Aurelia Butler

ABU DHABI (Reuters) – The United Arab Emirates is quietly urging the European Union to start talks on a trade pact separate from an Arab bloc, five people familiar with the matter said, as the Gulf state seeks closer political and economic ties with Europe. They told Reuters that Abu Dhabi is frustrated at long-stalled trade negotiations between the EU and the Gulf Cooperation Council (GCC), an Arab bloc that includes the UAE and Saudi Arabia.The UAE, an influential, oil-rich Middle East state, has long advocated deeper EU involvement in the Gulf region. It is the Arab world’s second largest economy after Saudi Arabia, a major Middle East trade partner for many other nations, and its sovereign wealth funds rank among the world’s most active.A UAE official denied Abu Dhabi had proposed bilateral talks with the EU, calling this “baseless and unfounded”. Such a move might strain relations with the UAE’s GCC partners.Three of the sources said the UAE had not yet submitted a formal request to the EU and it was unclear whether the GCC was aware Abu Dhabi had sought to initiate a bilateral process.Officially, the UAE continued to support the GCC-EU process, they said, although it was privately pushing for its own talks.However, the sources said UAE officials regularly raised the idea of a bilateral trade process in meetings with counterparts from the EU and its 27 member states, including in recent weeks.Emirati officials had brought up the matter in almost every meeting across many levels, said the sources, who asked for anonymity to discuss the matter as the details are not public.The EU prefers a deal with the GCC, which includes Qatar, Kuwait, Oman and Bahrain, but some EU states have voiced support for a UAE deal given the lack of GCC progress, the sources said.Failing any significant momentum by the summer, the EU could consider a bilateral process with the UAE, they said.The UAE official said the GCC and EU had recently met to agree on a timeline for technical discussions.”The UAE supports open, rules-based trade, and will always prioritise working through the GCC to support our collective regional and international trade ambitions,” the official said.The GCC, headquartered in Saudi Arabia’s capital Riyadh, is a longstanding alliance that seeks to encourage political and economic cooperation between the six Gulf states.The GCC Secretariat did not respond to emailed requests for comment. A European Commission spokesperson said expert-level discussions with the GCC were continuing and that the EU had also held talks with the UAE to enhance trade and investment relations, without saying whether the sides had discussed a bilateral process.The EU would require a new mandate from its member states to start bilateral talks with the UAE, a process the sources said could take several months. The UAE does not want to engage in simultaneous bilateral and bloc-to-bloc negotiations, they said, meaning that the EU negotiates either with the UAE or GCC. SLOW BURN The EU and energy-rich GCC started trade talks in 1990 that, if reached, would give companies in the European bloc better access to what is today the EU’s sixth biggest export market. However, the talks were formally suspended in 2008.Saudi Arabia, the world’s largest oil exporter and the Arab world’s biggest economy, is undergoing an ambitious economic transformation that has created huge business opportunities.A broader deal with the GCC could further open EU member states to investments from Gulf sovereign wealth funds, major cross-sector investors who take a decades-long outlook.But the GCC has signed very few trade deals. It finalised a pact with South Korea last year, 16 years after talks started, and entered into negotiations with the Britain in 2022. The UAE has also urged London to instead engage in a bilateral process, two other sources said, declining to be identified.The UAE has signed several bilateral trade agreements since 2022, including with India and Indonesia, and is in talks with other countries in Africa, Latin America, Asia and elsewhere.Those deals, known as comprehensive economic partnership agreements, often covered investment, services, and other areas, and, in the case of India, were finalised within months.But EU negotiations with the UAE are likely to take several years and Brussels would want human and labour rights provisions in any final agreement, the five sources said. More

This article is an on-site version of our Chris Giles on Central Banks newsletter. Sign up here to get the newsletter sent straight to your inbox every TuesdayToday, Japan ended an eight-year period of negative interest rates after gaining confidence that the country has defeated deflation for good. More on that below. Similar fireworks are unlikely when the Federal Reserve and Bank of England meet later this week. Their meetings will be interesting for what they say. They come at a time when people are getting nervous that inflation is becoming sticky at levels that are too high and the problem lies in the services sector. Claire Jones will be taking the hot seat next week to pore over the meetings and forecasts. But for now I would like to know your views. Is disinflation in trouble? Email me: [email protected] servicesNo one should care too much about