Aurelia Butler

FRANKFURT (Reuters) – The European Central Bank is set to keep interest rates at record highs on Thursday and take baby steps towards cutting them in the coming months as inflation continues to fall.Having reacted too slowly to a sudden surge in prices two years ago, the central bank for the 20 countries that share the euro is now reluctant to declare victory over the most brutal bout of inflation in decades.It is universally expected to keep its policy rate at a record 4.0%, and ECB policymakers are likely to repeat that they need more evidence inflation is under control and that ongoing wage increases will not give it another leg up.But the ECB’s new economic projections are likely to point to lower economic growth and inflation this year, which may require the central bank and its president Christine Lagarde to tweak their message slightly.”We expect a neutral policy stance and balanced communication, acknowledging the continued progress on inflation but avoiding a premature declaration of victory,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.Sources have been telling Reuters for months that the ECB is unlikely to reduce borrowing costs before its June 6 meeting as crucial data about wages will only become available in May.This gives the ECB another meeting – on April 11 – to explicitly open the door to what ECB Chief Economist Philip Lane has said is likely be the first in a series of rate cuts. Investors have pencilled in three or probably four reductions by the end of the year, which would take the rate the ECB pays on bank deposits to 3.25% or 3.0%.The ECB will announce its rate decision at 1315 GMT and Lagarde will hold a press conference at 1345 GMT. INFLATIONInflation has been coming down for nearly 18 months and it was 2.6% in February, slightly above the ECB’s 2% target.This was partly the result of a steep fall in fuel costs, which had been boosted by Russia’s invasion of Ukraine, but also reflected the ECB’s steepest ever increase in borrowing costs, which has brought lending to a standstill.But inflation excluding volatile food and fuel prices was still at 3.1%, as a rebound in real wages buttressed the price of services.”Disinflation is going much quicker than we expected on the headline level but we can’t be certain yet about core inflation because wage developments remain unclear,” ECB policymaker Peter Kazimir told Reuters in a recent interview. His German colleague – and fellow policy hawk – Joachim Nagel also said the ECB should resist the temptation to make an early rate cut, and wait for wages data. The ECB’s quarterly macroeconomic projections, due to be published on Thursday, are nevertheless set to confirm the trend.The inflation expectation for this year is likely to be cut from December’s 2.7% projection on account of much lower gas prices. Economists polled by Reuters see 2024 inflation at 2.3%.That means the ECB may hit its inflation goal later this year, rather than in 2025 as it has been expecting. GDP growth for 2024 was also likely to be cut, reflecting a weaker than expected recovery, particularly in Germany.Flagging growth and inflation has led several members of the ECB’s policy-making Governing Council, including Spanish central bank chief Pablo Hernandez de Cos, to start talking about an upcoming a rate cut. Greece’s Yannis Stournaras has pointed to June as a likely date.”This will make it very difficult for the European Central Bank President to kick the ball into the long grass,” Gilles Moec, chief economist at French insurer Axa, said. “Yet, the Governing Council is at this stage probably too divided for her to go beyond an admission that the internal debate has started.” Lagarde is also likely to face – and dodge – questions about the ECB’s ongoing review of its framework for steering market rates in an era of higher inflation and on the central bank’s mounting losses.Sources have told Reuters that policymakers have agreed on a new framework – which would see the ECB keep a “floor” under market interest rates – but no announcement is expected until later this month, at the earliest. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.A Chinese man who worked as a software engineer at Google in California has been charged by the US justice department with stealing artificial intelligence trade secrets from the technology giant while covertly working for rival China-based companies.Ding Linwei, a 38-year-old Chinese national, was hired by Google in 2019 to work on the software used in its supercomputing data centres. The indictment, which was unsealed in a California federal court on Wednesday, alleged that Ding “began secretly uploading trade secrets that were stored in Google’s network” between May 2022 and May 2023, “by which time Ding allegedly uploaded more than 500 unique files containing confidential information”.The technology Ding allegedly stole involved the “building blocks” of Google’s AI infrastructure, the indictment said. As an employee, Ding had been granted access to Google’s “confidential information related to the hardware infrastructure, the software platform and the AI models and applications they supported”, according to a press release announcing the indictment.Ding was arrested on Wednesday in Newark, California, and charged with four counts of theft of trade secrets. He faces a maximum penalty of 10 years in