Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a former central banker and a professor of finance at the University of Chicago’s Booth School of BusinessThe push for international openness to trade and capital flows has always been an elite project, but typically with enormous benefits to the domestic consumer, and to poor countries who develop by catering to foreign demand. But the great financial crisis of 2008 destroyed trust in the elite. One immediate casualty was globalisation. The obvious costs of inviting imports, for instance in terms of lost domestic jobs, are easy for the public to see, while the benefits often require further layers of explanation. Conversely, protectionism is an easy sell. It dominates the discourse once trust is lost, even more so if one’s primary trading partner has geopolitical ambitions.Rather than pushing for a better globalisation in which past mistakes are addressed, too many of today’s elite are willing to hedge it with enough caveats that it becomes rank protectionism. For instance, US national security adviser Jake Sullivan’s evocative picture of shielding a “narrow yard” of security-relevant technologies with “high fences” has expanded quickly into a much broader yard where any device or platform that collects information can be banned on security grounds, whether it be Chinese EVs or TikTok in the US or Apple and Tesla in China. Similarly, while it makes sense to examine takeovers by geopolitical rivals of companies in defence-sensitive areas, we now have the US subjecting the proposed takeover of strategically inconsequential US Steel by friendly Japan’s Nippon Steel to “serious scrutiny”.Once open borders are no longer the default, new impediments to competition proliferate. Europe wants to keep out Chinese EVs because of the heavy state subsidies Chinese manufacturers enjoy. At the same time, Europe subsidises green energy heavily, so its manufacturers will have lower carbon emissions, while it plans border tariffs on high-emission products made by foreign manufacturers, many of whom don’t have access to subsidised green energy. Everyone subsidises today, the question is where and by how much.Indeed, why bother with tariffs when one can handicap the foreign competitor directly? Emerging markets compensate for the lower productivity of their workers with lower wages and longer hours. The renegotiated USMCA (NAFTA’s replacement) requires a minimum hourly wage for Mexican workers that make cars for the US. Mexican workers ought to earn more over time, but should that not be determined competitively in Mexico?Protectionism is contagious. As the developed world turns its back on open borders, poorer countries are succumbing also, with average tariffs rising in LDCs over the past decade.The new elite project is industrial policy, with a focus on creating national champions. Partly as a natural consequence of the market failures during the financial crisis, partly from drawing the wrong lessons from China’s state capitalism, and partly from a desire for national security, faith in government’s ability to pick domestic winners has grown. A current focus is subsidies to chip manufacturers, which allow political sponsors to claim they are modernising the economy even while protecting security interests.Yet even if countries have the technological competence to manufacture chips, very few can bring the entire chip supply chain within domestic borders or reliably friendly shores. If so, the tens of billions of dollars spent on chip subsidies will neither buy them security nor, given the likely glut in global chip manufacturing, deliver a viable modern industry. Put differently, Russia has found ways to make chip-reliant armaments without a chip industry, even while being subject to sanctions by major chip producers.Cross-border investment (as a fraction of GDP) has already slowed, so will trade and growth, especially in emerging markets and developing countries. The IMF projected 7.2 per cent growth for these countries in 2006, but only 4 per cent in 2023. Low growth could increase internal political fractures within countries and possibly conflict between nations, triggering mass migration and yet more protectionism and government intervention.To break this vicious cycle, we need a dialogue, perhaps starting with the US and China, or initiated by more neutral countries, on how the global system of trade and investment can accommodate geopolitical rivals, subsidies and new information-intensive products without breaking down. This will require new rules of the game, more data and possibly new independent institutions. And, of course, countries will have to relearn the lesson that governments are not good at picking winners. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The share of children living in absolute poverty in the UK has risen by its highest rate for 30 years, official data shows, triggering outcry from charities which called on the government to urgently overhaul its welfare policy.Some 25 per cent of children in 2022-23 were living below the poverty line, up from 23.8 per cent the previous year, representing the largest annual increase since records began in 1994-95, according to Department for Work and Pensions figures on Thursday. Alison Garnham, chief executive of the Child Poverty Action Group, said the data was “shocking” and that anything short of scrapping the two-child limit and increasing child benefits would be “a betrayal of Britain’s children”. