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World-Watching: Minutes of the Monetary Policy Committee — Copom

272nd Meeting – July 29-30, 2025

[from the Central Bank of Brazil, 5 August, 2025]

Update of the economic outlook and the Copom’s scenario¹
1. The global environment is more adverse and uncertain due to the economic policy and economic outlook in the United States, mainly regarding its trade and fiscal policies and their effects.
2. Therefore, the behavior and the volatility of different asset classes have been impacted, altering global financial conditions. This scenario requires particular caution from emerging market economies amid heightened geopolitical tensions.
3. Regarding the domestic scenario, the set of indicators on economic activity has shown some moderation in growth, as expected, but the labor market is still showing strength.
4. In recent releases, headline inflation and measures of underlying inflation remained above the inflation target. Inflation expectations for 2025 and 2026 collected by the Focus survey remained above the inflation target and stand at 5.1% and 4.4%, respectively.
Scenarios and risk analysis
1. The inflation outlook remains challenging in several dimensions. Copom assessed the international scenario, economic activity, aggregate demand, inflation expectations, and current inflation. Copom then discussed inflation projections and expectations before deliberating on the current decision and future communication.
2. The global environment is more adverse and uncertain. If, on the one hand, the approval of certain trade agreements, along with recent inflation and economic activity data from the U.S., could suggest a reduction in global uncertainty, on the other hand, the U.S. fiscal policy—and, particularly for Brazil, the U.S. trade policy—make the outlook more uncertain and adverse. The increase of trade tariffs by the U.S. to Brazil has significant sectoral impacts and still uncertain aggregate effects that depend on the unfolding of the next steps in the negotiations and the perception of risk inherent to this process. The Committee is closely monitoring the potential impacts on the real economy and financial assets. The prevailing assessment within the Committee is the increased global outlook uncertainty, and, therefore, Copom should maintain a cautious stance. As usual, the Committee will focus on the transmission mechanisms from the external environment to the domestic inflation dynamics and their impact on the outlook.
3. The domestic economic activity outlook has indicated a certain moderation in growth, while also presenting mixed data across sectors and indicators.
4. Overall, some moderation in growth is observed, supporting the scenario outlined by the Committee. This moderation, necessary for the widening of the output gap and the convergence of inflation to the target, is aligned with a contractionary monetary policy. Monthly sectoral surveys and more timely consumption data support a gradual slowdown in growth.
5. At turning points in the economic cycle, it is natural to observe mixed signals from economic indicators—some leading, others lagging—as well as from comparisons between markets, such as the credit and labor markets.
6. The credit market, which is more sensitive to financial conditions, has shown clearer moderation. A decline in non-earmarked credit granting and an increase in interest and delinquency rates have been observed. Moreover, regarding household credit, there has been an increase in the household debt–service ratio and a deepening of the negative credit flow—that is, households repaying more debt than taking on. It was emphasized during the discussion that some recent measures, such as private payroll-deducted loans, have had less impact than many market participants expected. Given the implementation agenda in this credit line, as well as the effects of introducing and removing taxes on other credit modalities, the Committee believes it should closely monitor upcoming credit data releases.
7. In contrast to the credit market, the labor market remains dynamic. Both from the perspective of income—with real gains consistently above productivity—and employment—with a significant decrease in the unemployment rate to historically low levels—the labor market has greatly supported consumption and income.
8. Thus, the Committee assesses that the signals from demand and economic activity so far suggest that the scenario is unfolding as expected and is consistent with the current monetary policy. The Committee reiterates that the aggregate demand slowdown is an essential element of supply–demand rebalancing in the economy and convergence of inflation to the target.
9. Fiscal policy has a short-term impact, mainly through stimulating aggregate demand, and a more structural dimension, which has the potential to affect perceptions of debt sustainability and influence the term premium in the yield curve. A fiscal policy that acts counter-cyclically and contributes to reducing the risk premium favors the convergence of inflation to the target. Copom reinforced its view that the slowdown in structural reform efforts and fiscal discipline, the increase in earmarked credit, and uncertainties over the public debt stabilization have the potential to raise the economy’s neutral interest rate, with deleterious impacts on the power of monetary policy and, consequently, on the cost of disinflation in terms of activity. The Committee remained firmly convinced that policies must be predictable, credible, and countercyclical. In particular, the Committee’s discussion once again highlighted the need for harmonious fiscal and monetary policy.
10. Inflation expectations, as measured by different instruments and obtained from various groups of agents, remained above the inflation target at all horizons, maintaining the adverse inflation outlook. For shorter-term horizons, following the release of the most recent data, there has been a decline in inflation expectations. For longer-term horizons, conversely, there has been no significant change in inflation expectations between Copom meetings, even though measures of breakeven inflation extracted from financial assets have declined. The Committee reaffirmed and renewed its commitment to re-anchoring expectations and to conducting a monetary policy that supports such a movement.