movements in individual components of inflation, but many economists exempt the broad category of services from this rule because it has predicted overall inflationary trends well in the past. The services component is large — 61 per cent of the US consumer price index, for example. They are generally produced domestically and therefore fully reflect local economic forces. And services inflation is too high still. Everywhere. Fed chair Jay Powell recently said it was reasonable to think goods price deflation had run its course, so “that would mean the services sectors would have to contribute more” to disinflation. President Christine Lagarde said the European Central Bank would be “laser focused” on services prices and the wages that underpin them before taking a decision to cut rates in June. So it is helpful to look at services inflation and ask what this tells us about bringing inflation down. The evidence The chart below is a fantastic resource and compares annual manufactured goods and services inflation across the US, eurozone and UK. First look at the pre-pandemic period. Core goods inflation hovered around zero in both the US and eurozone. That would also have been the case for the UK were it not for Brexit, which hit sterling and raised imported goods prices after 2016. Services price rises in the eurozone were also below 2 per cent, resulting in persistently too low inflation, the need for quantitative easing and other unorthodox monetary policy. Paradoxically, that is everything hawkish central bankers like to avoid, so hawks should not want a return to this world. Services inflation in the US and UK at just above 2 per cent was healthier. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The noticeable thing about the pandemic is that the US both had a much sharper rise in core goods inflation than Europe and that it came earlier. It suggests excess demand was operating there (in addition to the supply chain problems that the Bernanke Blanchard model found). In comparison, the eurozone saw industrial goods prices rising sharply after Russia’s invasion of Ukraine, indicating an embedding of high natural gas prices at a time when US goods price inflation was moderating sharply. Again, this demonstrates that the two sides of the Atlantic did not suffer the same inflation shock. Services inflation has turned the corner and is declining everywhere, although the UK is a little behind its two big brothers. But services inflation still remains too high to be consistent with inflation falling to 2 per cent durably. In Europe, most of these big jumps in services price rises came almost a year ago and the signs are that annual inflation rates will fall. The bad news out of the US this year has been that the same is no longer true of the latest consumer price data. Of course, the Fed really targets the personal consumption deflator (not the CPI) and the inflation in housing is both surprisingly sticky and likely to come down because the most recent new rents are not showing the same price hikes as those used in the CPI. But the latest data has been poor and is likely to make the Fed cautious. As the table below shows, the latest one-month, three-month and six-month annualised inflation numbers are higher than the 12-month rate, so it is no longer true to say we are just waiting for past large price rises to fall out of the annual inflation calculation. Excluding housing, services prices have been rising at an annualised rate of 6.9 per cent over the past three months. That is not a sign of progress. Taking the median of all these inflation measures shows an annualised rate of 4.6 per cent over one month, gently declining to a 3.8 per cent rate over 12 months. It is not a cause for undue alarm, but the past two months of inflation data have been poor. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Academic evidenceIf the question is whether to worry about services inflation, there have been two recent international pieces of academic evidence, unhelpfully providing contradictory conclusions. The Bank for International Settlements quarterly review found that services inflation was not linked to previous energy price rises and therefore likely to pose an inflationary threat for longer. Its conclusion that interest rates needed to remain higher for longer was, however, rejected by separate research from Jan Vlieghe, formerly of the BoE, soon to be vice-chair at Millennium hedge fund, but currently writing as a researcher at the London School of Economics, who says there is much less to worry about after an energy shock.The BIS paper is nice and provides the conventional wisdom that services prices reflect domestic inflation and are likely to persist. But a core reason it gets this result is that it estimates the impact of energy prices on services inflation from the 2011 to 2015 period. This is a serious weakness in explaining what is happening today. Vlieghe’s paper finds energy prices to be much more important in driving services prices by estimating the effect using the most recent data and exploiting the cross-country differences in energy price spikes that have been a feature of the past three years. He finds energy to be highly significant in explaining the differences in service sector inflation across countries — about