US Treasury secretary Janet Yellen has told the US Congress that North America was facing "unacceptable levels of inflation" and the Australian share market has regained some ground after yesterday's interest rate rise-fuelled slump.
Ms Yellen appeared before the Senate Finance Committee and was forced by legislators to defend her previous comments that rising prices were "transitory".
Ms Yellen said she regretted the statements and said that inflation was the "top economic problem at this point".
"I was not envisioning impacts on food and energy prices we've seen from Russia's invasion of Ukraine."
Ms Yellen told CNN last week: "I think I was wrong then about the path that inflation would take."
It was the most direct concession from the Biden administration that officials failed to see the high risk of persistent inflation.
Federal Reserve chair Jerome Powell also previously described price rises as temporary.
'Toxic' stagflation
The World Bank has warned of a nightmare scenario of 1970s style stagflation and recession in some countries, because of the COVID-19 pandemic and the war in Ukraine.
In its latest Global Economic Prospects report, the World Bank said the Russian invasion of Ukraine has magnified the slowdown in the global economy and "a protracted period of feeble growth and elevated inflation" could become reality, raising the risk of stagflation.
The bank forecast that global growth is expected to slump from 5.7 per cent in 2021 to 2.9 per cent this year, down from its 4.1 per cent growth forecast in January.
Growth is forecast to hover around 2.9 per cent over 2023-24 as the war in Ukraine disrupts activity, investment and trade, demand fades, and government and central bank stimulus is withdrawn.
"Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality."
The World Bank's Ayhan Kose said the global situation was a "perfect storm" with the war in Ukraine adding to global inflation and creating a food crisis amid the risk of "toxic" stagflation.
"For economists, it is the type of problem difficult to overcome. Now, you need to, of course, find a way to increase supply so you reduce price pressures or to reduce demand. Again, to reduce price pressures. But both of them of course have its own challenges."
Banks limit ASX gains
The Australian share market open higher after yesterday's 1.5 per cent hit after the Reserve Bank raised official interest rates by a bigger than expected 0.5 percentage points to 0.85 per cent in what some economists called a "hawkish surprise".
It rose nearly 1 per cent at one point, boosted by tech stocks, miners and oil firms, but ran out of steam by the close as, one by one, all the big banks raised their mortgage interest rates in line with the RBA.
The All Ordinaries rose 0.4 per cent to 7,347, while the ASX 200 added 0.4 per cent as well to 7,121, with 10 out of 11 sectors making gains.
CommSec said the banks had their worst day in a year and energy stocks had their best day since early March.
Seven out of the top 10 losers on the ASX 200 were financial and real estate stocks.
Of the big four, Westpac did the worst (-6.1pc), followed by the Commonwealth Bank (-4.4pc), then National Australia Bank (-4pc), and ANZ (-2.3pc).
Bendigo Bank slumped 7.2 per cent to $9.81, the worst performer in the ASX 200.
In an economics note, National Australia Bank chief economist Alan Oster forecast two more 0.5 percentage point rate rises by the RBA in July and August.
"While this would be around the pre-pandemic level, it is likely to still be considered well short of neutral given the pickup in inflation relative to pre-pandemic levels."
Changes at the top for Boral
Construction supplies maker Boral appointed the former boss of ASX listed Cleanaway Waste Management Vik Bansal as its chief executive and managing director.
Current boss Zlatko Todorcevski will stay on until the transition is complete.
Boral shares surged 14.7 per cent by the close.
The best performer on the ASX 200 was toll road operator Atlas Arteria (+16.2pc) after industry super fund investor IFM Global Infrastructure Fund took a 15 per cent stake and said it was considering a takeover bid.
Uranium miner Paladin Energy (+13.5pc) was another top performer.
Among the losers were buy now, pay later firm Zip (-3pc), which fell for the seventh day in a row. It has now lost one-third of its value over a week, according to CommSec.
Aussie dollar volatile on rate hike
The Australian dollar regained ground overnight to rise by two-thirds of a per cent to around 72.32 US cents at 6:50am AEST.
But by late afternoon it had lost 0.4 per cent to be back below 72 US cents, at 71.96 US cents, as investors worried that rapid rate rises could cause a global recession.
The currency shot up above 72 cents yesterday after the Reserve Bank raised official interest rates by a bigger than expected 0.5 per cent to 0.85 per cent.
Later this week, the European Central Bank is expected to raise rates as well.
Spot gold was buying around $US1848.24 an ounce, down 0.2 per cent, while Brent crude oil rose 0.5 per cent to $US121.21 a barrel.
Wall Street gains
US stocks rose after a choppy session on hopes that global inflation may be peaking.
The Dow Jones index rose 0.8 per cent to 33,180, the S&P500 gained nearly 1 per cent to 4,160, and the Nasdaq Composite rose 0.9 per cent to 12,175.
Retailer Target (-2.3pc) said it will take a short term hit to profits as it cancels orders and marks down unwanted products to clear room for groceries and back to school supplies.
Target cut its quarterly profit margin forecast after seeing a steep drop in quarterly profit in May.
Its profit warning was seen by investors as having a dampening impact on inflation and could help the US central bank and other central banks fight surging price rises, without sharply increasing interest rates and leading to an economic slowdown.
"Target cuts both ways. On the one hand, obviously, it's negative news for Target. But on the other it's one of the first large signals that inflation may be peaking," said Rick Meckler, a partner at Cherry Lane Investments.
"Of course, this is the scenario of a soft landing. That we raise rates, that it reins in inflation some, but it doesn't stop the economy," he said.
British prime minister Boris Johnson survived a no-confidence vote, but the thin margin of victory prompted speculation that he would be replaced, which saw the pound and UK bonds fall.
The FTSE 100 index fell 0.1 per cent to 7,599, the CAC 40 in Paris fell 0.7 per cent to 6,500, and the DAX in Germany down 0.7 per cent to 14,557.
ABC/Reuters
