Intro: Lower interest rates tend to create upward pressure on inflation as they encourage greater bank lending, increase the incentive to spend money rather than hoard it, and discourage people from holding the currency as an investment. That said, given the multitude of forces at play, rate cuts are far from guaranteed to generate high…
Intro: Does currency weakness cause inflation or does inflation cause currency weakness? While it may appear that currency weakness causes inflation, the opposite is true. Declining export competitiveness and falling real interest rates resulting from higher inflation necessitate currency weakness. Contrary to economic theory, higher inflation prints can sometimes lead to short-term currency appreciation in…
Further devaluations likely in the near term regardless of whether an IMF agreement is forthcoming. Longer term, further rupee depreciation lies ahead but huge interest rate differential should more than offset the declines. Short-Term / Tactical Outlook: Reserve Gain Belies Increased External Fragility The uptrend in USDPKR in place since the SBP devalued…
Intro: High inflation is a common feature of emerging markets. Even when real GDP growth is positive and monetary and fiscal policies are prudent, the lack of willingness to hold local currency as a store of wealth typically results in higher inflation rates relative to developed markets. As explained in Strong Growth and Low Unemployment are…
Intro: While there are many factors which help determine real GDP growth rates across countries, countries with low levels of GDP per capita, high levels of human capita, political stability, financial stability, econoomic freedom, and business freedom will tend to experience rapid growth. High savings rates are also a key factor, along with growth in…
Intro: Not all economic indicators are created equal when it comes to their usefulness in predicting economic inflection points. Leading indicators such as profit margins, equity prices, and the yield curve tend to provide a useful guide to future changes in real GDP growth, while income and employment data merely reflect economic changes which have…
Intro: The complex nature of the global economy can make it difficult to conceptualize how the economic system works. If we remove money from the equation and simplify the economy into a few sectors, it can help us understand fundamental economic principles such as: how and why savings drive economic growth; how interest rates allocate…
Intro: As we explained in ‘Why Interest Rate Cuts Rarely Stimulate Economic Growth’, the majority of interest rate cuts are ineffective at stimulating economic growth as they tend to merely reflect changes in the saving/investment balance that have already occurred. However, central banks can, and do, engage in ‘activist’ monetary policy aimed at boosting asset…
Intro: Fiscal stimulus measures often appear to work because the benefits that result are highly concentrated and visible while the costs are disbursed and invisible. When fiscal stimulus does ‘work’ it does so by preventing the emergence of idle resources resulting from the unwinding of economic imbalances, but in doing so it creates additional distortions.…
Intro: Artificially weakening a country’s currency may appear to be beneficial for economic growth as it often leads to higher exports in local currency terms. However, while exports as a share of GDP may rise due to higher profitability in that sector, this is typically more than offset by the losses in the domestically-focused industries,…