01 Dec Omricon, Turkish Lira and Inflation
By Osama Rizvi
I hope everyone had a great Thanksgiving and enjoyable holiday. However, it seemed that for the global economy there was no respite as news after news came in casting shadows over its long term and sustainable recovery. From a rising dollar, to precipitous fall in Turkish and from the emergence of a new variant, Omicron, to a historic plunge in oil prices, below is a quick run-up of the important news recently.
Let’s start with the dollar. The greenback seems to be rising recently, with the Dollar Index touching its highest since June 2020, standing at 96. Big banks like JP Morgan, Citibank and others have already predicted that the index will continue to rise against the backdrop of a rising inflation and prospects of interest rate hike. Not only will this effect the demand of commodities, as strength of dollar and price of commodities are inversely proportional, but have its fair share of impact on emerging economies that are already underpressure as they fight inflation, soaring food prices, political instability. With dollar rising, the fiscal pressures will only mount as they will struggle to pay off their debts.
Closely related to this development is that of rising inflation. In the U.S. it is amongst the highest in the world standing at 6.2 percent. The Comsumer Price Index in the UK touched a 10 year high at 4.2 percent with BoE expecting it to reach 5 percent next year and they fancy to bring it down to 2 percent by 2023 – will it be that easy? I hardly think so. In Germany inflation stood at 5.2 percent, highest in 29 years. The number for the Eurozone is 4.9 percent, highest since the introduction of Euro! In France, prices jumped by 3.2 percent, the biggest increase in a decade.
The threat of inflation in emerging markets is even worse and the worst in Latin America. Chile reported a number of 6 percent, Mexico of 6.2 percent. Argentina registered a shocking 52 percent! As the graph below shows, the whole region of Latin America suffers from the largest increases in inflation in all regions in the world. Pakistan recently printed November inflation rate that was highest in 21 months, at 11.5 percent.
With these developments, a logical conclusion would be that we will see central banks across the globe raising interest rates to curb inflation. It has already started, Bank of Korea is planing to hike further after two increases since August. New Zealand that recently increased its rates twice in 2 months. Hungary has increased rates four times in just under two weeks.
How can we forget the story of Turkish Lira? Erdogan defied common economic logic as he applauded central bank that decreased interest rates from 19 percent to 15 percent as inflation surged to a staggering 20 percent! The Lira continues to slide to historic lows and has touched 13.47 from 8.5 in only three months. The future prospects aren’t looking good as well as Erdogan continues to advocate for interest rate reductions. We will see how this curious social experiment turns out.
As if all of this wasn’t enough, the world now also have a new COVID-19 variant, named Omicron. As soon as the news came out, stock markets jittered and oil markets, especially, started a sell off which was out of ordinary. Brent and WTI fell more than 10 and 11 percent respectively, and yesterday the crude markets slid further 6 percent with WTI falling all the way to $60. This will influence OPEC’s decision which will meet at December 3rd, 2021. Previously they shunned Biden’s calls for increasing production as gasoline prices increased to more than $3 at pump.
Lots to catch up! See you soon on our shows.