11. De-anchored inflation expectations is a factor of discomfort shared by all Committee members and must be tamed. Copom highlighted that environments with de-anchored expectations increase the disinflation cost in terms of activity. The scenario of inflation convergence to the target becomes more challenging with de-anchored expectations for longer horizons. When discussing this topic, the main conclusion obtained and shared by all members of Copom was that, in an environment of de-anchored expectations—as currently is the case—greater monetary restriction is required for a longer period than would be otherwise appropriate.
12. The inflation scenario has continued to show downside surprises in recent periods compared with analysts’ forecasts, but inflation has remained above the target Industrial goods inflation, which has already been showing weaker wholesale price pressures, continued to ease in the more recent period. Food prices also displayed slightly weaker-than-expected dynamics. Finally, services inflation, which has greater inertia, remains above the level required to meet the inflation target, in a context of a positive output gap. Beyond the changes in items, or even short-term oscillations, the core inflation measures have remained above the value consistent with the target achievement for months, corroborating the interpretation that inflation is pressured by demand and requires a contractionary monetary policy for a very prolonged period.
13. Copom then addressed the projections. In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 5.55² and evolves according to the purchasing power parity (PPP). The Committee assumes that oil prices follow approximately the futures market curve for the following six months and then start increasing 2% per year onwards. Moreover, the energy tariff flag is assumed to be “green” in December of the years 2025 and 2026.
14. In the reference scenario, four-quarter inflation projections for 2025 and for 2026 are 4.9% and 3.6%, respectively (Table 1). For the relevant horizon for monetary policy—2027 Q1—the inflation projection based on the reference scenario extracted from the Focus survey remained at 3.4%, above the inflation target.
15. Regarding the balance of risks, it was assessed that the scenario of greater uncertainty continues to present higher-than-usual upside and downside inflation risks to the inflation outlook. Copom assessed that, among the upside risks for the inflation outlook and inflation expectations, it should be emphasized (i) a more prolonged period of de-anchoring of inflation expectations; (ii) a stronger-than-expected resilience of services inflation due to a more positive output gap; and (iii) a conjunction of internal and external economic policies with a stronger-than-expected inflationary impact, for example, through a persistently more depreciated currency. Among the downside risks, it should be noted (i) a greater-than-projected deceleration of domestic economic activity, impacting the inflation scenario; (ii) a steeper global slowdown stemming from the trade shock and the scenario of heightened uncertainty; and (iii) a reduction in commodity prices with disinflationary effects.
16. Prospectively, the Committee will continue monitoring the pace of economic activity, which is a fundamental driver of inflation, particularly services inflation; the exchange rate pass-through to inflation, after a process of increased exchange rate volatility; and inflation expectations, which remain de-anchored and are drivers of future inflation behavior. It was emphasized that inflationary vectors remain adverse, such as the economic activity resilience and labor market pressures, de-anchored inflation expectations, and high inflation projections. This scenario prescribes a significantly contractionary monetary policy for a very prolonged period to ensure the convergence of inflation to the target.
Discussion of the conduct of monetary policy
1. Copom then discussed the conduct of monetary policy, considering the set of projections evaluated, as well as the balance of risks for prospective inflation.
2. Following a swift and firm interest rate hike cycle, the Committee anticipates, as its monetary policy strategy, continuity of the interruption of the rate hiking cycle to observe the effects of the cycle already implemented. It was emphasized that, once the appropriate interest rate is determined, it should remain at a significantly contractionary level for a very prolonged period due to de-anchored expectations. The Committee emphasizes that it will remain vigilant, that future monetary policy steps can be adjusted and that it will not hesitate to proceed with the rate hiking cycle if appropriate.
Monetary policy decision
1. The Committee has been closely monitoring with particular attention the announcements regarding the imposition by the U.S. of trade tariffs on Brazil, reinforcing its cautious stance in a scenario of heightened uncertainty. Moreover, it continues to monitor how the developments on the fiscal side impact monetary policy and financial assets. The current scenario continues to be marked by de-anchored inflation expectations, high inflation projections, resilience on economic activity, and labor market pressures. Ensuring the convergence of inflation to the target in an environment with de-anchored expectations requires a significantly contractionary monetary policy for a very prolonged period.
2. Copom decided to maintain the Selic rate at 15.00% p.a., and judges that this decision is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment.
3. The current scenario, marked by heightened uncertainty, requires a cautious stance in monetary policy. If the expected scenario materializes, the Committee foresees a continuation of the interruption of the rate hiking cycle to examine its yet-to-be-seen cumulative impacts, and then evaluate whether the current interest rate level, assuming it stable for a very prolonged period, will be enough to ensure the convergence of inflation to the target. The Committee emphasizes that it will remain vigilant, that future monetary policy steps can be adjusted and that it will not hesitate to resume the rate hiking cycle if appropriate.
4. The following members of the Committee voted for this decision: Gabriel Muricca Galípolo (Governor), Ailton de Aquino Santos, Diogo Abry Guillen, Gilneu Francisco Astolfi Vivan, Izabela Moreira Correa, Nilton José Schneider David, Paulo Picchetti, Renato Dias de Brito Gomes, and Rodrigo Alves Teixeira.