half of it. It is powerful evidence. This does not mean that the standard thinking that services reflect domestic inflationary pressures and that BIS research can be ignored. But it does suggest we should expect a significant part of recent services inflation to dissipate quickly after an energy shock.The upshotThe eurozone and UK should keep an eye on services prices and wages, but central bankers should expect it to moderate now that natural gas prices have reversed. Having not suffered anything like the same energy shock, the US almost certainly has a more traditional services prices story and therefore more to worry about with persistence of inflation. A nimble Bank of JapanEarlier today, the Bank of Japan ended negative interest rates and raised its policy rate from -0.1 per cent to a range of zero to 0.1 per cent. Read this for the breaking news and Robin Harding, FT Asia editor and our former Tokyo bureau chief, puts the story in context here. The mood music at the BoJ transformed last week after indications that large companies will offer the highest wage increases since 1992, indicating that a positive wage price dynamic is now operating. This is positive, but will not change the outlook hugely. A move had been expected in April in any case, and the BoJ has indicated it will keep rates accommodative “for the time being”. The first move upward in rates is unlikely to push Japanese rates towards anything like those in Europe or the US. Even as the central bank has formally ended yield curve control it still says it will “make nimble responses”, raising the rate of asset purchases if market interest rates spike higher. Economic activity is still lacklustre, the durability of the wage price dynamic is far from secure and smaller companies are yet to offer similarly sized wage increases. I could show a chart of forward Japanese interest rates over the coming year, but it is identical to that a week ago. Longer term Japanese market expectations of interest rates have actually declined a little. But let’s not get grouchy. The BoJ’s move demonstrates it knows how to take advantage of the situation and escape negative rates before other central banks start easing policy. This marks definitive progress and another step towards the normalisation of Japan’s economy. What I’ve been reading and watchingUS academic economists in the FT-Chicago Booth have been very consistent in their 2024 interest rate expectations. In early December 75 per cent thought there would be fewer than three rate cuts and now it is a little over two-thirds. I wonder if there would have been a different result if they had been asked in early January The ECB published its new framework for setting interest rates, plumping for a demand-led corridor system. This was much as expected. With such a large balance sheet, it will not apply for some timeArgentina has managed a large debt swap, increasing the maturities of its debts, giving it breathing space and allowing interest rates to come down to a mere 80 per cent from 100 per cent. Recessionary forces are still increasing and inflation is far from beaten, howeverIf you want to read the optimistic take on China, Martin Wolf has been examining itAnd if you want to be depressed that the Laffer curve rarely exists in practice, I went into the gory details from a UK perspectiveA chart that mattersI am indebted to Robin Brooks, senior fellow at the Brookings Institution, for this lovely graphical representation of the reversal of the Santa rally in financial markets. In November and December, traders were certain about a huge number of rate cuts to come during 2024 and these have mostly been reversed (Australia and Switzerland being minor exceptions to this rule). The chart shows that financial markets still expect current policy rates to come down by the end of 2024, but not nearly as much as at the end of last year. Let no one say it is only central bankers who get their forecasts wrong. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Recommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More

ZURICH (Reuters) – The Swiss National Bank called on Tuesday for an overhaul of bank capital regulations, saying that Switzerland needed rules that recognise UBS has become a bank with even more systemic importance following its takeover of Credit Suisse.In its annual report, the SNB also said it would accept some forms of credit as collateral from banks wanting to access cash in an emergency, a significant move that is designed to ensure banks do not run out of cash in a crisis.Last year, the SNB said Credit Suisse’s lack of collateral accelerated the bank’s collapse.The central bank had signalled its intention to enlarge the pool of assets that can be pledged to include credit such as Lombard and commercial loans, Reuters reported on Monday.Though the central bank can determine what collateral banks can use to cover liquidity needs, parliament is the prime mover in setting financial regulations, working off government recommendations.”The systemic importance of UBS has increased considerably with the acquisition of Credit Suisse. A review needs to be made as to whether the progression takes adequate account of this increase in systemic importance,” the SNB said.UBS declined to comment on the SNB report.Broadening