Inflation fears are back after 10 year break

Like the dog that did not bark in the Sherlock Holmes novel Silver Blaze, rising inflation has been overlooked as a risk to emerging markets this week, despite warnings that it could force central banks to raise rates, in the face of record levels of private debt.

  • By GlobalMarkets
  • 13 Oct 2018
Email a colleague
Request a PDF

After 10 years of being largely absent, inflation has returned to the worry list at the IMF-World Bank annual conference. Although this week’s meetings have focused on immediate threats such as the simmering trade tensions between the United States and China and an emerging market debt crisis, there is a growing realisation among policymakers, senior bankers and analysts that rising price pressures could soon force central banks’ hands.

“Inflation is going to be a problem over the next year,” said the head of the investment banking division at a global bank. “This time next year it will be a worry, but right now not enough people are concerned about it. We’ve had 10 years without it. But it’s coming back and it could be a real issue.”

Juan José Echavarría, governor of the central bank of Colombia, told GlobalMarkets: “Everybody should worry about new inflation because economies are booming. It is a very tricky question, because for many years we did not have inflation at the international level. If you talk to the central bankers in the advanced countries, they keep telling you that they do not understand very well what is going on.”

The immediate focus is on the US, where President Donald Trump jolted markets this week with his verbal intervention on monetary policy, accusing the Federal Reserve of “craziness” for its programme of gradual interest rate rises. But Echavarría said the US economy was booming, the labour market was very tight, while on top of that Trump’s expansionary fiscal policies would fuel growth.

Taimur Baig, managing director and chief economist, group research, at DBS Bank, said monetary policies were invariably going to tighten in this cycle, despite signs that the growth cycle is near the peak.  “But that does not exempt central banks from the need to continue normalising policy,” he said. “It’s a tricky balancing act. In a 12 month horizon, nobody is particularly bearish about growth, and the risk of inflation has risen because of oil, tightening and trade wars.”

Robin Brooks, chief economist at the Institute of International Finance, said emerging markets needed to keep an eye on wage inflation in the US, which might force Fed chairman Jay Powell to raise rates faster than markets expected. “Given how poorly risk assets behaved early this year when average hourly earnings grew above expectations, we see this as a potential risk event for EM in the near term,” he said.

The trigger could come as soon as next month, when October wage inflation data could show a spike. “What worries us from an EM perspective is that risk assets reacted poorly earlier this year,” he said. “We therefore flag this as a near term risk for EM.”

World Bank chief executive Kristalina Georgieva told GlobalMarkets she was worried about the record $164tr global debt mountain. “With interest rates climbing up and dollar appreciation, especially for economies that are burdened with dollar denominated debt, we already see very troubling signs.”

The IMF has played down the risk. Chief economist Maurice Obstfeld said at the launch of the Fund’s World Economic Outlook this week that core inflation rates were “largely quiescent”, thanks to robust policy frameworks “anchoring” inflation expectations.

Claire Dissaux, head of global economics at Millennium Global, agreed, saying lower growth across emerging markets meant there was “far less” inflation than during the last EM crisis. “Inflation expectations are also better anchored because fiscal discipline has improved since then too,” she said.

  • By GlobalMarkets
  • 13 Oct 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 258,439.97 1161 8.49%
2 Citi 234,461.54 980 7.70%
3 Bank of America Merrill Lynch 200,720.52 825 6.59%
4 Barclays 186,521.37 765 6.13%
5 Goldman Sachs 145,264.65 606 4.77%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 31,351.09 133 7.76%
2 Credit Agricole CIB 27,432.69 116 6.79%
3 JPMorgan 23,350.32 62 5.78%
4 Bank of America Merrill Lynch 22,852.01 62 5.65%
5 UniCredit 20,250.58 112 5.01%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 8,160.55 49 10.08%
2 Morgan Stanley 7,744.92 38 9.57%
3 Goldman Sachs 6,966.15 37 8.61%
4 Citi 5,856.44 44 7.24%
5 UBS 4,823.67 25 5.96%