Table 1

Inflation projections in the reference scenario
Year-over-year IPCA change (%)

Price Index	2025	2026	2027 Q1
IPCA	4.9	3.6	3.4
IPCA market prices	5.1	3.5	3.3
IPCA administered prices	4.4	4.0	3.9

Footnotes

1 Unless explicitly stated otherwise, this update considers changes since the June Copom meeting (271^st meeting).

² It corresponds to the rounded value of the average exchange rate observed over the ten working days ending on the last day of the week prior to the Copom meeting, according to the procedure adopted since the 258^th meeting.

Meeting information

Date: July 29-30 2025
Place: BCB Headquarters’ meeting rooms on the 8^th floor (7/29 and 7/30 on the morning) and 20^th floor (7/30 on the afternoon) – Brasilia – DF – Brazil
Starting and ending times:
July 29: 10:07 AM – 11:37 AM; 2:17 PM – 5:51 PM
July 30: 10:10 AM – 11:13 AM; 2:37PM – 6:34 PM

In attendance:

Members of the Copom
Gabriel Muricca Galípolo – Governor
Ailton de Aquino Santos
Diogo Abry Guillen
Gilneu Francisco Astolfi Vivan
Izabela Moreira Correa
Nilton José Schneider David
Paulo Picchetti
Renato Dias de Brito Gomes
Rodrigo Alves Teixeira

Department Heads in charge of technical presentations (attending on July 29 and on the morning of July 30)
André de Oliveira Amante	Open Market Operations Department
Euler Pereira Gonçalves de Mello	Research Department (also attending on the afternoon of 7/30)
Fábio Martins Trajano de Arruda	Department of Banking Operations and Payments System
Luís Guilherme Siciliano Pontes	International Reserves Department
Marcelo Antonio Thomaz de Aragão	Department of International Affairs
Ricardo Sabbadini	Department of Economics

Other participants (attending on July 29 and on the morning of July 30)
Alexandre de Carvalho	Office of Economic Advisor
André Maurício Trindade da Rocha	Head of the Financial System Monitoring Department
Angelo Jose Mont Alverne Duarte	Head of Office of the Deputy Governor for Licensing and Resolution (attending on the mornings of 7/29 and 7/30)
Arnaldo José Giongo Galvão	Press Office Advisor
Cristiano de Oliveira Lopes Cozer	General Counsel
Edson Broxado de França Teixeira	Head of Office of the Deputy Governor for Supervision
Eduardo José Araújo Lima	Head of Office of the Deputy Governor for Economic Policy
Fernando Alberto G. Sampaio C. Rocha	Head of the Department of Statistics
Isabela Ribeiro Damaso Maia	Head of the Sustainability and International Portfolio Investors Unit (attending on the mornings of 7/29 and 7/30)
Julio Cesar Costa Pinto	Head of Office of the Governor
Laura Soledad Cutruffo Comparini	Deputy Head of the Department of Economics
Leonardo Martins Nogueira	Head of Office of the Deputy Governor for Monetary Policy
Marcos Ribeiro de Castro	Deputy Head of the Research Department
Mardilson Fernandes Queiroz	Head of the Financial System Regulation Department
Olavo Lins Romano Pereira	Deputy Head of the Department of International Affairs
Renata Modesto Barreto	Deputy Head of the Department of Banking Operations and Payments System
Ricardo da Costa Martinelli	Deputy Head of the International Reserves Department
Ricardo Eyer Harris	Head of Office of the Deputy Governor for Regulation
Ricardo Franco Moura	Head of the Prudential and Foreign Exchange Regulation Department
Rogerio Antonio Lucca	Executive Secretary
Simone Miranda Burello	Advisor in the Office of the Deputy Governor for Monetary Policy

The members of Copom analyzed the recent performance and prospects for the Brazilian and international economies, under the monetary policy framework, whose objective is to comply with the inflation targets established by the National Monetary Council. This document represents Copom’s best effort to provide an English version of its policy meeting minutes. In case of inconsistency, the Portuguese version prevails.

Economics-Watching: Earmarking in Programmable Payments

[from the Federal Reserve Bank of Atlanta]

by Chris Colson, payments expert, Atlanta Fed Payments Forum

As programmable payments become more common, an old-school budgeting idea is making a comeback: earmarking. At its core, earmarking just means setting money aside for a specific purpose—like rent, payroll, or taxes—so it’s only used for that. It’s a simple concept, but when combined with automation, it could be the budgeting upgrade many people and businesses have been waiting for.

The word “earmark” dates to the 15th century, when farmers would notch their animals’ ears to show ownership. Over time, it came to mean setting something aside for a specific use. In personal finance, this idea lives on in the envelope system, where people divide up cash into labeled envelopes—groceries, bills, savings—and stick to those limits. It works, but let’s face it: handling cash envelopes isn’t exactly practical in a digital-first world.

That’s where programmable payments come in. These are payments that happen automatically based on rules you set. Instead of stuffing envelopes, you set up digital “buckets” for your money. Maybe 20 percent of every gig work payment goes straight to a tax account or your weekly paycheck splits into rent, groceries, and savings buckets automatically.

Through banking apps, digital wallets, or budgeting platforms, consumers choose or create spending categories and assign rules—like percentages, spending limits, or triggers. For example, you can link your checking account to a programmable wallet that auto-transfers money into savings or investments accounts on payday, or prevents spending on dining once you hit your monthly cap.

It’s like having a personal money assistant organizing your finances, paying your bills, and keeping you on budget without you having to think about it. For businesses, this brings new efficiency to managing payroll, vendor payments, and escrow accounts.

The timing couldn’t be better. Many Americans struggle financially. According to the Federal Reserve’s 2024 Survey of Household Economics and Decision-making (SHED), nearly 37 percent of adults wouldn’t be able to cover a $400 emergency without borrowing or selling something. Earmarking can help build emergency savings before the money gets spent elsewhere.

There’s also a big gap when it comes to retirement readiness. The Fed’s Survey of Consumer Finances (SCF) found that just over half of families have any kind of retirement account, and many people say they’re not on track with long-term savings. Automated payments into earmarked savings buckets can help make regular saving less of a hassle and more of a habit.

Even our spending habits show why this works. The Fed’s 2025 Diary of Consumer Payment Choice shows people still prefer cash for small purchases. Programmable payments bring that discipline into the digital world without the need for physical cash.

