Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Nigeria’s central bank sharply raised interest rates to 22.75 per cent at its first meeting since July as Africa’s most populous country hopes to contain its most severe economic crisis in almost three decades.The bank lifted its key rate by 400 basis points as it seeks to combat soaring food and fuel prices that have caused widespread anger over reforms that the government argues are necessary to jump-start an ailing economy.The naira has tumbled to record lows almost weekly after two devaluations and growing local scarcity of foreign currencies, falling about 70 per cent against the dollar since June.Central bank governor Olayemi Cardoso, a former Citigroup executive who took office in September, said after the two-day meeting that “the committee’s decision was centred on the current inflationary and exchange rate pressures, projected inflation and rising inflation expectations”. Cardoso also announced an increase in the cash reserve ratio, the percentage of commercial bank deposits to be kept with the central bank, from 32.5 per cent to 45 per cent in an effort to tame inflation by mopping up money supply.“It’s important that we’re able to manage insecurity and that agricultural production is also improved,” he said. “Our hope is to collaborate with fiscal [policymakers] so that the other elements of inflation that are not directly within our control can be managed a lot better.”Mma Amara Ekeruche, an economist and senior research fellow at the Abuja-based Centre for the Study of the Economies of Africa, said the rate rise was a “move in the right direction” but said the Nigerian economy’s structural problems could not be solved solely by increasing rates.“Do [rate hikes] actually work effectively in Nigeria?” she asked. “Sometimes we don’t see the pass-through effect. There are other policy reforms that need to be put in place to tackle inflation.”David Omojomolo, emerging market economist at Capital Economics, said in a note to clients that the central bank had showed an “appetite to tackle the inflation problem and restore its battered credibility”.“The key will be to keep monetary conditions tight for a prolonged period in order to get inflation down,” he said, predicting that rate cuts were unlikely until next year at the earliest.Since his inauguration in May, President Bola Tinubu has enacted sweeping reforms that have included partially ending a $10bn-a-year petrol subsidy and floating the naira after years of maintaining a peg that propped up its value. The elimination of substantial fuel subsidies has been widely praised by international investors and diplomats but is now being blamed for economic hardship as prices have more than tripled since May.According to the country’s statistics agency, headline annual inflation rose to 29.9 per cent last month — a level last seen in the mid-1990s during Nigeria’s dictatorship. Food prices rose 35.4 per cent. The Nigeria Labour Congress, an umbrella organisation for trade unions, began a two-day strike on Tuesday, demanding better working conditions including an increase in the minimum wage, an improvement of public utilities and subsidies to farmers to boost domestic food production. Security concerns caused by jihadist insurgents, criminal gangs and conflict between nomadic herders and farmers have driven many farmers from their plots in northern Nigeria.Cardoso said the bank paid out $400mn on Tuesday to businesses it had sold dollars to in forward contracts, as the central bank aims to boost confidence in the foreign exchange markets. A backlog of these overdue contracts continues to be a concern for companies seeking to repatriate their revenues abroad. More

LONDON (Reuters) -Britain’s code of good practice for asset managers will undergo a root-and-branch review to aid economic growth and international competitiveness, its compiler said on Tuesday, in a move that could see pay of top executives bumped up.The code sets out how asset managers should engage with companies over how they are run to improve long-term returns to investors. It is based on “comply or explain”, meaning asset managers must disclose when they don’t apply any of its principles.There are currently 273 signatories to the code, many based abroad, and representing 43.3 trillion pounds ($54.9 trillion) of assets under management, Since the Financial Reporting Council (FRC) wrote the latest version in 2019, it has been given a remit by government to aid growth and competitiveness.Britain is seeking ways to boost London’s attraction a global financial sector through listing and other reforms as Wall Street attracts European company listings and the UK financial sector is largely locked out of the EU since Brexit.”It’s clear that now is an opportune moment for a fundamental review process to ensure that the principles of the Code are still driving the right stewardship outcomes for investors while not unduly contributing to reporting burdens,” the FRC said in a statement.The review will focus on whether the code has led to unintended consequences, such as “short-termism” in targets.After meeting with industry participants, the FRC will make concrete proposals in the summer for public consultation, with the revised code published in early 2025.The Capital Markets Industry Taskforce (CMIT), an industry group chaired by London Stock Exchange CEO Julia Hoggett, said in November the code must be “recalibrated” to stop measuring compliance simply by counting the number of letters written to companies, or board resolutions opposed.Instead, there should be “constructive dialogue” allowing companies to set pay at globally competitive levels to end UK executives being paid less than global peers, which is a “deterrent to listing” in Britain, CMIT said.The High Pay Centre, a think tank focused on responsible corporate governance, said the review was a sign the regulator would be giving the green light to higher pay awards for CEOs.”It is wrong to suggest the UK lacks competitiveness in CEO pay, when FTSE CEOs are the best paid in Europe,” it said.Pressure from the business ministry led the FRC to ditch the bulk of its proposals to beef up its separate corporate governance code for companies last month.