prison and a fine of up to $250,000 for each count if convicted. “We have strict safeguards to prevent the theft of our confidential commercial information and trade secrets,” Google said in a statement. “After an investigation, we found that this employee stole numerous documents, and we quickly referred the case to law enforcement. We are grateful to the FBI for helping protect our information and will continue co-operating with them closely.” Google is among the Big Tech groups investing tens billions of dollars to develop generative AI products that have the potential to transform technology and other industries. An arms race for AI dominance kicked off last year when Microsoft invested $10bn in OpenAI, the maker of ChatGPT. The case comes as tensions have increased over Silicon Valley’s links to China. The Biden administration has moved to ban some US investment into China’s quantum computing, advanced chips and AI sectors in an effort to stop the Chinese military from accessing American technology and capital. It will largely affect private equity and venture capital firms. In advance of that, some US investors with large operations in the country, such as Sequoia Capital and GGV Capital, have spun off their Chinese businesses. The US attorney’s office in San Francisco in recent years charged three former Apple employees with stealing trade secrets related to self-driving car technology for Chinese companies.“Today’s charges are the latest illustration of the lengths affiliates of companies based in the People’s Republic of China are willing to go to steal American innovation,” FBI director Christopher Wray said in a statement.During his employment at Google, Ding secretly affiliated himself with two China-based tech companies, according to the indictment. It alleged he helped raise capital for one of the companies during a five-month trip to China in late 2022. Potential investors were told he was offered the position of its chief technology officer and owned 20 per cent of its stock, prosecutors said. He also allegedly founded his own AI and machine learning company and applied to a China-based incubation programme. Ding travelled to Beijing to present his company at an investor conference in November, prosecutors said.The indictment stated that he took steps to evade detection by Google’s data loss prevention systems, and also permitted another Google employee to use his work access badge to scan into a Google building, making it appear as if he was working from the US Google office when he was in China. More

“I was at two in December,” Kashkari said in an interview on WSJ Live, referring to the number of quarter-point interest-rate cuts he had penciled in when Fed policymakers last made their quarterly economic forecasts. Fresh projections are due in two weeks, when the Fed next meets to set policy. “It’s hard to see, with the data that’s come in, that I’d be saying more cuts than I had in December,” Kashkari said. “It seems like at a base case I’d be where I was in December, or potentially one fewer, but I haven’t decided.”The median forecast of his colleagues in December was three rate cuts this year, which would take the Fed policy rate to a range of 4.5%-4.75%, from its current 5.25%-5.5% range. Kashkari said the “base case scenario” is that the Fed will not raise rates any further, a view shared by all Fed policymakers, based on their forecasts published in December and remarks since. If the economy stays resilient and inflation proves to be more entrenched than expected, Kashkari said, “the first thing we do is keep rates where they are for an extended period of time.” With the economy and the labor market strong and inflation coming down, he said: “I would want to see the argument for, why do we think we’re actually tamping down the economy if the economy is ongoing in such a healthy way?” The Fed does want to avoid a downturn, he said, and to stick a “soft landing” where inflation falls but the job market does not collapse, as it historically has done when the Fed has waged a battle with too-high inflation. But now, he said, “if the economy is doing very well, maybe the economy can sustain this rate environment when we didn’t realize that was possible,” Kashkari said. More

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TOKYO (Reuters) -Momentum is building for the Bank of Japan to consider ending negative interest rates as soon as this month with upcoming annual wage negotiations likely to yield bumper pay hikes for the second year in a row.Despite recent weak signs in the economy, BOJ policymakers have signalled their intention to move ahead with their plan to dial back stimulus – including Governor Kazuo Ueda, who offered an upbeat take on Japan’s economic outlook last week.BOJ board member Naoki Tamura, a former commercial bank executive, has been the most vocal advocate of an early exit from negative rates, signalling in August last year that the bank could take such action by March 2024.Fellow board member Hajime Takata also called for an overhaul of the BOJ’s stimulus programme last week, saying that Japan was finally seeing prospects for durably achieving the bank’s 2% inflation target.At least one of the BOJ’s nine board members is likely to say that removing negative interest rates would be reasonable at this month’s policy meeting, Jiji news agency reported on