The upside of earmarking with programmable payments is clear: automation takes the work out of budgeting, real-time visibility helps track your money, and flexible rules let you customize how it all works. It’s also useful in more regulated settings like distributing aid or managing shared accounts because it adds accountability.

But if the rules are too rigid or confusing, that can frustrate users. Businesses may need to integrate programmable features with legacy systems, which takes time and money. And over reliance on automation poses risks—glitches, errors, or outdated settings can cause missed payments or unintended consequences.

Still, earmarking with programmable payments is a smart, modern take on a tried-and-true budgeting technique. It may not be right for every situation—and some apps already do this behind the scenes—but used intentionally, it can bring clarity, control, and purpose to the way money flows. In a complex financial world, that’s something both individuals and experts can benefit from.

Economics-Watching: Kuwait’s Banking Sector Posts Solid Credit Growth in October

[from NBK Group’s Economic Research Department, 21 November, 2024]

Kuwait: Solid credit growth in October driven by household credit. Domestic credit increased by a solid 0.4% in October, driving up YTD growth to 2.9% (3.2% y/y). The recovery in household credit continued, with growth in October at a solid 0.5%, resulting in a YTD increase of 2.4%. While y/y growth in household credit remains a limited 2.3%, annualized growth over the past four months is a stronger 4.7%. Business credit inched up by 0.2% in October, pushing YTD growth to 3.6% (2.9% y/y). Industry and trade drove business credit growth in October while construction and trade are the fastest growing YTD at 17% and 8%, respectively. In contrast, the oil/gas sector continued its downtrend, deepening the YTD decrease to 13%. Excluding the oil/gas sector, growth in business credit would increase to a relatively good 5% YTD. Looking ahead, the last couple of months of the year (especially December) are usually the weakest for business credit, likely due to increased repayments and write-offs, but it will not be surprising if the recovery in household credit is generally sustained, especially given the commencement of the interest rate-cutting cycle. Meanwhile, driven by a plunge in the volatile public-institution deposits, resident deposits decreased in October, resulting in YTD growth of 2.4% (4.2% y/y). Private-sector deposits inched up in October driving up YTD growth to 4.5% compared with 10% for government deposits while public-institution deposits are a big drag (-14%). Within private-sector KD deposits, CASA showed further signs of stabilization as there was no decrease for the third straight month while the YTD drawdown is a limited 1%.

Chart 1: Kuwait credit growth

(% y/y)

Chart 2: UK inflation

(%)

Egypt: IMF concludes mission for fourth review, sees external risks. The IMF concluded its visit to Egypt after spending close to 2 weeks, holding several in-person meetings with the Egyptian authorities, private sector, and other stakeholders. The IMF released a statement mentioning that the current ongoing geopolitical tensions in the region in addition to an increasing number of refugees have affected the external sector (Suez Canal receipts down by 70%) and put severe pressure on the fiscal front. The Fund acknowledged the Central Bank of Egypt’s commitment to unify the exchange rate, maintain the flexible exchange rate regime, and keep inflation on a firm downward trend over the medium term by substantially tightening monetary policy. It also highlighted that continued policy discipline was also a key to containing fiscal risks, especially those related to the energy sector. The Fund, as always, re-iterated the need for promoting the private sector mainly through an enhanced tax system and accelerating divestment plans of the state firms. Finally, it also said that the discussions would continue over the coming days to finalize the agreement on the remaining policies and reform plans. However, the release did not provide any clear hints about the conclusion on the government’s earlier request to push the timeline of some of the subsidy moves.

Oman: IMF completes article IV with a strong outlook for the economy in 2025. Oman’s economy continued to expand with growth reaching 1.9% in the first half of 2024 (versus 1.2% in 2023), despite being weighed down by OPEC+ mandated oil production cuts as non-oil GDP grew a stronger 3.8% y/y in H1 (versus 1.8% in 2023). The fiscal and current account balances remain in a comfortable situation evident by a decline in public sector debt and the recent rating upgrade to investment grade. The Fund expects Oman’s economic growth to see a strong rebound in 2025, supported by higher oil production. It also believes that fiscal and current account balances will remain in surplus but at lower levels. Key risks to the outlook stem from oil price volatility and intensifying geopolitical tensions. The IMF also mentioned that further efforts are needed to raise nonhydrocarbon revenues through more tax policy measures and the phasing out of untargeted subsidies which should help in freeing up resources to finance growth under the government’s diversification agenda.

UK: Inflation rises more than forecast, reinforcing BoE’s caution on rate cuts. UK CPI inflation increased to 2.3% y/y in October from 1.7% the previous month, slightly above the market and the Bank of England’s forecast of 2.2%. On a monthly basis too, inflation rose to 0.6%, a seven-month high, from September’s no change. The steep rise was mainly driven by an almost 10% rise in the household energy price cap effective from October. Core inflation also accelerated to 3.3% y/y (0.4% m/m) from 3.2% (0.1% m/m). While goods prices continued to fall (-0.3% y/y), service prices rose at a faster rate of 5% from 4.9%. Recently, the Bank of England had cautioned about inflation quickening next year (projecting a peak rate of 2.8% in Q3 2025), citing the impact of higher insurance contributions and rising minimum wages as outlined in the latest government budget. Therefore, with inflation rising above forecast, the bank will likely slow the pace of monetary easing after delivering two interest rate cuts of 25 bps earlier, with markets now seeing only two additional cuts by the end of 2025.