($1 = 0.7886 pounds) More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is professor of government at Georgetown University and co-author of ‘Underground Empire’Markets are now battlefields and the EU is scrambling to protect itself. From investment screening to export controls, Brussels is hard at work crafting an economic security apparatus. But it would be a mistake for Europe to target its defences primarily at China. With Donald Trump’s near-certain nomination as the Republican candidate for US president, the EU needs to quickly redouble its efforts or risk leaving itself woefully exposed. It is hard to understate the scale of the needed transformation. The EU was founded on the idea that openness and trade were channels for peace and prosperity, not vectors of vulnerability. Surprisingly, Europe has already started to adapt to these unexpected risks, releasing an economic security agenda supported by a raft of policy proposals.But decoding the bureaucratese reveals that these largely defend against the threat of China, even if this isn’t always explicit. The worries that they address (including investment screening, industrial espionage and dual use technology) are rooted in how Beijing has started pushing the EU around. Lithuania suffered punishing informal sanctions when it upgraded the title of Taiwan’s delegation, while China reportedly threatened to retaliate against German companies if the German government failed to clear an investment deal in the port city of Hamburg.China is a major threat, but the EU won’t talk about the even bigger elephant in the room — a future Trump administration. That is surprising, since it was Trump’s aggressive reimposition of Iran sanctions that first woke the EU from its geopolitical slumber in 2018. When the bloc realised that it was impotent against US measures targeting its oil, gas and financial sectors it started to think seriously about economic coercion.A second Trump administration would be much worse. When asked to identify major economic threats, Trump singled out the EU as a “foe”. His signature campaign promise is to impose a 10 per cent across-the-board tariff. Even if he does not go after Europe directly, he will no doubt escalate conflict with China. And unlike the Biden team, which has tried to work with European allies to minimise collateral damage, Trump would probably use sanctions, financial coercion and control of key technologies to force European business to bend the knee.The EU has to accept that economic coercion comes not only from the east but also the west. And it cannot wait until January 2025 to prepare. It must think through its vulnerabilities with the US now and work to minimise chokepoints in the relationship.First, the EU will have to invest in considerable expertise in economic coercion and sanctions, in particular. Over a single weekend in 2022, the European Central Bank, in co-ordination with the US Treasury, was able to freeze €300bn of Russian reserves. Europe does not lack economic power in principle. What it lacks is the expertise and authority to confront the US on its own. With only a few dozen sanctions targeters across the entire continent, European member states depend on the US Treasury to provide the necessary intelligence to target its own economic strikes. And US resolve helped Europe overcome an internal political process riddled with vetoes. Unfortunately, the European economic security agenda, so far, is silent on sanctions. Trump will exploit these weaknesses and the political divisions that undermine European efforts to remedy them.If Europe hopes to stand up to a bully, it must also be willing to act. Officials in Brussels publicly hope they will never be forced to deploy their theoretically powerful anti-coercion instrument, which turns access to its single market and customs union into a deterrent. But these hopes undermine the instrument’s credibility. If the EU isn’t prepared to use a weapon, no one will care that it exists on paper. Just as the US went after large European banks for breaching sanctions in the 2010s, the EU should start thinking about test cases that could signal its power and resolve. Turning defence into offence would not only push back against Trump but also an increasingly belligerent China. It would also be a warning for any future US administration that seeks to turn its economic weapons against Europe.Europe has proven itself more nimble than most critics would have expected, accepting that global markets generate vulnerabilities as well as prosperity. But it needs to focus not just on the challenge but the likely challengers. Ignoring the risk of a re-Trumpified America might set Europe up for a very harsh winter indeed. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Marks and Spencer has become the latest UK retailer to increase wages as large supermarket groups continue to battle to retain workers.The FTSE 100 company said hourly pay for 40,000 employees will from April go up from £10.90 to £12, a 10.1 per cent rise on last year. For those working in London, the rate will increase by more than £1 to £13.15.The pay bump means the majority of its workers will be paid the voluntary Real Living Wage, which is higher than the compulsory National Living Wage in the UK. The latter is set to rise to £11.44 an hour in April.Andrew Speke, at the High Pay Centre think-tank, said the growth in supermarket pay was largely a reflection of the challenges companies face in a tight labour market as it appeared to outpace average wage growth.All the major supermarkets have been increasing pay amid a tight labour market and the cost of living crunch over the past 18 months.Sainsbury’s announced in January it would increase its hourly rate from £11 to £12 for 120,000 employees from March, a move that will cost it £200mn. It mirrors similar rises from German competitors Aldi and Lidl. Last month Lidl matched Aldi’s pay rise for store and warehouse workers. From March, Lidl’s national rate is set to rise from £11.40 to £12, while its rate within the M25 will go up from £12.85 to £13.55. Aldi announced identical measures in December, which kicked in this month.