Take Two: Fed indicates interest rates could rise further; Japan’s GDP beats expectations

What do you need to know?

Federal Reserve (Fed) officials were divided over further interest rate hikes in July, minutes of the US central bank’s latest meeting showed. They voted unanimously to raise interest rates by 25 basis points to between 5.25% and 5.50%. During the meeting, some members of the rate-setting Federal Open Market Committee had favoured keeping interest rates on hold while assessing the impact of monetary tightening, which “could lead to a sharper slowdown in the economy than expected”. Most participants however saw “significant” upside risks to inflation which “could require further tightening.” The potential for further rate rises helped push government bond yields to multi-year highs.

Around the world

China’s central bank took a further step to support its sluggish economy by cutting key policy rates for the second time in three months. The People’s Bank of China unexpectedly reduced borrowing costs on 401bn yuan (US$55bn) worth of one-year medium-term lending facility (MLF) loans to some financial institutions by 15 basis points to 2.50%, the largest cut since 2020. Weaker-than-expected data underlined China’s slowing growth, as industrial output rose 3.7% in July from a year earlier, down on June’s 4.4% rise. Retail sales increased 2.5%, the slowest pace since December and after 3.1% growth the month before.

Figure in focus: 6.0%

Japan notched up its third consecutive quarter of economic growth in the April to June period according to a preliminary estimate. The world’s third-largest economy enjoyed better-than-expected expansion with GDP growth coming in at an annualised rate of 6.0%, up from a revised 3.7% in the first quarter (Q1). The pace of growth, which translates into a quarterly gain of 1.5%, came on the back of stronger exports, which were up 3.2% from the previous quarter – driven largely by a rise in automobile shipments – while inbound tourism boosted services. Elsewhere, Eurozone annual inflation was confirmed to have fallen to 5.3% in July from 5.5% in June.

Words of wisdom

Debt-for-nature swap: A deal in which part of a country’s debt is replaced with cheaper loans by a bank or investor to bring the cost of repayment down and fund conservation. Gabon, the Central African nation known for its biodiversity, has refinanced $500m of its foreign debt, freeing up $163m to fund the expansion of its protected coastal areas and reduce illegal overfishing. This is the first deal of its kind on mainland Africa and comes after Ecuador bought back $1.6bn of its debt in May, releasing $18m annually to protect the Galapagos Islands. Some critics however say there is a need for more comprehensive solutions to fund conservation.

What’s coming up

Two politically and economically important gatherings take place this week. The BRICS group of major emerging economies – Brazil, Russia, India, China and South Africa - holds its 15th summit from Tuesday to Thursday. It is expected to discuss potentially expanding the club of nations to allow other countries to join. In addition, the Fed’s annual Jackson Hole Economic Symposium runs from Thursday to Saturday and could bring more clarity around how higher interest rates could impact the US economy. In terms of economic data, flash August Purchasing Managers’ Indices figures for Japan, the Eurozone, UK, and US are released on Wednesday. On Friday, Germany publishes the final estimate of Q2 GDP.