Eurozone: ECB warns of fiscal and growth risks in its latest Financial Stability Review [archived PDF]. In its most recent Financial Stability Review (November) [archived PDF], the European Central Bank warned that elevated debt and fiscal deficit levels and anemic long-term growth could expose sovereign debt vulnerabilities in the region, stoking concerns of a repeat of the 2011 sovereign debt crisis. Maturing debt being rolled over at much higher borrowing rates raising debt service costs poses risks to countries with little fiscal space and leaves certain governments exposed to market fluctuations. The bank also emphasized the risks of high equity valuations, low liquidity and a greater concentration of exposure among non-banks. Moreover, it sees current geopolitical uncertainties and the possibility of more trade tensions as heightening risks. The Eurozone’s current government debt-to-GDP ratio stands at 88%, but the underlying data suggest a much more precarious situation with Greece, Italy, and France’s ratios at 164%, 137% and 112%. Recently, concerns about France’s high fiscal deficit (around 5.9% of GDP) and elevated debt levels saw yields on the country’s bonds rise steeply, widening the spread gap with German bonds to the highest level in over a decade.

Stock markets	Index	Daily Change (%)	YTD Change (%)
Regional
Abu Dhabi (ADI)	9,405	-0.23	-1.80
Bahrain (ASI)	2,043	-0.37	3.62
Dubai (DFMGI)	4,761	0.61	17.26
Egypt (EGX 30)	30,588	-0.33	23.18
GCC (S&P GCC 40)	709	0.09	-0.52
Kuwait (All Share)	7,353	-0.08	7.86
KSA (TASI)	11,868	-0.07	-0.83
Oman (MSM 30)	4,609	0.00	2.10
Qatar (QE Index)	10,438	0.12	-3.62
International
CSI 300	3,986	0.22	16.17
DAX	19,005	-0.29	13.45
DJIA	43,408	0.32	15.17
Eurostoxx 50	4,730	-0.45	4.60
FTSE 100	8,085	-0.17	4.55
Nikkei 225	38,352	-0.16	14.61
S&P 500	5,917	0.00	24.05

3m interbank rates	%	Daily Change (bps)	YTD Change (bps)
Bahrain	5.86	-1.29	-66.34
Kuwait	3.94	0.00	-37.50
Qatar	6.00	0.00	-25.00
UAE	4.43	3.81	-89.96
Saudi	5.50	-4.75	-73.14
SOFR	4.52	-0.09	-81.13

Bond yields	%	Daily Change (bps)	YTD Change (bps)
Regional
Abu Dhabi 2027	4.66	5.00	33.9
Oman 2027	5.49	6.00	33.0
Qatar 2026	4.68	6.00	16.1
Kuwait 2027	4.69	3.00	35.0
Saudi 2028	4.96	1.00	43.9
International 10-year
US Treasury	4.41	1.77	55.3
German Bund	2.34	0.35	31.2
UK Gilt	4.47	2.60	93.0
Japanese Gov’t Bond	1.07	1.0	45.4

Exchange rates	Rate	Daily Change (%)	YTD Change (%)
KWD per USD	0.31	0.04	-0.05
KWD per EUR	0.32	-0.46	-1.98
USD per EUR	1.05	-0.49	-4.47
JPY per USD	155.43	0.50	10.19
USD per GBP	1.27	-0.25	-0.62
EGP per USD	49.67	0.34	61.00

Commodities	$/unit	Daily Change (%)	YTD Change (%)
Brent crude	72.81	-0.68	-5.49
KEC	73.78	0.74	-7.26
WTI	68.87	-0.75	-3.88
Gold	2,648.2	0.80	28.40

Disclaimer: While every care has been taken in preparing this publication, National Bank of Kuwait accepts no liability whatsoever for any direct or consequential losses arising from its use. Daily Economic Update is distributed on a complimentary and discretionary basis to NBK clients and associates. This report and previous issues can be found in the “News & Insight / Economic Reports” section of the National Bank of Kuwait’s web site. Please visit their web site, nbk.com, for other bank publications.

Navigating through Sources

Consciousness and the Novel: Connected Essays by the famous British novelist David Lodge is a classic work published by Harvard in 2004.

In this Lodge book, the author mentions a famous British society-watcher, Charles Masterman. In 1909, Masterman published his best-known study, The Condition of England, which tells us that England at that time experienced a greater inflow of migrants into London than in previous centuries taken together.

[Charles Frederick Gurney Masterman PC MP (24 October 1873 – 17 November 1927) was a British radical Liberal Party politician, intellectual and man of letters. He worked closely with such Liberal leaders as David Lloyd George and Winston Churchill in designing social welfare projects, including the National Insurance Act 1911. During the First World War, he played a central role in the main government propaganda agency.]

We then notice that one recurrent topic in various movie versions of the E. M. Forster novel Howards End (1910, set in those years) is the “horrifying” trend where great mansions and stately estates (Howards End and Wickham Place, say, in the novel) are all being demolished and replaced by ugly “flats.”

There must be, one thinks, a direct link between all the massive migrations into London at the time and all the proliferating flats at the “expense” of beautiful and historical villas. (This “demolish” trend is also part of the story of the classic novel A Handful of Dust by Evelyn Waugh, 1934)

In the predecessor to Downton Abbey called Upstairs, Downstairs, the story ends in 1930 with a sign outside the great “house” at Eaton Place offering flats coming soon, as the demand for housing (think of San Francisco today) is so massive that sellers can make a fortune selling out to developers, move into one of the flats being created, and live off the sale for the rest of their lives and “duck” the higher “Lloyd George taxes.” (In Downton Abbey, the dowager played by Maggie Smith repeatedly lashes out at Prime Minister Lloyd George as a kind of financial traitor.)