“M&S’s decision to increase minimum pay levels in line with numerous other supermarkets reflects this reality,” Speke said. “While one would hope these companies are also taking into consideration the challenges low-paid workers face with the rising cost of living, the impetus for these pay increases is likely out of necessity due to market conditions rather than altruism.”The annual pace of growth in average weekly earnings, including bonuses, slowed to 5.8 per cent in the three months to December in the UK, according to official data this month.M&S chief executive Stuart Machin on Tuesday said the changes, totalling £89mn, were about being “the most trusted employer” as the company announced a host of other benefits relating to maternity, paternity and adoption policies.The announcement comes after more than 9,200 M&S employees were told last month they were set to receive bumper share payouts, thanks to a share save scheme, as the retailer’s turnaround continued. The stock has risen 52 per cent in the past year. 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 TuesdayThank you for commenting so expertly on the causes of the great inflation last week. I’ve collated some of the responses below, most of which concluded that the insides of the economic modelling sausage factory were pretty ugly. This week, I will take a look at economic scenarios. These promise to be the antidote to the forecasting difficulties central banks have experienced in recent years. You might notice I have some reservations. I’d love your thoughts. Email me: [email protected] vs scenariosA particular bugbear of mine occurs when officials paint some picture of the future and say: “This is a scenario not a forecast.” As I will explain shortly, this is a distinction without a difference in almost every case. Worse, the distinction generally has the specific purpose for the central banker of removing their accountability for errors of analysis or judgment. Ultimately, it makes public officials appear slippery and erodes trust in important economic institutions. With views like these, you will understand that my ears pricked up when Bank of England governor Andrew Bailey gave evidence to UK parliamentarians last week. He said the former Federal Reserve chair Ben Bernanke, who is advising the bank on forecasting, was actively looking at a greater role for scenarios in future BoE analysis, policymaking and communication.“If we were to use scenarios more — in other words, present scenarios around a forecast — would that help?” Bailey posed a good question. A focus on scenarios has been gaining a growing following among central bankers along with some academics, particularly during the pandemic. Before we can analyse the pros and cons, we need a brief detour into the difference between forecasts and scenarios. Central bankers often worry that the public believes their forecasts are unconditional and akin to predicting “the sun will rise in the east tomorrow”. In fact, all economic forecasts are conditional and depend on a series of assumptions relating to the path of interest rates, energy prices, the state of domestic and international politics and fiscal policy, among many other things. The moment a forecast is conditional, however, it is just a scenario with a particular set of assumptions. There is no difference. Conceptually, it is also the same as seeing the future based on tea leaves, wrinkles on your palm or your star sign. These are also conditional forecasts (although with underlying models I don’t like much). Unlike central bankers, I think the public are quite good at understanding conditional forecasts and language has evolved to convey this meaning quite specifically. If I shout, “read the tea leaves”, you know I am am accusing you of failing to look at the evidence correctly. Enough of that digression. There are some strong arguments in favour of using scenarios in addition to the usual forecasts. The first use case arises when you want to play the thought experiment, “what conditions would have to be in place to make something happen?” The Bank for International Settlements was particularly effective in 2022 on this, outlining what needed to happen for the world to get stuck in a high inflation equilibrium. For monetary policy, it is always worthwhile to think what would need to happen to end up in a high or low interest rate world, for example. A second use for scenarios is to examine radically different conditioning assumptions. In the pandemic, it was helpful to look at the likely economic landscape under scenarios such as “a vaccine becomes available” and “new deadly Covid variants emerge”. These had starkly different policy prescriptions, as a working paper by Michael Bordo, Andrew Levin and Mickey Levy in June 2020 highlighted. A third important use case arises from central banks’ delicate relationship with governments. Monetary policy officials generally have to base their main forecasts on existing fiscal policy, since anything else would suggest they were second guessing elected politicians. What should be possible occasionally, however, would be an alternative scenario based on a different fiscal policy. “What happens to inflation if the US government does not allow the 2017 tax cuts to expire in 2025?” That is something that could give an interesting and relevant answer. Alternatively, it might serve a purpose in showing the monetary policy consequences were trivial. A fourth use case arises when considering alternative outcomes on a more routine basis, such as what the difference is between assuming energy prices follow the future’s market curve or something else. European Central Bank chief economist Philip Lane has said that different scenarios