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SPI Management Newsletter 18.08.23

Rising Tourism Inflation Puts ECB on Edge

Tourist spots across Europe, notably the Greek islands, are witnessing a significant uptick in prices. This isn't solely due to increased demand but also mirrors the broader inflationary trends.

European tourism-centric businesses, such as Venice's hotels, have adjusted their prices by approximately 20% to counteract the rise in operational costs. Energy bills, for instance, have skyrocketed, directly influencing other dependent sectors.

This wave of inflation, particularly stemming from the tourism industry, has the European Central Bank (ECB) worried. The rapid increase in prices for flights, accommodations, and holiday packages, especially as the industry rebounds to near pre-pandemic levels, could undermine the ECB's efforts to maintain price stability. The surge in tourism prices is evident across the board. Accor, Europe’s largest hotel chain, has seen a room rate increase of 18% in the first half of the year. Furthermore, data indicates a 31.6% price increase in European flights compared to the previous year.

Interestingly, the rise in costs hasn't deterred tourists. In fact, there's been an influx, especially from long-haul destinations like the U.S. Surveys suggest that 41% of these tourists anticipate spending more than €1,500 per person on summer trips this year, an uptick from the previous year's 33%.

Several European countries, including Italy, Greece, Croatia, and Spain, are experiencing a tourism boom, with numbers even surpassing pre-pandemic levels. However, this isn't entirely rosy for hoteliers. Many argue that the rate increases, although substantial, haven't adequately compensated for the broader inflation since 2019. Additionally, a significant portion is still burdened with debts from the pandemic era.

The persistent inflation in the tourism sector may compel the ECB to re-evaluate its stance on interest rates. Though there was an indication to pause rate hikes in their upcoming policy review, continued inflation might necessitate a contrary decision.

China's Central Bank Reinforces Renminbi Amid Economic Uncertainties

Amid growing concerns for China's economic wellbeing, the People’s Bank of China (PBoC) has amplified measures to stabilize the renminbi. Recent unsettling economic data, displaying declining exports and dwindling consumer trust, has exacerbated the situation.

A sudden interest rate drop intensified the pressure on the renminbi. State banks responded by buying more renminbi while shedding dollars. On Friday, the PBoC established the renminbi's daily midpoint at Rmb7.2006 to the dollar, notably differing from Bloomberg's analysts' forecast of 7.3047. This deviation is the largest since 2018.

The PBoC's attempt to boost growth led to a substantial short-term liquidity injection, its biggest since March. However, high US interest rates and the dollar's strength make it challenging to cut rates without affecting the renminbi.

Market analysts anticipate the exchange rate to potentially surpass last year's low, Rmb7.3274, during China's COVID-19 peak. Currently, the renminbi stands at 7.2825 against the dollar. China's economic recovery has been sluggish post-pandemic, with feeble trade activities and unimpressive consumer spending. This year's economic growth goal stands at a modest 5%, a multi-decade low.

Bitcoin Faces Sell-off Amid US Regulatory Actions and Rising Interest Rates

Bitcoin experienced a sharp 8% decline in a single trading hour on Thursday, wiping out gains since June, and briefly touching $25,409. This drop paralleled downturns in other markets and came alongside news that Elon Musk's SpaceX had significantly reduced its Bitcoin holdings. Meanwhile, the US regulatory landscape grows tougher, with the SEC taking legal action against major cryptocurrency platforms Binance and Coinbase. Additionally, shifts in the US economy, including the Federal Reserve's recent interest rate hike—its highest in 22 years—have further impacted the digital currency market.

Adapted from WSJ, FT, NYT, Reuters, CNBC, Bloomberg

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