We see from this simple example how students should learn to “jump” between books and movies and TV miniseries to get a stronger focus on what’s being depicted on screens and pages and not just “swim along” at the surface level without any “drilling down.”

Education is largely the struggle or habit where students learn to bring pattern and structure out of “chaos,” thus giving narratives some overall shape.

This reminds one of the opening lines of Beryl Markham’s 1942 Africa memoir:

“How is it possible to bring order out of memory? I should like to begin at the beginning, patiently, like a weaver at his loom. I should like to say, ‘This is the place to start; there can be no other.’ ”
from West with the Night by Beryl Markham

This is a similar impetus: to bring order out of memory or others’ memories in books and movies from various times and places.

Penn Wharton: U.S. Budget Model

The U.S. Fiscal Imbalance: June 2022

[from Penn Wharton, University of Pennsylvania]

We estimate that the U.S. federal government faces a permanent fiscal imbalance equal to over 10 percent of all future GDP under current law where future federal spending outpaces tax and related receipts. Federal government debt will climb to 236 percent of GDP by 2050 and to over 800 percent of GDP by year 2095 (within 75 years).

We estimate that, under current law, the U.S. federal government faces a permanent present-value fiscal imbalance of $244.8 trillion, or 10.2 percent of all future GDP. This imbalance is equal to 52.7 percent of all future government receipts, 35.6 percent of all future expenditures, or some combination of both.
Even ignoring the negative macroeconomic feedback effects of rising debt on GDP in these “conventional” estimates, government debt climbs to 236 percent of GDP by 2050. Thereafter, debt continues to climb and exceeds over 800 percent of GDP within 75 years, by the year 2095.
Under the alternative “no-sunset” policy—where sunsets in 2017 Tax Cuts and Jobs Act are not enforced—the fiscal imbalance increases to $276.4 trillion, or 11.5 percent of all future GDP.
For the major entitlement programs—including Social Security, Disability and Medicare Part A—about one-half (54 percent) of the fiscal imbalance in perpetuity comes from past and current generations receiving more in benefits than they paid in taxes.

Read the full analysis [archived PDF].

View the data [archived XLSX].

Brief based on work by Agustin Diaz, Jagadeesh Gokhale and Kent Smetters. Prepared by Mariko Paulson.

EconoSpeak: Tariffs and Inflation

[from EconoSpeak, posted by Kevin Quinn]

Jason Furman and Janet Yellen have both suggested that cutting Trump’s tariffs would be anti-inflationary. But most economists agree that the incidence of the tariffs is for the most part on U.S. consumers, not foreign suppliers (pace the treasonous and ignorant former president, who crowed about all the revenues we were raising from China). So how is a tax cut anti-inflationary? There is a supply-side effect, which is all to the good, but the demand-side effects may well wash that out. So get rid of the tariffs but reverse the Trump tax cuts, which Manchin favors, through reconciliation. Taxes remain the same, so we’ve neutralized the effects on demand; and we still get the good supply side effects of a more rational global division of labor.

The Urban Institute’s State and Local Finance Initiative

The Urban Institute recently published its quarterly State Tax and Economic Review, which examines state tax revenues trends and the underlying economic factors.

They find that most states ended the year with surpluses. Yet states worry that the stimulus effect of the Trump tax cut is disappearing, forecasting weaker growth in income tax revenues for the fiscal year 2020.

[Archived PDF]

These analyses are based on data gathered directly from individual states. This collection is the only timely and accurate data source covering state tax revenue and fiscal performance for baselines and comparisons.

Abstract

State government tax revenues rebounded in the first quarter of 2019 after declines in the fourth quarter of 2018. However, year-over-year growth was substantially weaker in the first quarter of 2019 than in the final quarter of 2017 and the first three quarters of 2018. Most of the recent weakness was attributable to personal income tax declines.

State personal income taxes declined for the second consecutive quarter, reflecting a spike in state income tax payments in December 2017 and January 2018 in response to changes made in the TCJA. However, preliminary data for the second quarter of 2019 indicate double-digit growth in state personal income tax revenues, mostly because of higher final payments and delayed estimated payments filed in April. The surge in personal income tax revenues made up for earlier shortfalls in most states and put the revenues back on track for the states to close the budget books for fiscal year 2019 without shortfalls.

[Archived PDF]

If you are interested in accessing this data, please visit the Urban Institute to subscribe to its data services.

Economics-Watching IMF RESMF Newsletter (November 2019)

from the IMF:

IMF Research Perspectives, volume 20, number 1

Featured Policy Work

Investigating the Impact of Global Stablecoins

The provision of financial services and products is undergoing rapid transformation, including through the development of stablecoins, which seek to stabilize the price of a digital currency by linking its value to that of a pool of assets. Stablecoins can potentially serve as a means of payment and store of value, and may contribute to the development of global payment arrangements that are faster, cheaper, and more inclusive. Yet these potential benefits can only be realized if significant risks are addressed. Stablecoin initiatives built on an existing big tech platform with a global customer base may have the potential to scale rapidly, and could pose regulatory and oversight challenges and risks related to consumer protection, fair competition, and the combating of money laundering and terrorism financing, among others, as well as have a significant impact on public policy goals such as financial stability and monetary policy transmission. This paper, written jointly by G7 members, the BIS, and the IMF, including RESMF staff, scopes the causes and implications of the adoption of global stablecoins, and the potential policy efforts to rein in the risks they can bring about.

