Aurelia Butler

FRANKFURT (Reuters) – The European Central Bank is all but certain to keep borrowing costs at a record high on Thursday but is likely to signal that a rate cut could come as soon as June, given a sharp slowdown in inflation and continued economic weakness.The ECB has kept interest rates steady since September but has already signalled that cuts are coming into view, with policymakers awaiting a few more comforting wage indicators before pulling the trigger.The only complication could be if the U.S. Federal Reserve delayed its own policy easing, although even that might slow but not stop the ECB given a widening gap in performance of the world’s biggest economy and the 20-country euro zone. The currency bloc is now in its sixth straight quarter of economic stagnation and the labour market is starting to soften. Meanwhile, the U.S. economy continues to grow above trend, its labour market remains tight and inflation rose more than expected last month, raising the risk of price growth getting stuck. “June feels like a compromise between (ECB) doves and hawks,” Deutsche Bank said in a note. “The hawks accept that the inflation outlook has improved but don’t want to rush into easing as soon as April. The doves may be pleased the hawks are not opposing cuts and are happy to wait until June for a stronger consensus on a cut.”Policymakers have pointed to a June cut in the 4% deposit rate so often that investors consider it an effective pre-commitment and any walking back would risk damaging the ECB’s credibility.But ECB President Christine Lagarde is likely to avoid any talk of what happens beyond June, especially as there is little consensus yet on how far and fast interest rates need to fall. Markets have priced in 80 basis points of cuts this year, or between three and four moves, but these expectations have moved in a wide range. FED IN SIGHT Fuelling rate-cut talk, consumer price inflation fell to 2.4% last month and could ease back to the ECB’s 2% target before year-end, well ahead of the bank’s own 2025 projection. Meanwhile rapid wage growth, seen by the ECB as the single biggest inflation threat, is slowing, labour markets are softening, investment is weak and bank lending stagnant, all pointing to a further decline in price pressures. “We think the ECB might stop slightly above neutral and we are forecasting a 2.25%-2.50% terminal rate,” Antonio Villarroya at Santander (BME:SAN) CIB said. “As a result, the ECB would need to cut 150-175bp in slightly over three quarters. Therefore, the room for skipping/pausing looks very limited and we think a 25bp cut/meeting is the most likely scenario.”Most others, however, see slower moves, with the ECB skipping a meeting or two – possibly July or October, when it does not publish new inflation and growth projections.The Fed could also disrupt the ECB’s plans.While the U.S. central bank is still keeping three rate cuts on the table for this year, markets are increasingly doubtful given the remarkable strength of the American economy and upside surprises in inflation. Cuts too close to November’s U.S. elections might also risk fuelling accusations of political interference. The ECB insists that it sets policy independently, but prolonged divergence with the Fed, which traditionally sets the pace for the global economy, could be counterproductive.Faster ECB rate cuts would weaken the euro and push up yields as funds flow across the Atlantic, so markets would simply undo some of the ECB’s work. A June rate cut would pre-empt the Fed in any case but the ECB will be careful not to get too far ahead. “Imagining policies diverging for longer is more difficult, because ultimately whatever drives decisions at the Fed will spill over to Europe and affect the euro zone as well,” Danske Bank economist Piet Haines Christiansen said. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.John Paulson, the Republican megadonor considered to be a potential Treasury secretary if Donald Trump wins the presidential election, has warned that the US must not “decouple” from China, striking a more measured tone than the former president on trade.The hedge fund billionaire, who hosted the Republican candidate at a $50mn fundraiser in Florida last week, also said tariffs, which Trump has vowed to impose on China, were a “blunt tool” to fix trade imbalances.“We don’t want to decouple from China,” Paulson told the Financial Times in an interview. “China is the second-largest economy in the world. We need to have a good economic and political relationship with them.”The comments show that trade remains an area of potential disagreement between Trump, who has repeatedly lashed out at “globalists” as he proposes an “America first” agenda, and his deep-pocketed Wall Street backers. He launched a trade war with Beijing during his presidency and has continued to call for widespread tariffs and potentially a decoupling of the US and Chinese economy. He has also floated a 10 per cent tariff on all goods imported into the US. Paulson advocated for “fairness and reciprocity” in the US relationship with China, which he said remained “very one-sided”, and pushed to eliminate a law allowing China to export cheap goods to the US duty-free. But trade was “beneficial for the global economy”, he said, and tariffs were a “blunt tool to level the playing field”. Paulson also struck a more moderate tone on the Federal Reserve than Trump, who has accused chair Jay Powell of being “political”, suggesting he might lower interest rates this year to help Democrats in the presidential election. “So far, I don’t have any issues with the way the Fed is approaching their interest rate policies,” said Paulson, who made his fortune investing against the housing bubble that caused the 2008 crash.Paulson also downplayed the strength of President Joe Biden’s economy, which has included fast growth, low unemployment and record stock market highs. The boom was due to “excessive” and “unsustainable” government stimulus spending since the Covid-19 pandemic, he said. Paulson instead heaped praise on Trump’s record, and declined to say that Biden had won the 2020 election.