• As expected, after the Banco Central de Reserva del Perù (BCRP) began its cutting cycle on September 14, there was an additional 25bps cut on October 5, bringing down the policy rate to 7.25%.
• This followed a dramatic fall in inflation in September, with headline CPI growth falling from 5.6% to 5.0%. Core inflation has likewise seen a sharper decline of 3.0% in September compared to 3.8% in August.
• However, the sharper slowdown in inflation can be partly attributed to the downturn in growth that Peru has been experiencing. Peru’s economic growth has remained constrained amid ongoing political- and weather-related headwinds which have resulted in the GDP forecast for 2023 being revised down from 1.8% previously to 0.6%
• Fitch Solutions anticipates that the BCRP will cut rates by another 25bps at the next meeting on November 9. Fitch believes that the rate will end the year at 6.75% and reach 4.50% by end-2024, as inflation has been falling sharply due to a slowdown in growth.
• Risks to the 2024 forecast remain high, as Fitch thinks end-2024 rates may be higher due to supply shocks such as El Niño and political protests.

(Source: Fitch Solutions)

• Oil prices surged by over 4% due to the Israel-Hamas conflict entering its third day after a surprise attack by Hamas on Israel. Global benchmark Brent rose by 4.2% to $88.15 a barrel, and U.S. West Texas Intermediate increased by 4.3% to $86.38 per barrel, marking the largest one-day gain since April 3.
• Hamas initiated a multi-pronged infiltration into Israel using various means, following numerous rockets fired from Gaza into Israel. At the time, at least 700 Israelis and 313 Palestinians have reportedly died in the conflict.
• Analysts view the surge in crude prices as a likely temporary and knee-jerk reaction. The conflict doesn't directly threaten major oil supplies, as neither Israel nor Palestine are significant oil producers. However, the conflict is near a key oil-producing and exporting region, raising concerns about potential impacts on global oil markets.
• Iran's oil supply is a major concern, especially if linked to the conflict, potentially affecting oil exports and prices. Ongoing geopolitical tensions pose a risk of spillover and escalation in the region, potentially affecting oil supply and prices.
• The Strait of Hormuz, a crucial oil transit chokepoint, could be impacted if the conflict involves Iran, potentially leading to a significant increase in oil prices.

(Source: CNBC)

• IMF states that about 5% of global banks are vulnerable to stress with prolonged higher central bank interest rates. A further 30% of banks, including major ones, could be vulnerable during a period of low growth and high inflation ("stagflation").
• The assessment is based on a new global stress test applied to 900 lenders in 29 countries after the recent collapses of major banks. Tobias Adrian, IMF's director, highlights the weak tail of banks in many countries and emphasizes the need for strong regulatory oversight and increased bank resilience.
• The report emphasizes the importance of proactive and intrusive supervision by governments and regulators and advocates for timely corrective actions.
• The IMF calls for urgent efforts to enhance bank resilience by boosting capital levels. The warning comes amidst gatherings of global financial leaders in Marrakech, Morocco, for the IMF and World Bank annual meetings.
• Recent U.S. Federal Reserve interest rate hikes resulted in losses on government bond portfolios for regional U.S. banks, leading to subsequent failures.
• The report suggests that weak banks experience a decline of more than five percentage points in capital levels or fall below a floor of 7%. Under baseline conditions, 55 banks (4% of global assets) were identified as weak, rising to 215 banks (42% of assets) in the stagflation scenario.
• The IMF recommends central banks maintain higher rates until inflation subsides and warns against premature easing of monetary policy based on historical caution. The U.S. Federal Reserve is expected to continue raising rates to manage inflation, signalling another hike before the end of the year and potential rate levels above 5% by 2024.

(Source: Reuters)

• General Accident Insurance Company is looking at opportunities to expand regionally. Managing Director of General Accident Sharon Donaldson says this was a big part of the company's decision to move up to the main market of the Jamaica Stock Exchange.
• The move will provide the company with the opportunity to raise more capital, especially equity capital so that the company can continue with its expansion.
• The company is also looking to go completely online as part of that expansion, so the insured will have a frictionless experience, one such that customers should be able to take out an insurance policy for their car or their home, get a printout of their documents without the hassle of going into a physical location.
• This will enable GENAC to expand its reach, thereby generating more revenues and doing so in a more efficient way which saves cost and bolsters the bottom line.