Read the full report [Archived PDF].

Recent Research

IMF Research Perspectives, Volume 20, Number 1 [Archived PDF]

Blog

The Mobilisation Effects of Multilateral Development Banks

by Giulia Lotti & Andrea Presbitero

Filling the investment gap to achieve the sustainable development goals is one of the most important development challenges. Multilateral development banks can play an important role through a stronger engagement to attract additional resources from the private sector. This column uses data on syndicated lending to a large set of developing countries and shows that MDBs are able to crowd in bank credit to sectors to which they lend. The role of MDBs could be relevant, as they can mobilize up to seven dollars in bank credit for each dollar invested.

[Archived PDF]

Working Papers

Designing Central Bank Digital Currencies

by Itai Agur, Anil Ari & Giovanni Dell’Ariccia

We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of payment instruments dependent on the number of their users. CBDC can be designed with attributes similar to cash or deposits, and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank’s tradeoff.

[Archived PDF]

One Ring to Rule Them All? New Evidence on World Cycles

by Eric Monnet & Damien Puy

We estimate world cycles using a new quarterly dataset of output, credit and asset prices assembled using IMF archives and covering a large set of advanced and emerging economies since 1950. World cycles, both real and financial, exist and are generally driven by US shocks. But their impact is modest for most countries. The global financial cycle is also much weaker when looking at credit rather than asset prices. We also challenge the view that synchronization has increased over time. Although this is true for prices (goods and assets), this not true for quantities (output and credit). The world business and credit cycles were as strong during Bretton Woods (1950–1972) as during the Globalization period (1984-2006). For most countries, the way their output co-moves with the rest of the world has changed little over the last 70 years. We discuss the reasons behind these new findings and their policy implications for small open economies.

[Archived PDF]

Optimal Macroprudential Policy and Asset Price Bubbles

by Nina Biljanovska, Lucyna Gornicka & Alexandros Vardoulakis

An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.

[Archived PDF]

Doing More for Less? New Evidence on Lobbying and Government Contracts

by Senay Agca, Deniz O Igan, Fuhong Li & Prachi Mishra

Why do firms lobby? This paper exploits the unanticipated sequestration of federal budget accounts in March 2013 that reduced the availability of government funds disbursed through procurement contracts to shed light on this question. Following this event, firms with little or no prior exposure to the federal accounts that experienced cuts reduced their lobbying spending. In contrast, firms with a high degree of exposure to the cuts maintained and even increased their lobbying spending. This suggests that, when the same number of contractors competed for a piece of a reduced pie, the more affected firms likely intensified their lobbying efforts to distinguish themselves from the others and improve their chances of procuring a larger share of the smaller overall. These findings are stronger in government-dependent sectors and when there is intense competition. The evidence is more consistent with a rent-seeking explanation for lobbying.

[Archived PDF]

The Long Shadow of the Global Financial Crisis: Public Interventions in the Financial Sector

by Deniz O Igan, Hala Moussawi, Alexander F. Tieman, Aleksandra Zdzienicka, Giovanni Dell’Ariccia, Paolo Mauro

We track direct public interventions and public holdings in 1,114 financial institutions over the period 2007–17 in 37 countries based on publicly available information. We use aggregate official data to validate this new dataset and estimate the fiscal impact of interventions, including the value of asset holdings remaining in state hands at end-2017. Direct public support to financial institutions amounted to $1.6 trillion ($3.5 trillion including guarantees), with larger amounts allocated to lower capitalized and less profitable banks. As of end-2017, only a few countries had fully divested the initial support they provided during the crisis. Public holdings were divested faster in better capitalized, more profitable, and more liquid banks, and in countries where the economy recovered faster. In countries where the government stake remained high relative to the initial intervention, private investment and credit growth were slower, financial access, depth, efficiency, and competition were worse, and financial stability improved less.

[Archived PDF]

Do Old Habits Die Hard? Central Banks and the Bretton Woods Gold Puzzle

by Eric Monnet & Damien Puy

Why did monetary authorities hold large gold reserves under Bretton Woods (1944–1971) when only the US had to? We argue that gold holdings were driven by institutional memory and persistent habits of central bankers. Countries continued to back currency in circulation with gold reserves, following rules of the pre-WWII gold standard. The longer an institution spent in the gold standard (and the older the policymakers), the stronger the correlation between gold reserves and currency. Since dollars and gold were not perfect substitutes, the Bretton Woods system never worked as expected. Even after radical institutional change, history still shapes the decisions of policymakers.

[Archived PDF]

The Price of Capital Goods: A Driver of Investment Under Threat

by Weicheng Lian, Natalija Novta, Evgenia Pugacheva, Yannick Timmer & Petia Topalova

Over the past three decades, the price of machinery and equipment fell dramatically relative to other prices in advanced and emerging market and developing economies. Using cross-country and sectoral data, we show that the decline in the relative price of tangible tradable capital goods provided a significant impetus to the capital deepening that took place during the same time period. The broad-based decline in the relative price of machinery and equipment, in turn, was driven by the faster productivity growth in the capital goods producing sectors relative to the rest of the economy, and deeper trade integration, which induced domestic producers to lower prices and increase their efficiency. Our findings suggest an additional channel through which rising trade tensions and sluggish productivity could threaten real investment growth going forward.

