Aurelia Butler

ISTANBUL (Reuters) – Turkey’s central bank is expected to raise its policy rate sharply on Thursday in a strong signal that re-elected President Tayyip Erdogan has accepted some steps toward economic orthodoxy to address inflation that has soared under his watch. The expected policy pivot, under new central bank chief Hafize Gaye Erkan, comes amid a cost-of-living crisis that saw inflation hit a 24-year high of 85.5% in October, before declining to just below 40% last month. The lira currency, meanwhile, has skidded to record lows since last month’s election.All 18 economists in a Reuters poll predicted a rise in the one-week repo rate. But the level remains uncertain as the central bank has not given any signals as to its next steps, including the size or pace of potential hikes.Some economists have expressed doubt about Erdogan’s commitment to abandoning his unorthodox policy of low rates, which led the central bank to slash its policy rate from 19% in 2021 to 8.5% currently.The median estimate was for a hike of 1,250 basis points to 21% this month. Predictions ranged from 12.50% to 30%, with some economists thinking hikes will be more gradual.The central bank’s foreign exchange buffer has dwindled, with net reserves touching a record low of negative $5.7 billion in May, reflecting authorities’ efforts to prop up the lira. Given the drawdown in reserves, analysts have warned of a potential balance-of-payments crisis as the country’s current account deficit widened to $48.4 billion last year, its highest since 2013, mainly due to soaring energy prices.The lira has lost more than 80% of its value since 2018, largely due to rate cuts in the face of rising inflation.Authorities hope foreign investors and hard currency will return after a years-long exodus, potentially reducing the central bank’s need to intervene to keep the lira stable.GREEN LIGHT FOR HIKESMalek Drimal, lead CEEMEA strategist at Societe Generale (OTC:SCGLY), forecast a hike to 15% and commitment to more hikes in coming months, with the policy rate reaching 25% in August.”However, our clients would typically like to see a substantial tightening very soon – in the area of 15-25% hike at the next meeting,” he said.”We believe that even a more gradual hiking cycle – accompanied by hawkish messages and a push to return to orthodoxy in general – might be sufficient to stabilise the lira during the summer, with the help of tourist revenues.”All but one of 13 economists in the poll saw further tightening this year. The median estimate for the policy rate at end-2023 was 30%, with forecasts ranging from 18% to 35%.Erdogan said last week he had approved the policy steps that new Finance Minister Mehmet Simsek, highly regarded by financial markets, will take with the central bank, suggesting he has given the green light to rate hikes.Ratings agency Moody’s (NYSE:MCO) said on Tuesday proof that Turkey has shifted towards more orthodox and predictable economic policymaking would be “unequivocally credit positive”.But Erdogan also said his views on interest rates have not changed, and the goal is to ultimately lower inflation, as well as rates, to single digits. Erdogan frequently espouses the maverick view that high rates stoke inflation. Some analysts noted previous examples where Erdogan returned to orthodoxy only to change his mind. He named Naci Agbal as central bank governor in Nov. 2020 but, after some sharp rate hikes, replaced him less than five months later.One banker, who requested anonymity, said the fact that Simsek has not brought in any new Monetary Policy Committee members except Erkan shows he “has little room to manoeuvre.”The central bank is scheduled to announce its rate decision at 1100 GMT on Thursday. More