Wednesday, without citing sources.An end to negative interest rates would be a landmark decision by the BOJ that would roll back more than a decade of a radical monetary experiment that has aimed to put an end to prolonged deflation and economic stagnation.With inflation exceeding its target for well over a year and prospects growing of sustained wage gains, the BOJ has been dropping hints of a near-term end to negative rates.Over 80% of economists expect the BOJ to end negative rates in April, according to a Reuters poll taken from Feb. 15-20, with some betting on action at the March 18-19 meeting.If a majority of the nine-member board vote in favour of ending negative rates, it would pave the way for Japan’s first rate hike since 2007.But there is uncertainty on whether any proposal to end negative rates in March would gain enough votes. The BOJ is expected to downgrade its assessment on consumption and output this month, nodding to recent weak signs in the economy.Board member Seiji Adachi has said it might take until after the April 2024 start of the next fiscal year to determine whether conditions are conducive to ending negative rates.Board members Toyoaki Nakamura and Asahi Noguchi have also voiced caution over a premature withdrawal of monetary support.Another board member, Junko Nakagawa, will deliver a speech and hold a news conference on Thursday.The factors that will determine the exit timing include the outcome of big firms’ annual wage negotiations with unions on March 13, which will serve as a benchmark for nationwide trends.A strong outcome will likely meet a crucial prerequisite the BOJ set for ending negative rates, which is for rising inflation to trigger durable wage hikes.Economists project wage hikes of about 3.9% on average at the wage talks, exceeding a 3.58% deal struck in 2023 that was the highest in three decades.If the BOJ were to end negative rates, it will likely pay 0.1% interest on financial institutions’ reserves parked with the central bank, said sources familiar with its thinking.The 0.1% interest will help guide the overnight call rate, which is the benchmark for short-term borrowing costs, in a range of zero to plus 0.1%, they said.After deploying a massive asset-buying programme in 2013 to fire up inflation to its 2% target, the BOJ introduced negative interest rates and yield curve control (YCC) in 2016.The BOJ relaxed its tight control on long-term interest rates last year by watering down YCC, and is likely to remove the 0% target set for the 10-year bond yield set under YCC when ending negative rates, the sources said. More

OTTAWA (Reuters) – Bank of Canada Governor Tiff Macklem, speaking a month before the federal budget is delivered, on Wednesday warned against policies that might spur demand amid a housing crunch, saying it can only be resolved by increasing supply.In an interview after keeping its key overnight rate on hold at 5% earlier in the day, Macklem said that borrowing costs cannot solve the country’s housing problem. “Our message really is that high rates, low rates – if we don’t grow supply, we’re not going to solve the housing problem,” Macklem said.”Policies that mostly add to demand are not helpful at this time. Demand is not the problem. Policies that are more skewed to increasing supply would be helpful.”Shelter costs continue to be the primary driver of inflation, which in January was 2.9%, still above the central bank’s target of 2%.His comments on housing come as Prime Minister Justin Trudeau’s government puts together its next budget, which Finance Minister Chrystia Freeland said will be focused on building homes. “Our economic plan is about building more homes, faster, making life more affordable, and creating more good jobs,” Freeland said when she announced the budget would be delivered on April 16.When asked about a Canadian Home Builders Association suggestion to allow for 30-year insured mortgages for first-time homebuyers who purchase a newly built house, Macklem said he would not comment on specific policies.”We’re not the experts in increasing supply in housing,” Macklem said, adding however that with strong underlying demand, “we don’t need policies that stimulate demand.”When the Bank of Canada paused its interest rate hikes last year, housing prices spiked, only to come down again when it raised them by a half-a-percentage point in the summer. A rush back to the market when rates start to come down would mean “the scope to cut interest rates is less,” Macklem said. There have been signs of a recovery in the housing market even though rates remain at a 22-year high, including a surge in sales in the Toronto area in January.”We really need policies that are focused more on the supply side and I will say I think governments are acutely aware of this,” Macklem said. More

