AFP

Britain has had its knuckles rapped over its controversial debt-fueled budget at the IMF’s annual meetings, with the crisis lender’s chief urging London on Thursday to maintain “coherent and consistent” policies.

British finance minister Kwasi Kwarteng was already under fire back home when he arrived in Washington for the annual gathering, which Bank of England Governor Andrew Bailey is also attending.

IMF officials — from the institution’s top economist to its managing director — have had their say about Britain’s fiscal choices this week after already warning last month that the measures would increase inequality.

IMF chief Kristalina Georgieva said she had a “very constructive” meeting with Kwarteng and Bailey.

“We discussed the importance of policy coherence and communicating clearly so there can be no — in this jittery environment — there could be no reasons for more jitters,” she said at a news conference.

The UK’s sovereign bonds and the pound have taken a beating on financial markets since Kwarteng and Prime Minister Liz Truss unveiled a “mini-budget” last month that included tax cuts in a bid to ease a cost-of-living crisis.

The move forced the Bank of England, which has been raising borrowing costs to tame inflation, to jump into bond markets to help protect financial stability.

Since then, Kwarteng axed his proposed tax cut for the richest earners and brought forward his debt-reduction plans and economic forecasts to October 31.

The British pound rallied against the dollar on Thursday on reports that the embattled leaders were mulling more U-turns, including on planned changes to corporation tax.

Kwarteng, however, insisted that his “position hasn’t changed.”

“I will come up with the medium-term fiscal plan on the 31st of October, as I said earlier in the week, and there’ll be more detail there,” he told reporters.

He added that Georgieva had told him on Wednesday that he was “quite right to focus on growth.”

– ‘Runaway train’ –

The International Monetary Fund has stressed throughout this week’s meetings of finance chiefs that the priority was for central banks to continue to tighten monetary policies to control inflation and for governments to keep their budgets tight.

“Our message to everybody, not just to the UK, to everybody at this time: fiscal policy should not undermine monetary policy,” Georgieva said.

This would make the task of monetary policy “only harder and it translates into the necessity for even further increase of rates and tightening financial conditions,” she said.

“So don’t prolong the pain and make sure that actions are coherent and consistent.”

While she called for consistency, Georgieva said it was “correct to be led by evidence, so if the evidence is that there has to be a recalibration, it is right for governments to do so.”

The IMF’s chief economist, Pierre-Olivier Gourinchas, said earlier this week that the divergence between BoE monetary policy and government’s fiscal plans was “not going to work very well.”

“It’s like having a car with two people in the front, and each of them is steering the wheel, and trying to steer the car in a different direction,” he said.

Georgieva used more analogies on Thursday as she warned that “we cannot allow inflation to become a runaway train.”

“I’m going to say it again because it is so important for this message to penetrate. When monetary policy puts a foot on the brakes, fiscal policy should not step on the accelerator,” she said.

– ‘A dressing-down’ –

European Central Bank chief Christine Lagarde made a veiled reference to Britain at an event on the sidelines of the IMF meetings where she called for cooperation between monetary and fiscal policies.

“We have seen good and bad examples of what cooperation or lack of cooperation can do,” she said at the annual meeting of the Institute of International Finance.

Susannah Streeter, senior investment and markets analyst at UK asset management firm Hargreaves Lansdown, said that “being given a dressing down by the IMF is never a good look.”

“Such international criticism doesn’t help stem evaporating confidence among investors about the government’s handling of the economy,” Streeter told AFP.

But, she added, it is likely to be “finger-pointing” domestically that would make the UK treasury reassess its tax cut policies.

Kenya on Thursday denied it had defaulted on interest repayments on a loan advanced by China for the construction of a railway line from the port city of Mombasa that opened in 2017.

The $5 billion project, financed 90 percent by China, replaced the so-called “Lunatic Express” — a line built more than a century ago by colonial power Britain which was notorious for lengthy delays and breakdowns.

Kenya’s Business Daily reported that the government failed to repay interest on the loan in the financial year ended June, attracting a fine of 1.312 billion Kenyan shillings ($10.8 million). 

But Treasury Cabinet Secretary Ukur Yatani rejected the report as “misinformation”, saying the financial position of the East African economic powerhouse was “sound and robust”.

“We wish to state categorically that Kenya has never defaulted on its settlement of its debt service obligations to any of its creditors,” Yatani said in a statement. 

The Standard Gauge Railway (SGR) is Kenya’s biggest infrastructure project since independence from Britain in 1963 and was launched as a master plan by East African leaders to connect their nations by rail. 

Currently snaking from Mombasa via the capital Nairobi to the Rift Valley town of Naivasha, it is planned to eventually link Uganda, Rwanda, South Sudan, Burundi and Ethiopia.

The railway was to be managed by the Chinese contractor for five years before being handed over to the Kenyan government.

But it has posted losses, with analysts worrying the trend could continue after newly elected President William Ruto last month reversed a policy that made it mandatory for cargo to use the railway. 