of the Ukraine war were helpful in framing ECB thinking in March 2022, for example. But in the end I am still sceptical about the transformational value of building alternative scenarios around the main central bank forecasting scenarios — either in private or for public consumption. I caught up with Professor Martin Weale, former BoE external monetary policy committee member, for a chat about this last week. He said it was very interesting to look at different scenarios and their implications for monetary policy. The problem when it came to setting policy, he added, was that you need to “know which scenario you are in” to be able to have a view on rates, so they don’t give you any more guidance than the normal forecasts. Also, economic models tend to bring the world back into some sort of order pretty quickly. A good illustration of this is to look at the scenarios facing the Fed in September 2008 in its “greenbook”, which is published five years in arrears. As the chart from Bordo, Levin and Levy below shows, none of the unemployment scenarios modelled by the Fed as Lehman Brothers collapsed was remotely serious enough, compared with the actual unemployment (red line) the US suffered after 2008. My third reservation is that central banks are unlikely to use scenarios where they might be most valuable in examining potential fiscal policy moves and most likely to use them as a tool to minimise accountability for their analysis and decisions. Even if the world was different from the conditioning assumptions made in central bank forecasts, it is legitimate to question their actions and thinking. A highly relevant scenarioI’ve lost count of the number of times I’ve heard central bankers say they must be cautious about inflation because energy prices might rise again. This is a reasonable scenario to ponder. It would be better, however, if European central bankers also questioned closely what happens if energy prices keep falling, as they have since mid-October. The falls in European natural gas futures are important and large as the chart shows. If you click on it and go online, you can toggle between UK and European wholesale prices. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Revisiting Bernanke and BlanchardI received a large postbag regarding last week’s newsletter on the causes of the great inflation using the framework developed by Olivier Blanchard and Ben Bernanke. Some, such as Erik Nielsen, adviser to UniCredit, said the results showed the ECB could have been more cautious in raising rates since the initial inflation conditions were weak. Others were less focused on the results than the estimation methodology. Paul Donovan at UBS worried that high vacancy to unemployment rates was not really demonstrating tight labour markets, but post-pandemic special factors. The model was potentially giving incorrect results, he said. Stefan Hofrichter at Allianz criticised the lack of fiscal and, particularly, monetary stimulus as a potential inflation driver in the modelling. The most comprehensive response came from Marco Casiraghi and Krishna Guha at Evercore ISI, who have replicated the Bernanke Blanchard model for the US (having received the code from the authors) and played around with the assumptions. Their key conclusion is that the model is rather sensitive to the precise assumptions used. They argue that more plausible alternative specifications provide a very different policy conclusion. Instead of demand weakness and higher unemployment being necessary to bring inflation down, they find the opposite results are possible with a different specification of the same model.Similar to Donovan, they worry that the vacancy rate is not the best measure of a tight labour market for the US and get very different results using the quits rate as shown in the following interactive chart. If you’re reading on email, click on the chart to view it interactively online.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.What I’ve been reading and watchingAdvanced economy house prices are rising again, concludes my colleague Valentina Romei after analysing OECD data. Good news if you’re concerned about the fragility of the banking system. Bad news if you’re concerned about the affordability of housingNot surprising at all is the fact that central banks are making large losses arising from quantitative-easing programmes in a higher interest rate environment. Last week, we saw the ECB and Bundesbank reporting. These are genuine public finance losses for the consolidated public sector, reaped mostly by commercial banks, although most countries like to pretend otherwiseNever one to avoid a scrap, Larry Summers of Harvard University has joined in the debate on why the US public appears so cross about a strong economy. People don’t like high borrowing costs, a working paper he has co-authored concludesFormer BoE official David Bholat convincingly argues that the central bank digital currency blueprint in the UK creates “a product without an obvious market”. It won’t pay interest, prevent private-sector surveillance, be anonymous or safer than existing digital payment mechanismsIn my column last week, I look at the real differences between the EU and US economies — rising relative employment offset by weakening productivity. Resolving this needs both structural reform and a supportive macro environmentA chart that mattersDon’t be surprised on Thursday if US inflation, as measured by the core personal consumption expenditure deflator (the one the Fed prioritises), is “surprising”. The consensus expectation is for the monthly increase in January to be 0.4 per cent, the same as the monthly rise in the consumer price index a couple of weeks ago. But while the PCE tends to rise a little less, the variability in outcomes relative to the CPI have become much greater since the pandemic. I’m not suggesting it will be much lower, but there have been many surprises recently. 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

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