President Volodymyr Zelenskyy appealed to his allies to start funding “real projects” for his country’s reconstruction at a summit in London dedicated to spurring a Ukrainian recovery.“We must move from vision to agreements and from agreements to real projects,” Zelenskyy told foreign ministers, Ukrainian officials, bankers and development experts at the Ukraine Recovery Conference in London by video link.“Every new day of Russian aggression brings new ruins,” Zelenskyy said.The World Bank estimated in March that the cost of reconstruction and losses to the Ukrainian economy from Russia’s war stood at $411bn with $14bn needed for priority repairs this year.The conference is intended to encourage private sector-led investment in Ukraine’s recovery, including by expanding publicly subsidised insurance to cover war risks for investors. “The war has proved how much Ukraine has to offer,” said UK prime minister Rishi Sunak.However, progress is expected to fall short of Ukrainian hopes for G7-funded insurance covering billions of dollars of private investment.UK officials said the event was not a “pledging conference” but that individual pledges from governments and announcements of loans from international financial institutions would allow Ukraine to approach the $14bn need for priority repairs and investments.US secretary of state Antony Blinken said Washington was sending an additional $1.3bn in aid to strengthen Ukraine’s energy grid, modernise and expand its border and port infrastructure to ease export flows and subsidise war risk insurance.The EU said it would provide €50bn in grants and loans over the next four years. The UK will give £3bn in guarantees to the World Bank to expand its lending to Kyiv.European Commission president Ursula von der Leyen said Brussels would present proposals by the end of July on using seized Russian assets to help pay for Ukraine’s recovery. Brussels on Wednesday said Kyiv met two of the seven EU benchmarks demanded by the bloc before starting membership negotiations. The reforms are seen as vital to improving the business environment, with von der Leyen saying Ukraine’s progress would “send a powerful message to international investors”.G7 countries and IFIs have formed a “multi-donor platform” to co-ordinate their aid to Kyiv but some Ukrainian officials have voiced frustration that it is too bureaucratic and not as focused on practical outcomes as the Rammstein group marshalling military aid. Ukrainian officials say that a push to stabilise the economy and salvage private sector activity will yield tax revenues to finance their war effort.“We can pay salaries from soldiers only from taxes,” said Oleksandr Kubrakov, deputy prime minister for recovery. “Nobody knows how long this war will last. It is critical to start the recovery.”Ukrainian businesses have been resilient but many are in financial distress due to a punishing 25 per cent interest rate and a lack of collateral. A survey for the World Bank found that 69 per cent of large Ukrainian companies are expected to be in arrears in the next six months. 75 per cent of exporters have experienced a drop in exports due to logistical problems. The Ukrainian government lacks expertise in planning and managing capital projects, creating bottlenecks for reconstruction, say development bank officials. “Building capacity in Ukraine is really important,” said Anna Bjerde, managing director for operations at the World Bank. She pointed out that Ukraine’s capital spending amounted to $4bn-5bn a year before the full-scale invasion. Now it would have to manage several times that sum.Kubrakov said his country did not lack skilled personnel but that the effort of complying with the procedures of international financial backers had grown enormously. Kyiv has asked donors to take charge of procurement on some projects to ease the burden.Donors and lenders are also stepping up their tracking procedures to prevent corruption.Most of the $23bn disbursed to Kyiv since February 2022 by the World Bank has been paid to Ukraine’s finance ministry, which has a “robust financial tracking system”, said Bjerde. “When we move into other sectors we need to be really cognisant of the corruption risks.”The EU commission will establish an independent audit board to report on suspected mismanagement of public funding and weaknesses in control. Ukrainian officials meanwhile are touting technology as a way of reassuring donors and lenders about fraud and corruption risks. The government says it will deploy a suite of digital applications and tools, known by the acronym DREAM, to manage contracts and track money. It includes the digital public procurement system known as Prozorro, which provides full transparency of contracts, and is credited by anti-corruption activists for cleaning up government purchasing. “At some points, Ukraine is more transparent than our partners,” said Danylo Mokhanov, one of the team behind the DREAM initiative.Additional reporting by Henry Foy in Brussels More

Below are the details of some of the commitments made in connection with the Ukraine Recovery Conference in London. EUROPEAN UNIONThe EU said on Tuesday it would provide Ukraine with 50 billion euros ($54.6 billion) in aid for 2024-27, of which 17 billion euros would come in free grants and the rest in the form of low-interest loans, it said. UNITED STATESU.S. Secretary of State Antony Blinken pledged $1.3 billion of additional aid.He said $520 million was for overhauling Ukraine’s energy grid, $657 million was for modernising its border crossings, ports, rail lines and other critical infrastructure, $100 million was to help digitise Ukraine’s customs and other systems, while another $35 million would help businesses in the country with financing and insurance costs.BRITAIN British Prime Minister Rishi Sunak outlined a package of support including loan guarantees worth $3 billion over three years. The country will also commit up to 250 million pounds ($318 million) of new capital for the British International Investment mechanism in Ukraine.There will also be an extra 240 million pounds of aid for Ukraine this year for humanitarian support, disaster relief kits, mine-clearance and energy projects. FRANCEFrench Foreign Minister Catherine Colonna said France would provide an additional 40 million euros ($44 million) to fund emergency reconstruction of critical infrastructure and health equipment. GERMANYGerman Foreign Minister Annalena Baerbock committed an extra 381 million euros for humanitarian assistance this year. “For everything from generators to food, and tents for those who have fled or lost their homes recently,” she said. ($1 = 0.7870 pounds)($1 = 0.9155 euros) More