(Source: RJR News)

• Tourism Minister, Hon. Edmund Bartlett, says the development of new highways across Jamaica will reduce travel time for tourists and increase opportunities within the sector.
• Jamaica will now have infrastructure for land and road communication, the likeness of which has never been seen before. Prime Minister Andrew Holness’ announcement regarding further expanding the road network into Negril will significantly reduce travel time.
• The Montego Bay bypass, which is slated for construction, would enable persons to travel directly to Negril from Montego Bay without going through Lucea, Hopewell and Sandy Bay, which would significantly change the game.
• Bartlett further indicated the buildout of St. Thomas as a brand-new tourism destination is being powered by the southeastern highway, which the Prime Minister will open soon.

(Source: JIS News)

• The International Monetary Fund (IMF) on Tuesday, October 3, significantly raised its 2023 growth forecast for Mexico to 3.2% from a 2.6% forecast issued in July, citing strength in private consumption, services, construction and automotive production. The IMF also raised its 2024 growth forecast for Mexico to 2.1% from 1.5% in July.
• The new forecasts indicate continued economic strength in North America as the IMF prepares to release a new update to its World Economic Outlook global growth forecasts next week during annual meetings in Morocco.
• The IMF said Mexico's expansion was broad-based, with record-low unemployment and record-high manufacturing capacity utilization rates. Mexico has a significant opportunity to capture "nearshoring" of U.S. supply chains due to deep trade links to its northern neighbour.
• "However, capitalizing on this potential and competing with other production locations will require addressing Mexico’s long-standing structural challenges while continuing to pursue prudent macroeconomic policies," the IMF said. "This will require higher and better-targeted public investment, better governance, increasing access to domestic sources of finance, increasing female labour force participation, and pivoting consumption toward cleaner sources of energy," it added.
• That being said, the Fund added that the planned 2024 budget was "unduly procyclical," with increased spending on pensions, wages and flagship investment projects compounded by revenue pressures, for a projected deficit of 5.4% of GDP. It said this "will boost demand at a time when the economy is operating above potential and inflation is not yet back to the central bank's target."
• The IMF said this added growth pressure will likely lead to a higher path for interest rates, a stronger currency, a higher debt-to-GDP ratio and a slower decline in inflation.

(Source: Reuters)

• In line with expectations, Colombia’s Banco de la República (BanRep) decided to hold rates at 13.25% for a third time at its September meeting in a five to two vote.
• In his remarks, the Governor of the Board of Directors, Leonardo Villar, stated that members broadly did not think that the conditions were sound to start loosening policy, given that headline and core inflation remain elevated at 11.4% y-o-y and 9.9% in August, respectively.
• In addition, unemployment surprised to the downside, falling to 9.3% in August, the lowest reading for the month since 2018, signalling that rate tightening has not sufficiently slowed the economy to bring inflation under control.
• Given these factors, Fitch Solutions believes that BanRep is likely to start its rate-cutting cycle in October; if inflation continues to ease in line with its expectations. This underpins Fitch’s interest forecasts of 12.75% by end-2023 and 9.25% by end-2024.
• That said, risks are skewed heavily to the upside: If inflation remains hot, BanRep is likely to delay their rate cuts to December or even to 2024. Additionally, risks to Fitch’s 2024 inflation forecast are also elevated, especially in H124, when the El Niño phenomenon could accelerate food and energy inflation.

(Source: Fitch Solutions)

• The number of Americans filing new claims for unemployment benefits rose moderately last week, while layoffs declined in September, pointing to still-tight labour market conditions at the end of the third quarter. The economy's prospects during the last quarter were bolstered by other data on Thursday showing the trade deficit shrinking to its smallest in nearly three years in August, with exports of capital goods hitting a record high. The economy has so far weathered hefty interest rate increases from the Federal Reserve to cool demand. That resilience raises the risk of the U.S. central bank hiking rates again by year-end.
• Initial claims for state unemployment benefits increased by 2,000 to a seasonally adjusted 207,000 for the week ended Sept. 30, the Labour Department said. Economists polled by Reuters had forecast 210,000 claims for the latest week. For much of September, claims hovered in the lower end of their 194,000-265,000 band for this year.
• Claims could push higher this month as the United Auto Workers (UAW) strike, now in its third week, constrains supply chains and forces manufacturers to temporarily lay off more non-striking workers. Ford Motor, General Motors and Chrysler-parent Stellantis have furloughed and laid off hundreds of workers because of strike impacts.
• Though conditions remain tight, the labour market is gradually cooling. The government reported on Tuesday that there were 1.51 job openings for every unemployed person in August and unfilled positions increased by the most in two years.
• The Commerce Department reported a 9.9% contraction in the trade deficit to $58.3 billion, the lowest since September 2020, beating economists' expectations of $62.3 billion. Exports of goods and services increased by 1.6% to $256.0 billion, driven by a surge in goods exports, particularly capital goods. However, food and beverage exports hit a low point.
• Imports of goods and services fell by 0.7% to $314.3 billion, with a notable decline in consumer and capital goods imports, potentially indicating reduced domestic demand due to higher borrowing costs. Economists predict that trade will contribute significantly to third-quarter GDP growth after being neutral in the previous quarter, expecting a boost of at least one percentage point to GDP growth.
• Economists foresee continued short-term support for economic growth, anticipating that foreign consumers will buy more American goods and the recovering manufacturing industry will bolster growth.

