th September 2022
Even after raising its policy rate by 100bp today, the Riksbank signalled that its tightening cycle has some way to go. We expect another large hike at its final meeting of the year in November, perhaps by 75bp. Next year, the beginning of QT will ease …
After reaching close to a record high at the start of 2021, the gap between supermarket and all-retail equivalent yields has since fallen back to its pre-COVID-19 level. That is likely to reflect the decline in sales at food stores as the economy has …
16th September 2022
Even more caution than usual should be exercised when using UK overnight indexed swap (OIS) rates to infer the expected path of Bank Rate over the next couple of years. This is because they have risen by far more than the yields of Gilts with comparable …
15th September 2022
After fully adjusting our economic forecasts to take account of what is shaping up to be a big fiscal expansion, we now think the Bank of England will raise interest rates from 1.75% currently to a peak of 4.00% next year (our previous forecast was 3.00%) …
Italy’s right-wing coalition, which looks set to win the upcoming general election, will probably run slightly looser fiscal policy than Draghi’s government, but clashes with the EU similar to those in 2011 and 2018 are unlikely. Instead, delays on …
The recent decline in oil prices has weighed on some equity market indices and come alongside a decline in US inflation compensation, but we don’t think those moves will unwind much even if, as we expect, oil recovers a bit. Oil prices have now fallen …
Shifts in China’s approach in debt talks with Zambia and planned changes to the Common Framework, such as establishing firm timelines, will go some way to smoothing the debt restructuring process for affected EMs. For now, though, there are reasons to …
14th September 2022
Fiscal support to protect households and businesses from sky-high energy prices generally amounts to around 2-3% of GDP across Central and Eastern Europe (CEE). This will cushion, rather than fully offset, the hit to real economic activity from the …
India is facing renewed concerns about energy supply, fuelled by low inventories of coal. With the economy very reliant on coal for electricity generation, persistent shortages would almost certainly weigh on the economy while also stoking price pressure. …
13th September 2022
The public sector has been responsible for almost 90% of the rise in total employment since the pandemic and now accounts for the largest sustained share of employment since the early 1990s. The latest data show signs that this is being reversed, but …
One year into Hakainde Hichilema’s presidency, Zambia has taken key steps on the path out of a sovereign default, including securing an IMF deal this month. But with debt restructuring talks yet to conclude in earnest, the road to debt sustainability …
We think the yen will strengthen against the US dollar over the next few years, as the headwinds that have driven the currency to multi-decade lows begin to unwind. The yen has fallen nearly 20% against the greenback this year, the most of any of the …
