WASHINGTON, June 16: The U.S. Federal Reserve on Wednesday raised its benchmark interest rate by 75 basis points, marking the sharpest rate hike since 1994, as data released in recent days indicated inflation showed no clear sign of easing.
"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures," the Fed said in a statement after a two-day policy meeting, adding that the Fed is "highly attentive to inflation risks."
The Federal Open Market Committee (FOMC), the Fed's policy-making body, decided to raise the target range for the federal funds rate to 1.5 to 1.75 percent and "anticipates that ongoing increases in the target range will be appropriate."
The statement showed that 10 committee members voted for the decision and one voted against it. Esther George, president of the Federal Reserve Bank of Kansas City, preferred a half-point rate hike.
The Fed's newly released quarterly economic projections showed that Fed officials' median projection of personal consumption expenditures (PCE) inflation is 5.2 percent by the end of this year, up from 4.3 percent in March projection.
The economic projections showed that median projection of PCE inflation would fall to 2.6 percent by the end of 2023, and then to 2.2 percent by the end of 2024.
Fed officials' median projection of unemployment rate, meanwhile, is 3.7 percent by the end of this year, slightly up from the current 3.6 percent. The median projection of unemployment rate would reach 3.9 percent by 2023 and 4.1 percent by 2024.
"If you're looking at getting that back down to almost a 2 percent inflation by 2024 and the unemployment rate is as low as 4.1 percent, I would call that as meeting that test (of a soft landing)," Fed Chair Jerome Powell said Wednesday afternoon at a press conference.
The economic projections showed that the median FOMC projection for year-end federal funds rate has jumped to 3.4 percent, much higher than the 1.9 percent projected in March.
"The committee's views are around a modestly restrictive stance which will be in the 3 - 3.5 percent range by the end of the year," Powell told reporters.
"If we see data going in a different direction it will be reflected in our policy. As you see today," he added.
The 75-basis-point rate hike on Wednesday marked a major shift from Powell's remarks in early May that 50-basis-point interest rate increases should be "on the table" at the next couple of meetings. Fed officials began their pre-meeting quiet period on June 4.
Desmond Lachman, senior fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua that the inflation number released last week was higher than the Fed expected, and the Fed is determined to "regain control over inflation."
The U.S. Labor Department reported Friday that consumer price index (CPI) skyrocketed 8.6 percent in May from a year earlier, marking the third straight month of inflation over 8 percent and hitting a new four-decade high. The figures, which exceeded consensus estimates, dashed hopes that inflation had peaked.
Powell said he expects a 50 or 75 basis point rate hike will be "most likely" at the next central bank policy meeting in July, adding that the committee will make decision based on incoming economic data.
"The committee is moving rates up expeditiously to more normal levels, and we came to the view that we'd like to do a little more front-end loading on that," he added.
MAY 13: She cooks the day's meals in one go, as the family tries to make ends meet on her husband's monthly earnings of around 10,000 rupees ($129; £106).
The woman, who didn't want to be named, is among millions of Indians struggling to afford cooking gas cylinders - which use liquefied petroleum gas (LPG) - after a series of price hikes over the past year and a half. The most recent hike last week - of 50 rupees (0.65; £0.53) - led to the price of a 14.2 kilogram cylinder crossing 1,000 rupees in some parts of the country.
Cylinder prices have long been a hotly-debated political issue in India, with opposition parties - including the ruling Bharatiya Janata Party before it came to power in 2014 - routinely taking to the streets to protest against hikes.
But the issue has become even more sensitive after the Covid pandemic, which suppressed incomes, caused job losses and exhausted savings.
Food and fuel costs have also been soaring - last week, India's central bank announced its first interest rate hike in two years in an attempt to slow inflation.
But the pinch on people's pockets is expected to continue as companies pass on high borrowing costs to consumers.
Experts say any increase in the price of essential commodities such as cooking gas cylinders at a time of high inflation will force people to cut back on other priorities.