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Campaigners and economists have been calling for the ruling Conservative government to scrap its two-child limit policy, which means that families who claim universal credit or child tax credit cannot do so for a third or subsequent child. The data also showed that income fell last year for all but the top 20 per cent of earners, with the largest reductions in the poorest households.Sam Ray-Chaudhuri, research economist at the Institute for Fiscal Studies think-tank, said: “Given the double whammy of Covid and the cost of living crisis, it may not come as a shock that this parliament is on course to be one of the worst ever for growth in household incomes.”Material deprivation, which measures individuals’ ability to afford a range of everyday goods and services, has also risen compared with before the pandemic. In 2022-23, some 8 per cent of people aged 65 and over lived in material deprivation, up from 6 per cent in 2019-20, the first recorded increase in almost a decade.Absolute poverty has been broadly falling for decades, as living standards have improved. However, the data signalled a change in direction with the share of children below the poverty line increasing by 318,000 to more than 3.6mn. Poverty rates are expected to rise further as more families are affected by the two-child limit, which only applies to children born after April 2017.While other policies can have an indirect impact on child poverty, removing the two-child limit was crucial to “shift the dial”, said Jon Sparkes, chief executive of charity Unicef UK.“If we want to have a greater impact quickly, then it’s the big policy decisions around transfers that are important,” he added. Alison McGovern, Labour’s shadow employment and social security minister, blamed the Conservatives for the “horrifying” statistics and said her party intended to fix this failure by “growing the economy”.She said that Labour would build more affordable housing, reduce school uniform costs and provide breakfast clubs in every primary school.Children were twice as likely to fall below the poverty line as pensioners, according to the data. Absolute poverty is defined as having income below 60 per cent of the inflation-adjusted average in 2010-11 after housing costs. Britons aged 65 or older have seen a steep fall in deprivation in recent decades as a result of targeted policies such as the triple-lock on pensions, which requires the government to raise the state pension each year at least in line with earnings.Mel Stride, secretary of state for work and pensions, acknowledged that the past few years had been “tough” and said the government had provided cost-of-living support worth an average of £3,800 per household, preventing 1.3mn people from falling into poverty last year.He added that in April the government would go further by uprating benefits and pensions and extending its household support fund. More

ISTANBUL (Reuters) -Turkey’s central bank unexpectedly raised interest rates by 500 basis points to 50% on Thursday, citing a deteriorating inflation outlook and pledged to tighten further if significant and persistent deterioration in inflation is foreseen.The hawkish surprise came 10 days before nationwide local elections and was seen by analysts as a signal that the central bank was independent from any political constraints and determined to tackle price rises. In response the lira currency rallied as much as 1.5% to 31.91 against the dollar, reversing weeks of steady declines, and Turkey’s dollar bonds extended a rally. The bank has now raised its key one-week repo rate by 4,150 basis points from 8.5% since last June, following President Tayyip Erdogan’s victory in May elections and U-turn towards greater orthodoxy in economic policy. The “tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range,” it said.Policy “will be tightened in case a significant and persistent deterioration in inflation is foreseen,” it added after the monthly meeting of its monetary policy committee.To reinforce the tightening move, the central bank also adjusted its policy operational framework, setting the overnight borrowing and lending rates 300 basis points below and above the repo rate. The rate hike “stunned the market,” said Piotr Matys, senior FX analyst at In Touch Capital Markets in London.”Today’s decision is a very strong signal that Governor (Fatih) Karahan, who took over from (Hafize Gaye) Erkan when she unexpectedly resigned, is determined to bring staggeringly high inflation under control,” he said. PRE-ELECTION RATE HIKEInflation rose to a higher than expected 67% last month, when the central bank had held rates steady after a sustained string of hikes since June. Though inflation is expected to dip around mid-year, the recent lira slide coupled with declining foreign reserves had raised some expectations of more rate hikes ahead – though not until after the March 31 municipal vote for which Erdogan’s AK Party is trying to win back key cities like Istanbul. In a Reuters poll, 20 of 22 respondents expected the bank to keep the rate steady in March, while the other two forecasted a hike of only 250 basis points. The poll showed however that a strong majority expected it to hike again later this year.The central bank in recent weeks took other steps to tighten credit including action on reserve requirements, prompting some banks to either reduce loan limits or even stop offering loans. It also raised the maximum rate on credit card cash withdrawals.Tighter fiscal policy is expected after the coming elections, adding to the rising credit costs and compounding economic pain for Turks after a years-long cost-of-living crisis. Earlier this month, Finance Minister Mehmet Simsek promised steps to help the central bank reduce inflation. Fiscal stimulus cooled significantly after last year’s May general elections but picked up a bit in recent months ahead of this month’s vote. “You can read into this (rate hike) that Simsek and the central bank have the capacity to be more aggressive, upcoming election or not,” said Peter Kisler, EM portfolio manager at Trium Capital in London.Last Friday, the central bank’s monthly survey of market participants’ expectations showed that Turkey’s year-end annual inflation was seen at 44.19%, higher than the bank’s own forecast of 36%. More