China is Kenya’s second-largest lender after the World Bank and has funded a number of costly infrastructure projects that have raised concerns about Nairobi taking on more debt than it can afford.

The country’s public debt load in June stood at 8.6 trillion shillings ($71.1 billion), an 11.5 percent rise from a year earlier, according to government figures.

Loan interest repayments have however shot up in recent months as the value of the shilling rapidly loses ground against international currencies, trading at 121 to the dollar on Thursday.

Yatani said there was no cause for alarm as the country frequently undergoes independent sovereign rating reviews which are published widely. 

“At no time has Kenya been flagged as a country defaulting on its external debt obligations,” he added.

Equities fell sharply on Thursday after data showed US inflation jumped more than expected in September, before quickly bouncing higher.

The data was seen as solidifying expectations of further interest rate hikes, and helped push the dollar higher. The greenback hit its highest level against the Japanese yen since 1990.

US consumer prices rose 0.4 percent in September compared to August, twice the 0.2 percent projected by analysts even as the annual increase in the consumer price index slowed slightly to 8.2 percent from 8.3 percent.

But core inflation, excluding volatile energy and food prices, climbed to 6.6 percent from 6.3 percent in August.

The US Federal Reserve has raised interest rates at an aggressive clip of 0.75 percentage points at its last three meetings. It has signalled plans to continue doing so until rampant inflation is brought under control.

That has led to a slump in stock prices in recent months, as higher interest rates will reduce consumer spending power.

Last month saw a brief rally in stocks after data suggested the US economy was slowing. Investors hoped that it would allow a “pivot” by the Fed to a slower rate of interest rate hikes.

“The strong CPI only reinforces the view that there is no way the Federal Reserve can contemplate a ‘pivot’ this year,” said Stephen Innes at SPI Asset Management. 

Wall Street stocks plunged after the opening bell, the Nasdaq Composite quickly dropping more than three percent.

But by late morning, Wall Street’s main indices were all solidly higher.  

“In the aftermath of the hotter US CPI report, we saw risk assets tumble as the dollar and bonds jumped,” said market analyst Fawad Razaqzada at City Index and FOREX.com.

“Much — or in some cases, all — of those moves have since been undone due to profit-taking, while banks and energy stocks rose thanks to even higher yields and rebounding crude oil prices,” he added.

– Europe stocks recover –

European stocks also bounced back from sharp losses.

Frankfurt closed 1.5 percent higher and Paris rose 1.0 percent.

The FTSE 100 in London added 0.4 percent amid media speculation the government may cut back on its fiscal stimulus plans and increase corporate taxes in its latest policy U-turn.

The speculation sent the pound soaring 1.9 percent against the dollar. 

Meanwhile the UK government’s 30-year bond yield eased to 4.56 percent and the 10-year fell to 4.23 percent.

The ten-year yield on Wednesday struck 4.64 percent, the highest since the 2008 global financial crisis and higher than the level that prompted the BoE’s recent bond market intervention.

The drop in UK bond yields helped fuel a rebound in stocks of home builders and mortgage lenders.

The dollar rose as high as 147.67 yen, its highest level since 1990, as US and Japanese monetary policy increasingly diverge.

The Bank of Japan has so far refused to raise interest rates, making yen investments less attractive than dollar investments.

“The Bank of Japan continues to keep monetary policy easy because inflation and wages remain relatively low” in Japan, said Carol Kong, and economist and currency strategist at Commonwealth Bank of Australia.

– Key figures around 1530 GMT –

New York – Dow: UP 1.3 percent at 29,576.35 points

EURO STOXX 50: UP 0.9 percent at 3,362.40

London – FTSE 100: UP 0.4 percent at 6,850.27 (close) 

Frankfurt – DAX: UP 1.5 percent at 12,355.58 (close)

Paris – CAC 40: UP 1.0 percent at 5,879.19 (close)

Tokyo – Nikkei 225: DOWN 0.6 percent at 26,237.42 (close)

Hong Kong – Hang Seng Index: DOWN 1.9 percent at 16,389.11 (close)

Shanghai – Composite: DOWN 0.3 percent at 3,016.36 (close)

Pound/dollar: UP at $1.1310 from $1.1100 Wednesday

Dollar/yen: UP at 147.25 yen from 146.91 yen

Euro/dollar: UP at $0.9764 from $0.9703

Euro/pound: DOWN at 86.33 pence from 87.41 pence

Brent North Sea crude: UP 1.4 percent at $93.72 per barrel

West Texas Intermediate: UP 1.4 percent at $88.53 per barrel

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Inflation kept its hold on the US economy in September, jumping more than expected according to government data Thursday that adds to the headwinds facing President Joe Biden’s Democrats shortly before midterm elections.

The last consumer price report before the November 8 vote to decide control of Congress showed US prices rose 0.4 percent in September compared to August, twice the 0.2 percent projected by analysts, with increases for food, housing and medical care weighing on consumers.