"Different households make different choices on where to cut spending, but we have seen that food and education are two common categories - for instance, people may decide to stop buying milk or paying for their children's coaching classes," says Himanshu, an economist and academic who only uses his first name.
Both choices, he points out, will have negative long-term consequences.
High cylinder prices may also be reversing the noticeable gains made by the ambitious Pradhan Mantri Ujjwala Yojana, which was launched by Prime Minister Narendra Modi's government in 2016.
The scheme aimed to move poor rural households away from high-polluting fuel sources such as wood, to cleaner energy by giving them subsidised LPG connections and cylinders - the government said in 2019 that it has provided more than 80 million connections under the programme.
A 2020 report by the Council on Energy, Environment and Water (CEEW), a policy think-tank, said that LPG's share in Indians' primary cooking fuels had increased from 28.5% in 2011 to 71% by March 2020 - much of the credit, it says, goes to the Ujjwala scheme.
But it also pointed out hurdles that prevented even people who had received LPG connections from using only that for cooking.
"The biggest reason given by households that owned an LPG connection but stacked it with other cooking fuels was the inability to afford the high recurring expense of refilling their cylinders," says Sunil Mani, a programme associate at CEEW and one of the authors of the study.
There are several other reasons that prevent people from transitioning to exclusive use of LPG - from lack of awareness to difficulties in procuring cylinders.
"But that is all secondary to the affordability barrier. That needs to be solved first," Mr Mani says.
According to research from CEEW, an average household in rural India set aside 4.9% of its monthly expenditure on procuring cooking fuel in March 2020.
By April 2022 - when the price of a cylinder was at 950 rupees - this had risen to 11% of the household monthly expense. Even this number, Mr Mani says, is likely to be an underestimate as it assumes that incomes have remained constant.
It's essential, he says, to give adequate, targeted subsidies to poorer households to ensure that the gains made by the scheme are not undone.
Himanshu also adds that the government has to provide relief through spending more on subsidies and other welfare measures.
"Unless the government absorbs the price shock, people will cut their spending, leading to a further decline in demand. It is a vicious cycle," he says.
There are major health hazards as well.
People in urban areas have fewer choices when it comes to LPG alternatives, and it's hard to cook over an open flame in small rooms without proper ventilation.
But people in rural areas are more likely to return to unclean options such as cow dung and firewood - which cause major health risks. According to the Global Burden of Disease study, household air pollution accounted for more than 600,000 deaths in India in 2019.
Mr Mani points out that the health risks have only increased due to Covid, which affects the respiratory system.
"Preparing alternatives to LPG is also a gendered activity - the burden usually falls on women."
With inputs from BBC
MAY 5: The Reserve Bank of India (RBI) raised the repo rate - at which it lends money to commercial banks - by 40 basis points to 4.4%.
The rate had been reduced to a record low of 4% during the Covid-19 pandemic.
RBI governor Shaktikanta Das made the surprise announcement during an online media briefing on Wednesday.
The RBI also announced a 50 basis point increase in the cash reserve ratio - the percentage of cash that banks need to keep in reserve against their total deposits - to suck out excess liquidity from the system.
The decision came amid soaring prices of food and fuel, with inflation at an 18-month high and higher global prices filtering through into India.
"Inflation-sensitive items relevant to India such as edible oils are facing shortages due to the conflict in Europe and export bans by key producers. The jump in fertiliser prices and other input costs has a direct impact on food prices in India," Mr Das said.
RBI believes this, coupled with lockdowns in major production hubs such as China, is likely to "accentuate global supply chain bottlenecks while depressing growth", and pose further upside risks to India's inflation trajectory.
He added that food inflation is expected to remain high as "spillovers from global wheat shortages are impacting domestic prices, even though domestic supply remains comfortable".
But despite lingering global headwinds and intensifying geopolitical headwinds, RBI believes domestic growth will be supported by a broad rebound in economic activity, the forecast of a normal monsoon and a revival in the investment cycle and exports.
