The Week Ahead

The Week Ahead
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Conference brings Latin American central banks together. UN General Assembly opens. Bank of Japan releases monetary policy statement. Federal Reserve expected to maintain interest rate. Endangered species event focuses on trade. All in The Week Ahead.

Conference brings Latin American central banks together

On Monday, Argentina’s central bank will bring together central bank governors and presidents from the Brazilian, Argentine, and Mexican central banks. With the new administrations in Brazil and Argentina, and Brazil in particular struggling through significant economic straits, the central bank governors of the three largest Latin American economies will face pressure to tamp down inflation while stabilizing their domestic economies, especially considering the troubling economic and political developments underway in Brazil. Mexico has steadily raised interest rates since December from 3% to 4.2%; Argentina has been incrementally lowering interest rates from around 38% to slightly above 27% now; and Brazil maintained interest rates at a stable 14.25% since August 2015.

The three differing approaches reflect the political and economic environments of the three countries. In Argentina, the stridently anti-market administration of President Kirchner, which created pressure to raise interest rates given declining market confidence in the country, has been replaced by the pro-market Macri administration, reducing pressure on the central bank to stabilize the currency and Argentine market.

In Brazil, the ongoing political instability in the country culminating in the removal of President Rousseff from office, the removal of the Speaker of the House Eduardo Cunha under corruption charges, and the charging of former President Lula da Silva on corruption charges, has created pressure for the Brazilian central bank to maintain some semblance of stability for the economy.

In Mexico, the low interest rate compared to Argentina and Brazil reflects the robustness and stability underpinning the Mexican economy, though the ongoing upticks in the central bank interest rates reflect weakening growth in the economy.

The lack of Latin American central bank policy coordination, though potentially helpful in allowing each country to enact its own policy without considering outer consequences, may nevertheless reflect mixed signals on the strength of the LATAM economy with such divergent interest rate decisions.

 

UN General Assembly opens, bringing world leaders together in New York

On Tuesday, the United Nations General Debate will begin, harkening the opening of the UNGA. Several world leaders will be attending, including the presidents or prime ministers of the United States, Greece, France, and the UK. The event will include a UN Leaders’ Summit on the global refugee crisis, to be hosted by President Obama and attended by several major heads of state. The United States has already announced it will extend the overall number of refugees being accepted to the country next year to 110,000 (above the 85,000 from this year), and it would not be surprising to hear similar commitments from other world leaders.

The UNGA week will also include the U.S.-Africa Business Forum, hosted by Michael Bloomberg and U.S. Secretary of Commerce Penny Pritzker. President Obama is expected to attend this event too.  From a political perspective, one of the more intriguing elements of the opening week could be Secretary Hillary Clinton’s expected meeting with several world leaders as she moves to boost her commander-in-chief bona fides ahead of the first presidential debate next Monday. She is slated to meet with Ukrainian president Petro Poroshenko, as well as Egyptian President Sisi. Though typically these types of meetings with presidential candidates, rather than sitting presidents, are perfunctory in nature, she knows several of the heads of state personally from her time as Secretary of State, so the meetings may end up being more significant both in substance and in interaction.

 

Bank of Japan releases monetary policy statement

On Wednesday, the Japanese central bank will release its monetary policy announcement following the board meeting of the BoJ, followed by a press conference with Governor Haruhiko Kuroda immediately thereafter. The Bank of Japan has faced criticism for its quantitative easing that has largely failed to spur consumer spending or inflation. It should be noted, however, that the Japanese central bank, as well as the central banks of the United States, EU, UK, and elsewhere, are limited in the policies they can enact, and the lack of substantive policies from the governments of these countries can easily be viewed as responsible for spurring growth moving forward.

In wealthy, OECD economies, most central banks’ interest rates are hovering around zero. Japan, Sweden, and the ECB are at or below 0% while the U.S. is at 0.5%, South Korea is at 1.25%, Canada at 0.5%. Purchases of government bonds have also revealed significant limitations. Meanwhile, the UK has engaged in a range of cost-cutting measures during a time of economic downturn, which most economists would indicate is the wrong time to engage in such a policy, particularly if markets are fairly confident in the country’s underlying economic fundamentals. The U.S. policy of sequestration has been criticized by both economists and political figures on both sides of the aisle, and cost-cutting measures in France, Greece, and Spain were criticized for hindering growth in countries that most assuredly need it.  Nevertheless, the Bank of Japan is likely to get major coverage for its policy decision this week.

 

With divisions in the FOMC, Federal Reserve expected to maintain interest rate

On Wednesday, the Federal Reserve will decide whether to maintain interest rates at 0.50% or to raise them. Markets have gone back and forth over whether an interest rate rise will occur in September, though the divisions that appear to exist within the FOMC have made many market observers convinced that an interest rate rise is unlikely in September. The fact that the September meeting is so close to the presidential election and that the Fed typically tries to avoid making major decisions close to an election also makes a hike unlikely.

However, it will be increasingly difficult to sustain maintaining U.S. interest rates unchanged. Unemployment rates in the United States have remained below 5% for months, and wages have begun to pick up, with a recent study looking at 2015 marking the most robust growth in incomes for the middle class and poor in over 40 years. The Fed will also issue short-term projections for the U.S. economy, followed by a press conference with Federal Reserve Chair Janet Yellen. Should the September decision end without an interest rate rise, expectations will rise significantly that one will occur in December.

 

Endangered species event focuses on trade

On Saturday, the 17th Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) will take place on Saturday in Johannesburg, South Africa.  CITES covers upwards of 35,000 endangered species, many of which are gathered by smugglers and poachers due to their rarity and supposed value. In 2012, there were at least 1 million recorded illegal transactions.

The illegal trade of endangered species has become important both in developed and developing countries. Many African and Latin American nations have faced increasing economic pressure to crack down on illegal poaching of endangered wild flora and fauna due in part to the fact that conservation efforts encourage ecosystem tourism and help to elevate country status. In addition, many endangered species serve as a source of pride; for example, the revelation that Costa Rica’s golden toad had gone extinct led to national outcry.

Many developed countries, which have their own endangered species to protect, are frequently more concerned with the imports of endangered species, particularly in the products of major endangered mammals — elephant and rhinoceros horn, skins from big cats, etc. This has become increasingly problematic in countries with large newly wealthy middle classes like China as they use rare products like ivory from endangered rhinos as displays of wealth. One encouraging sign is the vast majority of countries, including the largest exporters and importers of illegally traded endangered species, have made major efforts to crack down on illegal trading, in part because no country wants to look like it is undermining the protection of endangered species.

 

The Week Ahead provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, The Week Ahead presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.

The Week Ahead is written by GRI analyst Brian Daigle.

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