LONDON (Reuters) -Britain’s economy is moving in the right direction for the Bank of England to start cutting interest rates, Governor Andrew Bailey said on Thursday as two of his colleagues dropped their votes for a rate hike.The BoE’s committee of interest rate-setters voted 8-1 to keep borrowing costs at their 16-year high of 5.25% as the two officials who had previously called for higher rates changed their stance.Most economists polled by Reuters had expected one member of the Monetary Policy Committee (MPC) to continue voting for an increase in Bank Rate.But both Jonathan Haskel and Catherine Mann joined the majority in favour of no change. Swati Dhingra again cast the lone vote to cut Bank Rate to 5.0%.Bailey said there had been “further encouraging signs that inflation is coming down” but he also said the BoE needed more certainty that price pressures were fully under control.”We’re not yet at the point where we can cut interest rates, but things are moving in the right direction,” he said in a statement.British government bonds rallied immediately after the announcement. Sterling fell against the dollar and the euro. The five-year gilt yield fell to its lowest level since the BoE’s last policy meeting on Feb. 5, down 11 basis points on the day.Investors slightly increased their bets on interest rate cuts through 2024, with a 76% chance of a first cut in June and a reduction of 75 basis points now fully priced in by December.”Every month that passes without an upside inflation or wage growth surprise brings the MPC closer to cutting interest rates,” said Rob Wood, chief UK economist of consultancy Pantheon Macroeconomics.The BoE decision follows the U.S. Federal Reserve’s announcement on Wednesday that it remained on track for three interest rate cuts this year, prompting stock market rallies.The European Central Bank has tried to cool talk about a run of rate cuts for the euro zone as investors increasingly consider the fight against global inflation to have been won.Earlier on Thursday, the Swiss National Bank cut its main interest rate, becoming the first major central bank to relax monetary policy after the surge in inflation globally.In Britain on Wednesday, data showed consumer price growth fell to its lowest in almost two-and-a-half years.But the BoE said key indicators of the persistence of inflation were still elevated. It also said Britain’s labour market remained relatively tight despite further loosening and signs that high borrowing costs were weighing on the economy.”The Bank of England will need to see a lot more moderation in wages and services prices before it starts cutting rates,” Marion Amiot, senior European economist at S&P Global Ratings, said, adding the firm expected a first cut only in August. Britain’s headline inflation rate – which topped 11% in October 2022 and led to a historic living standards squeeze – remained the highest in the Group of Seven in February at 3.4%.INFLATION UNDER 2% SOONThe BoE said it expected inflation would drop below its 2% target in the second quarter due to the impact of finance minister Jeremy Hunt’s decision this month to freeze fuel duty once again.Overall, the measures in Hunt’s March 6 budget statement were likely to increase economic output by about 0.25% over the coming years but would push up inflation by less, it said.The BoE forecast last month that inflation will creep up again later this year and most analysts and investors have said they think the BoE will cut rates in the third quarter, probably at its August meeting.The central bank wants to see wage growth slowing further before making its move.Britain’s minimum wage will rise by nearly 10% next month, and retailers that often pay staff only slightly more have raised salaries ahead of that increase.Employers overall have offered pay settlements of about 5% since the start of 2024. Average wage growth is about 6%, higher than about 4% in the United States and the euro zone.As well as employers, mortgage-holders and consumers, the ruling Conservative Party is also keen to see rates come down as it struggles to rein in the opposition Labour Party’s strong lead in opinion polls with an election expected later this year.Jeremy Hunt took the unusual step of commenting on what Wednesday’s inflation data might mean for the BoE, saying: “As inflation gets closer to its target that opens the door for the Bank of England to consider bringing down interest rates.” More