the range of assets could enable UBS to significantly expand how much it could tap in an emergency. As of the end of 2022, UBS had $154 billion of Lombard loans on its books.The SNB said banks’ financial positions needed to be strengthened to avoid future crises.”In particular, the SNB recognises a need for action in the areas of early intervention, capital and liquidity requirements, and resolution planning,” it said.The central bank’s report comes as the Swiss government is preparing its own recommendations on how to deal with banks that are “too big to fail”, expected to be published next month.Last year, the SNB played a major role in the state-sponsored rescue of Credit Suisse, making over 200 billion Swiss francs of liquidity available to ease its takeover by UBS.It also took flak, however, from some critics who argued Credit Suisse could have been saved if the SNB had acted sooner.The SNB said in its report that it became apparent that some of Credit Suisse’s Common Equity Tier 1 (CET1) capital was “not of a high enough quality”. Days before the bank’s implosion in March 2023 the SNB said the bank met its capital requirements.The SNB highlighted a need for action in two areas on capital regulation: AT1 bond instruments and the strength of CET1 ratio, a measure of capital strength.AT1 bonds act as shock absorbers if a bank’s capital levels fall below a certain threshold. They can be converted into equity or written off.The SNB said on Tuesday that in the case of Credit Suisse, the bank failed to use its loss-absorbing capacity ahead of its downfall. The aim, the SNB said, should be to suspend buybacks and convert the AT1s into capital “at an earlier stage”.The central bank also said it was important to ready a broad range of options for the resolution of a systemically important bank.In the event of a liquidity crisis, it is vital that market regulator FINMA “is able to enforce resolution measures in a timely manner and with sufficient legal certainty”, the SNB said.In order to stabilise a systemically important bank in time, the SNB said that the “early intervention tool kit” should be expanded to include market-based and forward-looking indicators.The SNB said it is participating at national and international level in the debate about regulatory adjustments. More

The following is a compilation of key policymaker quotes on the timing of the ECB’s next rate change.Luis de Guindos, ECB Vice President, March 19″We haven’t yet discussed anything about future rate moves. We need to gather more information. In June we will also have our new projections and we will be ready to discuss this.”Klaas Knot, Dutch central bank Governor, March 14″Personally I pencilled in June for a first rate cut. Where will we take it from there? We are data dependent, so I would focus on those meetings in which we have most data available, which are the meetings in which we have new projections, so September and December.””Does that rule out non-projection meetings? No. If data tells us we should do more, then the interim meetings should be available. But my prime inclination would be to focus on the projection meetings.” Pablo Hernandez de Cos, Spanish central bank Governor, March 17″If our macroeconomic forecasts are met in the coming months, it is normal that we will start cutting rates soon and June could be a good date to start.” Philip Lane, ECB chief economist, March 14″I wouldn’t overanalyse April versus June.” “I think that Q2 is a time when we will be far enough into 2024 to see more of the wage dynamic to see more of the price pressures. So we will learn some more by April we will learn a lot more by June.”Peter Kazimir, Slovak central bank Governor, March 11″We will learn a bit more in April, but only in June, with new forecasts at hand, will the level of confidence reach the threshold.””The current picture clearly favours staying calm for the coming weeks and delivering the first rate cut in summer.” Yannis Stournaras, Greek central bank Governor, March 14“We need to start cutting rates soon so that our monetary policy does not become too restrictive.” “I think to cut rates already in April we will need to see the economy crashing and I don’t expect that.”“It is appropriate to do two rate cuts before the summer break, and four moves throughout the year seem reasonable.”Gabriel Makhlouf, Irish central bank Governor, March 15″My current view is that the picture should be sufficiently clearer when the Governing Council meets in June — as we will have a lot more information – particularly on wage dynamics – available in our deliberations — to give us sufficient confidence to make monetary less restrictive.”Olli Rehn, Finnish central bank Governor, March 16″My view is that it is time to start easing off the brakes on the monetary policy pedal this summer. “After June, there are still several meetings and decisions will be made meeting by meeting. If inflation is sustainably stabilizing at 2%… then we will have the conditions for several interest rate cuts this year.Francois Villeroy de Galhau, French central bank Governor, March 13″The consequences we, at the European Central Bank, should draw is probably to cut rates in the spring and I remind you that in France and Europe this is a season that lasts from April to June 21. More