(Reuters) -There was an uptick in U.S. economic activity from early January through late February while inflation and the jobs market presented conflicting signals on how quickly they will cool further, a U.S. Federal Reserve survey showed on Wednesday, underscoring the complicated picture for central bankers as they seek to fully tame pricing pressures. The U.S. central bank released its latest temperature check on the health of the economy after Fed Chair Jerome Powell said earlier on Wednesday that it remains unclear when the Fed may cut interest rates and underpin the current expansion given further progress on inflation was not assured.Powell and his colleagues are attempting to engineer a so-called “soft landing” for the economy in which economic growth gradually slows and the unemployment rate remains low even as inflation, which spiked to a 40-year high two years ago, returns to the Fed’s 2% target rate.”Economic activity increased slightly, on balance,” the Fed said in its survey released on Wednesday, known as the “Beige Book,” which polled business contacts across the central bank’s 12 districts through Feb. 26. “The outlook for future economic growth remained generally positive, with contacts noting expectations for stronger demand and less restrictive financial conditions over the next 6 to 12 months.”Eleven of the 12 Fed regions reported steady or increased economic activity with the other district noting a slight softening.Since March 2022, the central bank has raised its policy rate by 525 basis points to the current 5.25%-5.50% range, where it has been held since July. While rates are set to remain unchanged at the next interest-rate setting meeting on March 19-20, Fed officials in December provisionally penciled in three rate cuts this year.PERSISTING INFLATIONRecent stronger-than expected data on employment and inflation though has raised fears that the economy is still too robust for pricing pressures to fully return to the Fed’s target rate. By the Fed’s preferred measure, inflation in January was running at a 2.4% annual rate, down from the 7.1% peak reached in June 2022. The Fed’s survey did little to provide clarity. While contacts said the labor market had eased further in recent weeks, wages also grew although several Fed districts indicated a slower pace of gains.For example, the Kansas City Fed described pay for new hires as “elevated,” but said many contacts were focusing wage increases “primarily on workers who expanded their capabilities, responsibilities, and productivity.”On inflation, Fed contacts reported businesses finding it harder to pass through higher costs to their customers. There were, however, also renewed upward pressures with contacts citing increases in freight costs and several insurance categories, including employer-sponsored health insurance.Elsewhere, the report highlighted the ongoing drag from inflation, even as several districts reported price pressures moderating. “I wish my twenty-dollar [sandwich] lunch went back to [costing] ten,” a Minnesota worker told the Minneapolis Fed. “It instead keeps going up.” More

(Reuters) – A look at the day ahead in Asian markets.As you were.Asian markets are set for a positive open on Thursday following a widespread ‘risk on’ move on Wednesday, while investors in the region await trade figures from China and Australia, and an interest rate decision from Malaysia.Global stocks and risk assets on Wednesday shrugged off the previous day’s jitters and resumed their climb higher while U.S. bond yields drifted lower, after Federal Reserve Chair Jerome Powell kept the door open to interest rate cuts later this year.If Powell’s goal was to play a straight bat in his three hours of questioning from U.S. House of Representative lawmakers on Wednesday and avoid any market ructions, he more than met it.The MSCI Asia ex-Japan index had already risen 0.77% on Wednesday before Powell spoke, its biggest rise in two weeks. The dollar slide, lower bond yields and rise on Wall Street after his testimony should give regional sentiment a further boost on Thursday.The main economic indicator in Asia on Thursday is Chinese trade. Beijing this week said it is aiming for GDP growth this year of around 5% again, but many analysts are skeptical – the performance of imports and exports in recent months suggests trade will not be a major driver. Export growth likely slowed in the January-February period, suggesting manufacturers are still struggling for overseas buyers and in need of further policy support at home.Data for the January-February period is expected to show exports grew 1.9% year-on-year in U.S. dollar terms compared with 2.3% growth in December, according to a Reuters poll, while import growth accelerated to 1.5% from 0.2%.Several Asian countries publish their latest foreign exchange reserves holdings on Thursday. At the last count, the six jurisdictions – China, Japan, Hong Kong, Malaysia, Indonesia and Singapore – held a combined $5.55 trillion, nearly half of the global total.China and Japan are the world’s largest holders with $3.22 trillion and $1.29 trillion, respectively. Changes in FX reserve holdings are very small, but China’s numbers in particular are always closely watched. Malaysia’s central bank, meanwhile, announces its latest interest rate decision. Bank Negara Malaysia (BNM) is expected to leave its overnight policy rate (OPR) unchanged at 3.00% and hold it there until at least 2026 as inflation was expected to pick up, a Reuters poll found.Although inflation eased to 1.5% in January, having peaked at 4.7% in August 2022, economists expect price pressures to rise in the second half of this year, suggesting a rate cut from the central bank was unlikely anytime soon.Here are key developments that could provide more direction to markets on Thursday:- China trade (February)- China, Japan FX reserves (February)- Malaysia interest rate decision (By Jamie McGeever) More