By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy, VanEck
Poland’s nasty inflation print signals that it is too early for the central bank to relax. Brazil’s might have been one of EM’s fiscal stars this year – can the government resist temptation to spend more?
Some central banks pretended for far too long that inflation was a paper tiger. Well, the tiger is real and it bites. Today’s inflation print in Poland was nasty – annual headline inflation surged to 6.8%, and rising core inflation (estimated to have reached 4.6%) signals that not all price pressures are temporary. The Polish central bank (NBP) had surprised with a 40bps rate hike earlier this month, but indicated in subsequent communications that there will be no prolonged “shock and awe” campaign. This morning’s release suggests that this assessment might have been premature, and that the NBP might need to deliver a double punch at its next meeting (in the form of a 50bps hike or so) to regain credibility – especially against the backdrop of the government’s fiscal push.
As regards fiscal plans, few countries attract as much attention as Brazil. Today’s general government budget numbers looked really good – the 12-month running primary deficit narrowed to 0.63% of GDP and the overall deficit to 4.84% of GDP in September due to stronger growth and higher inflation. But this might be a “short term gain/long term pain” situation, if the government will try to buy votes with higher social spending in the run up to the elections, adding to inflation pressures. The central bank will be forced to tighten more, and local bonds will continue to suffer – if this scenario were to materialize.
The policy talk often keeps us on the edge these days – especially when it is about taxes and environment. We decided to end this week with some fun facts (and pictures) about both. In France, wineries are allowed to pay some tax dues in kind – more specifically, in pomace, which is the residue remaining after the grapes were crushed and pressed to extract juice (see photo below). This is good for the government – it can then produce other things from it and pocket the money. This is good for environment – no-waste production. And a taxman can get a good break from the office routine! Stay tuned and have a great weekend!
Chart at a Glance: A Fun (And Environmentally Friendly) Way To Pay Taxes
Source: Natalia Gurushina