[Archived PDF]

Credit Supply and Productivity Growth

by Francesco Manaresi & Nicola Pierri

We study the impact of bank credit on firm productivity. We exploit a matched firm-bank database covering all the credit relationships of Italian corporations, together with a natural experiment, to measure idiosyncratic supply-side shocks to credit availability and to estimate a production model augmented with financial frictions. We find that a contraction in credit supply causes a reduction of firm TFP growth and also harms IT-adoption, innovation, exporting, and adoption of superior management practices, while a credit expansion has limited impact. Quantitatively, the credit contraction between 2007 and 2009 accounts for about a quarter of observed the decline in TFP.

[Archived PDF]

The Motives to Borrow

by Antonio Fatás, Atish R. Ghosh, Ugo Panizza & Andrea F Presbitero

Governments issue debt for good and bad reasons. While the good reasons—intertemporal tax-smoothing, fiscal stimulus, and asset management—can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing though budgetary institutions and fiscal rules can play a role in mitigating governments’ tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price—in terms of lower growth and greater output volatility—for excessive debt accumulation.

[Archived PDF]

Discriminatory Pricing of Over-the-Counter Derivatives

by Harald Hau, Peter Hoffmann, Sam Langfield & Yannick Timmer

New regulatory data reveal extensive p r ice discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.

[Archived PDF]

Education and “Then and Now” Thinking

The great historian A. J. P. Taylor (the ideal historian in the opinion of Professor Niall Ferguson of Harvard/Stanford) shows us the “comfortableness” of the world for at least some people before “the guns of August” and WWI destroyed that social world:

“Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post-office and the policeman. He could live where he liked and as he liked. he had no official number or identity card. He could travel abroad or leave his country for ever without a passport or any sort of official permission. He could exchange his money for any other currency without restriction or limit. He could buy goods from any country in the world on the same terms as he bought goods at home. For that matter, a foreigner could spend his life in this country without permit and without informing the police. Unlike the countries of the European continent, the state did not require its citizens to perform military service.

“An Englishman could enlist, if he chose, in the regular army, the navy, or the territorials. He could also ignore, if he chose, the demands of national defence.

“Substantial householders were occasionally called on for jury service. Otherwise, only those who helped the state who wished to do so.

“The Englishman paid taxes on a modest scale: nearly 200 million pounds in 1913-14, or rather less than 8% of national income. The state intervened to prevent the citizen from eating adulterated food or contracting certain infectious diseases. It imposed safety rules in factories, and prevented women, and adult males in some industries, from working excessive hours. The state saw to it that children received education up to the age of 13.

“Since 1 January 1909, it provided a meagre pension for the needy over the age of 70. Since 1911, it helped to insure certain classes of workers against sickness and unemployment. This tendency to more state intervention was increasing. Expenditure on the social services had roughly doubled since the Liberals took office in 1905.

Still, broadly speaking, the state acted only to help those who could not help themselves. It left the adult citizen alone. All this was changed by the impact of the Great War.”

(A. J. P. Taylor, English History 1914-1945, Oxford, 1965, page 1)

It seems hard to argue that life has become more “charming” since then and this pre-WWI seems much more calm, sane and relaxed than the world of 2019. Thinking about “then and now” gives us a feel for the decay in some domains despite the cascade of technologies, gadgets, things.

Then and Now Thinking: Facile Comparisons Lead to “Concept-Fraud”

The economist Arthur Laffer recently received an award from President Trump. Laffer wants to deceptively “cartoonize” reality by arguing that as taxes “go to 100%” (i.e., confiscation), output will go to zero and conversely as taxes “go to zero” output will go to “infinity.”

This is an example of playing with “bad infinities.”

This Laffer argument has been naively compared to David Hume’s economics:

“Back in the eighteenth century, the wise Scot David Hume anticipated David Hume in these 1756 words of sooth:

“‘Exorbitant taxes, like extreme necessity, destroy industry by producing despair; and even before they reach this pitch, they raise raise the wages of the laborer and manufacturer, and heighten the price of all commodities. An attentive disinterested legislature will observe the point where the emolument ceases and the prejudice begins.’”

(David Hume, Writings on Economics, ed. Eugene Rotwein, Edinburgh, Thomas Nelson and Sons, 1955, page 87)

(quoted in Greed is Not Enough: Reaganomics, Robert Lekachman, Pantheon Books, 1982, page 49)

Reaganomics and Laffer-nomics have nothing to do with David Hume and facile “then-and-now” comparisons, all of which are false since the “anarcho-capitalism” of Reagan/Thatcher views has noting to do with Hume.

Thatcher said: “properly speaking, there is no such thing as society. There are only individuals.”

But Hume believes the exact opposite as a socially conscious brand of conservative:

“Hume cherished the structures that sustain our social life. He was in this respect deeply conservative, in the good sense of the conservationist of the shapes and forms which these institutions have taken.

“And of course he was deeply mistrustful of any scatterbrained project of doing better, by promoting anarchism or society without government or law, or dismantling the institutions of contract or private property.

“He would have had absolutely no patience whatsoever with the contemporary takeover of social ideals by monetary and market values.

“When free-marketeers say that there is no such thing as society, they are denying the very arches needed to sustain contracts, law, government, and markets in the first place, and then knavery loses its stigma, and we may well expect the worst, as their practice becomes ‘answerable’ to their ‘speculation.’”

(quoted in How to Read Hume, Simon Blackburn, Granta, 2008, page 70)

Deceivers make duplicitous linkages between hallowed names and ideas of the past and the dangerously “tricky” present.

Thus, Hume-to-Laffer linkages and trajectories makes no sense whatsoever. This is an example of “then-and-now thinking” used for “concept-fraud.”