According to economists, the RBI's decision, which came ahead of the US Federal Reserve's meeting later on Wednesday, was slow to come, given inflation is at its highest levels in several decades in many developed economies. They also forecast more rate hikes in the year ahead.
"We do foresee an additional 35-60 bps of rate hikes in the remainder of H1 FY2023," said Aditi Nayar, Chief Economist, ICRA Limited, in a press statement.
According to the real estate consultancy, the hike signals "an imminent end to the all-time low interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began," and will dampen housing demand to some extent.
It will also raise the borrowing costs of companies, which have already begun passing these on to consumers. According to industry bodies, this will end up hurting consumer and business sentiments at a time when the economy is still recovering from the pandemic.
"Any increase in the interest rate will further impact the cost of doing business, which is already high viz-z-viz high raw material cost," said Pradeep Multani, president, PHD Chamber of Commerce and Industry.
Indian households have been struggling to stretch their budgets over the past few months as prices of daily household items such as cooking oil and lemons soar. Economists point to a number of reasons - from higher transportation costs to supply side bottlenecks, and a weakness in the jobs market that suppresses disposable incomes.
After the rate hike announcement, the Indian markets closed the day in the red with a 1,300 point loss on the benchmark 50-share Sensex.
SYDNEY: After dropping interest rates down to historic low levels during the pandemic, the Reserve Bank of Australia (RBA) has hiked interest rates by 0.25 to 0.35 per cent, the first rise since 2010, in an effort to calm growing inflation. RBA Governor Philip Lowe said that it was now “the right time” to withdraw […]
MARCH 24: Official figures show the price of some household staples - such as sugar - have jumped by as much as 14% over the past week.
Inflation is set to keep rising in Russia where the rouble has weakened since the Ukraine assault was launched.
The value of the currency has dropped by 22% this year.
On Wednesday, Russia's economic ministry said annual inflation had jumped 14.5% in the week ending 18 March - the highest level since late 2015.
The Federal State Statistics Service said the cost of sugar rose by as much as 37.1% in certain regions of the country and increased by an average 14%.
Sugar, which is commonly used to preserve food or make liquor, was the biggest gainer in the week, the government agency found.
Prices for onions was the second biggest riser over the week, up 13.7% nationwide and 40.4% in some areas. Meanwhile, nappies grew 4.4% more expensive. Prices for black tea rose 4% and toilet paper increased by 3%.
Stephen Innes, managing partner at SPI Asset Management, said prices were higher because of the weaker rouble.
"The biggest culprit is imported inflation," Mr Innes told the BBC. "Anything Russia imports is exponentially (pricier) due to the weaker rouble."
The UK, along with the US and the European Union, have cut off a number Russian banks from financial markets in the West.
They have also prohibited dealings with Russia's central bank, state-owned investment funds and the finance ministry.
The Bank of Russia more than doubled its interest rate to 20% in March, in a bid to stop its currency from sliding further.
A large number of Western businesses have pulled out of Russia because of the war in Ukraine. Others, such as the Swiss food giant Nestle, have withdrawn major brands such as KitKat and Nesquik.
Videos on social media show shoppers scrambling to buy sugar and buckwheat at supermarkets in Moscow.
Deputy prime minister Viktoria Abramchenko has told citizens the country is "fully self-sufficient when it comes to sugar and buckwheat".
"There is no need to panic buy these goods. There is enough for everybody," she said.
Russia has hit back at international sanctions, and threatened to seize the assets of businesses which have stopped operating in the country.
It sanctioned US President Joe Biden and 12 other US officials last week.
On Wednesday, Russian President Vladimir Putin announced that the country would start selling natural gas to "unfriendly" countries in roubles. It is understood the move is aimed at supporting the currency.
The EU relies on Russia for 40% of its gas. However, many existing contracts are agreed upon in euros and it is unclear if Russia can change them.
Mr Putin's announcement drove the rouble to a three-week high. It later closed at 97.7 against the dollar.
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