The BoE’s rate-setters voted 8-1 to keep borrowing costs at their 16-year high of 5.25% on Thursday, as the two officials who had previously called for higher rates changed their stance.Most economists polled by Reuters had expected one member of the Monetary Policy Committee to continue voting for an increase in Bank Rate.MARKET REACTION:FOREX: The pound fell against the euro and the dollar. It was last down 0.4% at $1.2734 versus $1.2749 earlier.BONDS: British government bond yields extended their fall, with rate-sensitive two-year yields down 10 bps at 4.12% compared to 4.14% just before the BoE statement. Interest-rate futures showed traders are pricing a roughly 70% chance the BoE will cut rates in June. STOCKS: UK stocks rallied, with the blue-chip FTSE 100 hitting an intra-day high just after the BoE decision. It was last up 1.5% on the day.COMMENTS: RUTH GREGORY, DEPUTY CHIEF UK ECONOMIST AT CAPITAL ECONOMICS, LONDON:”Today’s communications suggest the MPC is gaining confidence that inflation will fall sustainably back to the 2.0% target.”That said, no-one joined Dhingra in voting for a 25-bp cut to 5.00%. And the MPC largely stuck to its hawkish guns in the policy statement, saying that key indicators of inflation persistence remain elevated and that policy will be “restrictive for sufficient long” and “restrictive for an extended period”.”We’re not sure this guidance tells us a great deal. It is the data that will decide when rates are cut.”KALLUM PICKERING, SENIOR ECONOMIST, BERENBERG, LONDON:”Dovish hold: The BoE seems keen to validate market expectations for a summer interest rate cut and is emphasising that monetary policy will remain restrictive for some time, even as policymakers lower the bank rate due to the fact that the current bank rate of 5.25% is above the neutral rate – which is in the 3.5-4.0% range, in my view. “Policymakers are growing in confidence that they have mostly tamed inflation and now want to take steps to ease the monetary headwind on the economy – reaction function is shifting from taming inflation to supporting growth.”JESSICA HINDS, DIRECTOR IN FITCH RATINGS ECONOMICS TEAM:”The recent improvements in the inflation and wage data resulted in the last remaining hawks on the MPC capitulating today, with both Catherine Mann and Jonathan Haskel dropping their vote for a further increase in Bank Rate.” “But Governor Bailey signalled that the Bank was not yet on the cusp of cutting interest rates. The minutes also suggested a wide range of views about inflation persistence among the eight members voting for a hold today, with particular concerns about services inflation. We think it will take until August for the majority to join Swati Dhingra in voting for a cut.” ANDREW JONES, PORTFOLIO MANAGER, JANUS HENDERSON, LONDON:”With inflation for February coming in roughly in line with expectations (core CPI at 4.5% versus 4.6% consensus) yesterday, it is not a surprise to see interest rates being held flat by the MPC today. “As it seems very likely that inflation will continue to move downwards over the next few months, we would still expect to see interest rate cuts in the middle of the year.””UK domestic stocks are currently valued very modestly in relation to their history, but as recent trading news from companies such as Wickes, DFS, Marshalls and Travis Perkins (LON:TPK) has shown, demand is currently weak. It is likely though when interest rates are cut, that stocks which are mostly exposed to the UK economy could well start to attract more interest again.”FIONA CINCOTTA, MARKET STRATEGIST, CITY INDEX, LONDON:”That what’s really caught my eye – the two hikes last meeting have turned more neutral and looking to keep rates on hold.””Overall that must make for a less hawkish position from the central bank. And you can see the ship is turning towards that rate cut and that is what the pound has grasped on to. It’s definitely a much more concrete feeling that the next move is going to be a cut and it’s going to be coming, potentially, sooner than we thought, especially now that we don’t have those two hawkish votes.”What might offer the pound a bit of support against the euro and the U.S. dollar, as we go towards the next meeting is the fact that inflation is still stickier in the UK and also the services sector is still holding up strongly, service-sector inflation at 6.1% is still very sticky.”COLIN ASHER, SENIOR ECONOMIST, MIZUHO BANK, LONDON:”The meeting unfolded more or less as expected. The shift in the vote is dovish but its not especially dovish, as in a cutting cycle its the doves rather than the hawks that drive things. The rest of the committee don’t need Mann and Haskel to lower rates.”There don’t seem to be many cracks in the centre as yet – there were plenty of references to inflation persistence (and today’s PMI data don’t help on this front). “May seems to be off the table for rate cuts unless something bad happens. June is possible but we still see August as most likely at this point.” SUSANNAH STREETER, HEAD OF MONEY AND MARKETS, HARGREAVES LANSDOWN, LONDON:”The Bank of England has adopted the same stance as the Fed yesterday and the ECB … indicating that inflation is following the right path, but it’s still wary about the potential for prices to bubble up again.”Input costs are continuing to climb due to wage pressures and higher shipping fees, so companies are pushing up prices. So, it’s not surprising that caution remains the name of the game for the Bank.”Continued stubbornness in wage growth could tip a decision by the Bank of England towards August instead (of June), when a fuller monetary policy report is published.”PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:”The decision to hold rates itself and the arguments which committee members are putting forward are no surprise. “If the shift in the dynamics on the committees is representative of the MPC (Monetary Policy Committee) as a whole, then we maintain our current view that the Bank of England will begin to cut rates in June.” More