While the annual rate of inflation slowed slightly to 8.2 percent from 8.3 percent, according to the Bureau of Labor Statistics data, analysts expressed increasing concerns that pricing pressures have become more engrained in the economy.

Biden touted “some progress in the fight” but admitted that “prices are still too high” and that “we have more work to do” — as the disappointing data set the stage for more aggressive rate hikes by the US Federal Reserve.

The Fed has been walking a tightrope for months in trying to wrestle inflation down from the current 40-year highs — without triggering a damaging recession in the world’s largest economy.

In an interview with CNN on Tuesday, Biden acknowledged the possibility of a mild recession, but said he didn’t think it was likely. 

Thursday’s data showed core inflation, which strips out volatile energy and food prices, rose 0.6 percent in September, more than the 0.4 percent projected by analysts.

Other items that saw price increases in September included motor vehicle insurance, householder furnishings and education. Items with decreases included used cars and apparel.

Republican candidates have blamed Biden for broad-based price increases as they seek to win back control of Congress from Biden’s camp — tying high gasoline prices to Democratic resistance to new oil and gas drilling and to the White House’s efforts to address climate change. 

Treasury Secretary Janet Yellen and other Biden administration officials have defended their policies, attributing price increases to supply chain problems and other unforeseen events, such as the Russian invasion of Ukraine that has boosted prices for energy, wheat and other commodities.

– More Fed pain ahead –

Thursday’s data is certain to disappoint the Fed, which in September had enacted its third straight increase of 0.75 percentage point as Fed Chair Jerome Powell acknowledged that there isn’t a “painless” way to bring inflation down.

But the data Thursday showed the Fed’s actions thus far have come nowhere near realizing the goal of two percent inflation over the long run. The central bank has aimed to stop inflation before it becomes engrained in the economy

Analysts said the disappointing report not only boosts the odds of another 0.75 percentage point hike in November, but also raises the chances for a supersized December rate hike, or for bigger increases down the road.

Higher interest rates increase the cost for mortgages and car loans, weighing on the economy.

“With still very strong inflation readings, the Fed is now clearly forced to err on the side of overdoing at the cost of hurting the economy to preserve its credibility,” said a note from UniCredit Bank Economist Edoardo Campanella.

Stocks, which have been in retreat over the last month, gyrated following the report, initially tumbling as the market priced in higher interest rates, but later staging a rebound.

Near 1545 GMT, the Dow Jones Industrial Average was up 1.7 percent at 29,719.16, more than 1,000 points above its level earlier in the session.

– Cost-of-living adjustment –

In one bright spot for US consumers, the Social Security Administration announced it was boosting its payments by 8.7 percent in 2023 in the largest cost-of-living adjustment to retiree since 1981.

Retail industry analyst Neil Saunders of GlobalData pointed to one other silver lining: With many retailers facing excess inventories due to supply chain snafus in recent months and unpredictable consumer demand during the pandemic, “discounting will remain elevated” through the holiday shopping season.

While inflation is moderating in some categories, pricing pressure for energy and other essential goods will pose challenges in the upcoming period, Saunders said.

“While many households are now used to inflation, higher energy bills during the winter months could be the next big blow to consumer confidence,” he said.

The yen on Thursday dropped to the lowest level against the dollar since 1990 after US inflation data indicated more aggressive interest rate hikes from the Federal Reserve.

One dollar was worth 147.67 yen following the stronger-than-expected inflation number, which comes as Japan’s central bank holds off from hiking interest rates.

“The yen has been the weakest major currency so far in 2022,” noted Carol Kong, a currency strategist at Commonwealth Bank of Australia.  

“There are two key reasons behind its rapid weakness. The first is the growing divergence in monetary policy between the US and Japan,” she told AFP.  

“The Bank of Japan continues to keep monetary policy easy because inflation and wages remain relatively low” in the country. 

Kong said the yen had been hit hard also by a collapse in Japan’s current account balance after oil prices surged following the invasion of Ukraine by key energy producer Russia.  

With Japan relying on oil imports to meet most of its energy needs, the surge in crude costs recently sent its current account into deficit, she pointed out. 

On the upside, a weaker yen is helpful to Japanese exporters, whose products turn cheaper for foreign buyers holding stronger currencies.

Fast Retailing, the parent company of Japanese clothing giant Uniqlo, posted on Thursday a record full-year net profit thanks to the weak yen and a rebound in demand after virus lockdowns.

The yen’s dramatic fall — from around 115 against the dollar in February to over 138 in late August — was a boon for the company, which owns Uniqlo stores worldwide.

Wall Street and European stock markets were meanwhile also down sharply following Thursday’s US inflation data that solidified expectations of further big interest rate hikes from the Federal Reserve.

US consumer prices rose 0.4 percent in September compared to August, double the figure projected by analysts.

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