(Source: Reuters)

• The International Monetary Fund (IMF) Managing Director, Kristalina Georgieva, emphasized the need for structural reforms in Germany due to current global economic challenges.
• Germany is perceived as potentially the only major economy contracting in 2023, prompting discussions about it becoming the "sick man of Europe" again.
• The auto industry is a critical area for reform, with Georgieva stressing the need to restructure it for future productivity.
• Germany's auto industry, a significant export sector, is facing challenges due to weakened car production and exports attributed to consumer spending constraints and economic uncertainties.
• The IMF predicts a mild recession in Germany this year but expresses confidence that the country will recover as energy price shocks and inflation subside.
• Globally, the IMF notes a slow and uneven recovery, with the U.S. being the only large economy that has fully recovered from the pandemic's economic impact. Emerging markets and low-income countries are lagging further behind in their recovery. The IMF projects average global growth at 3% over the next five years, down from pre-pandemic levels of around 3.8% over the previous decade.

(Source: CNBC)

• At its meetings on 27 and 28 September 2023, the Bank of Jamaica (BOJ) unanimously agreed to maintain: (i) the policy interest rate (the rate offered to deposit-taking institutions (DTIs) on overnight placements with BOJ) at 7.0%, (ii) tight Jamaican dollar liquidity conditions, and (iii) stability in the foreign exchange market.
• The decision to maintain the monetary policy stance is aimed at ensuring that Jamaica’s inflation rate continues to trend downward to the Bank’s target range of 4.0 to 6.0%. The annual headline inflation rate in August 2023 of 6.8% was above the outturns in July (6.6%), June (6.3%) and May (6.1%) 2023, but much lower than the peak rate of 11.8% recorded in April 2022. Correspondingly, core inflation (which excludes food and fuel prices from the Consumer Price Index (CPI)) increased to 5.6% in August 2023 from 5.5% in July 2023 but was lower than the 8.4% recorded in April 2022.
• As anticipated by the Bank, the mild uptick in inflation between May and August 2023 was driven by several shocks. Increases in telephone and internet rates, the national minimum wage and higher agricultural prices, along with some upward movement in energy-related prices such as water, electricity and transportation costs, contributed to inflation over the period. The other key drivers of inflation, such as grain prices, shipping costs and inflation expectations, however, continued to generally trend downward.
• The Monetary Policy Committee expects that the higher-than-targeted inflation rate over the past four months will continue in September 2023, due to higher agricultural prices, education costs, oil prices and wage pressures. While the Bank is still projecting that inflation will decelerate to the target range in the December 2023 quarter and generally remain there except for some months in 2024, it has heightened its surveillance of the risks to this outlook.
• The risks to the inflation outlook are skewed to the upside. Higher-than-projected future wage adjustments in the context of continued tightness in the domestic labour market, second-round effects from the sharp increase in agricultural price inflation over the first half of 2023, worsening supply chain conditions and continued increases in world oil prices could put further upward pressure on inflation. Downside risks to this outlook include weaker-than-expected global growth, which could reduce domestic demand, and the non-materialisation of some projected increases in regulated prices.
• Future monetary policy decisions will depend on incoming data related to the strength of the potential headwinds to inflation noted above. As such, the Bank will continue to closely monitor the global and domestic economic environments for these potential risks to Jamaica’s inflation rate. If the emerging risks materialise, the MPC noted that it is prepared to take the necessary actions to anchor inflation sustainably within the target range in the shortest possible time.

(Source: BOJ)