“The 2020 election is in the past, but I do believe there were legitimate concerns raised about election integrity,” Paulson added. “Going forward, it’s very important that people believe in the fairness and integrity of elections.”The Trump funder also hit out at the court cases against the former president, which include charges relating to his alleged efforts to overturn Biden’s victory.“I think a lot of these cases against Trump are politically motivated,” Paulson said. “I never thought it would be happening in the US that our judicial system would be used for political purposes.”He added: “When people understand the nature of these cases, they feel that Trump is being politically prosecuted. Instead of harming him, it’s creating enormous support for Trump.” More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Industrial support policies that discriminate against foreign companies are “self-defeating” and harm free trade, the IMF has warned, as wealthy nations including the US increase subsidies for strategically important sectors. The number of industrial policies used by advanced economies has surged as they seek to boost innovation and curb emissions, the fund found, accounting for more than half of all trade interventions in the past decade. That is well above the share among emerging economies. Boosting spending on fundamental research and innovation across sectors can, if properly executed, pay for itself in the longer term by raising economic output, said the IMF. The US and China are among the countries increasing efforts to bolster their industrial bases in key areas including green technologies and advanced semiconductors, sparking fears of rising trade tensions and wasteful subsidies. “Geoeconomic fragmentation could be self-reinforcing and hard to reverse,” the IMF warned. “As most of the stock of knowledge is imported even for most countries at the technology frontier, policies discriminating against foreign firms can prove self-defeating and trigger costly retaliation.”The fund highlighted an “abundance of failed programmes”, such as Washington’s synthetic fuels scheme in the 1980s, that testified to the risks of taxpayer money being squandered. History, it found, is “full of cautionary tales of policy mistakes, high fiscal costs and negative spillovers in other countries”.  In the US, the Chips Act and the Inflation Reduction Act, both signed into law by President Joe Biden in August 2022, will dole out hundreds of billions of dollars in tax credits, grants and loans. The subsidies have provoked the ire of close partners including EU capitals which fear the US has ditched free trade as it rewards companies for locating supply chains in the US. Brussels has opened multiple investigations into Chinese companies, including a probe into wind turbine manufacturers this week, as it seeks to shelter its industry from cheaper foreign competition. The IMF found that policies that discriminate against foreign companies end up backfiring, given the risk of triggering retaliatory moves and the widespread reliance of companies on overseas technologies. Another risk is “political capture”, where policy is swayed by sectoral interests but delivers only minimal economic benefit, the IMF said in a chapter of its fiscal monitor, which will be released next week as the fund and World Bank hold their spring meetings in Washington. The fund said the key to getting the balance right was delivering support to sectors that have “high knowledge spillovers” to other domestic sectors, raising economy-wide innovation and productivity growth. Public research, R&D tax incentives and research grants were the most cost-effective tools for governments to use, the research found. Properly targeted support for R&D equivalent to 0.5 percentage points of gross domestic product could raise output by 2 per cent for the average advanced economy, the Washington-based fund said in a chapter of its upcoming fiscal monitor. The policy also lowers the public debt-to-GDP ratio by about 0.5 percentage points over an eight-year horizon. If designed right, innovation policies can therefore pay for themselves in the long term, the IMF added.The dash for industrial policies comes as countries seek fresh ways of countering sagging growth. Separate projections from the IMF released on Wednesday showed that global growth would slow to just over 3 per cent by 2029. Absent policy measures to bolster productivity, growth could drop to 2.8 per cent by the end of the decade, it added. That would be around a percentage point below the pre-pandemic average set from 2000 to 2019. In its annual report, the World Trade Organization has forecast that the volume of world merchandise trade will increase 2.6 per cent in 2024 and 3.3 per cent in 2025 after high energy prices and inflation led to a 1.2 per cent drop last year.However, WTO economists warned that the use of subsidies to prioritise domestic production, as well as conflicts such as the Houthi attacks on shipping in the Red Sea and wider geopolitical tensions, could dent the expected growth in the global goods trade.Ralph Ossa, chief economist, told the Financial Times there were early signs of “fragmentation” as developed countries reduced dependence on China and sought to trade more closely with allies.Additional reporting by Andrew Bounds in Brussels More