LONDON (Reuters) – British inflation defied forecasts of a fall in May and stayed far above price growth in the United States and elsewhere in Europe, pressuring the Bank of England to keep on raising interest rates despite the growing hit to mortgage-holders.Britain has struggled more than other countries with the surging cost of food, a shortage of workers to fill jobs and its heavy reliance on natural gas to generate power and domestic heating, all of which adds to inflation pressure.Below is an explanation of Britain’s high inflation problem.HOW DOES UK INFLATION COMPARE TO OTHER COUNTRIES?Britain’s consumer price index rose by 8.7% in annual terms in May, unchanged from April and defying forecasts among analysts polled by Reuters for a slowdown to 8.4%. Although down from 11.1% last October, it left the country with the highest inflation rate among the Group of Seven advanced economies.By comparison, inflation stood at 4.0% in the United States and 6.3% in Germany. WHAT ABOUT CORE INFLATION?Britain’s measure of underlying inflation that excludes volatile items, such as energy and food, took investors by surprise by accelerating for a second month in a row in May, hitting 7.1%, up from 6.8% in April.Higher core inflation is seen as a sign that price growth is more likely to remain persistently high.Another gauge of underlying price pressure that is watched closely by the BoE – services price inflation – also rose. Both increases were the strongest in more than 30 years. WHY IS FOOD INFLATION SO HIGH IN THE UK?Britain has had western Europe’s highest rate of inflation for food, with prices up more than 18% over the past year, down only slightly from a recent peak of more than 19%, the highest since 1977.Freak weather has affected crops around the world, pushing up prices for many countries. But Britain is the world’s third largest net importer of food and drink, according to the Food and Agriculture Organization of the United Nations – behind only China and Japan – leaving it particularly exposed.Industry data published on Tuesday showed British grocery inflation eased slightly for the third month in a row in June. BoE Governor Andrew Bailey said last month that British food producers may have locked in higher costs than the BoE had anticipated, explaining some of its underestimate of inflation.ENERGY PRICESBritain is highly reliant on imported gas to generate electricity, exposing it to the full force of the surge in gas prices last year after Russia’s invasion of Ukraine. The way Britain regulates energy prices for domestic and business users – it announces changes to maximum tariffs on a quarterly basis – means that international price rises are slower to push up inflation than in many other countries but falls are also slower to feed through into bills for users.IS BREXIT PART OF THE PROBLEM?Britain voted in 2016 to exit the European Union and it left the EU’s single market at the start of 2021. Although London and Brussels have an agreement allowing largely tariff-free trade in goods, there are barriers to exports and imports in the form of paperwork which have caused delays and higher costs.The end of free movement of workers from EU countries has contributed to a shortage of staff faced by many employers that is more acute in Britain than in many other economies and which has pushed up wages and ultimately prices for consumers.WHAT DO PEOPLE THINK WILL HAPPEN WITH INFLATION?The British public’s expectations for rising prices have cooled somewhat in recent months, perhaps the only bright spot for the BoE as it monitors the risk of an inflation psychology becoming engrained in consumer behaviour.But those expectations remain elevated, contributing to wage growth at levels that makes the BoE uncomfortable about future inflation pressures. WHAT IS THE BANK OF ENGLAND LIKELY TO DO?Investors and analysts responded immediately to Wednesday’s data by pricing in more interest rate increases than they had previously been expecting. Rate futures showed investors saw a roughly 40% chance that the BoE will raise rates by half a percentage point to 5.0% on Thursday and a 60% chance of rates reaching 6% by December. More

Analyzing the U.S. situation, BlackRock notes that “labor shortages are fueling wage growth, keeping core inflation elevated. That has led the Fed to double down on a “whatever it takes” approach to fighting inflation “They warn, “We think the Fed and ECB appear to be underappreciating the existing damage from hikes. The Fed revised its growth forecast up based on historically low unemployment. The Fed may be relying on a job and growth relationship that has broken, in our view. Labor shortages have made firms reluctant to let workers go, even as demand slows and growth stagnates.”BlackRock adds, “That has made job growth look resilient (orange line in the chart) in recent months compared with weaker jobs data in past recessions (gray lines), even as some data suggest recession may have already arrived.””We don’t think the Fed can expect to bring inflation back down so quickly and maintain such an optimistic view on growth. CPI data last week confirmed core inflation is not cooling enough yet for inflation to return to 2%.”Turning to its analysis of the European market, BlackRock warns that “the ECB’s determination to keep hiking has pushed up euro area government bond yields. The market pricing of hikes by the ECB and the Bank of England have become more extreme than our view: Pricing shows rates for both staying higher for much longer than the Fed while inflation stays elevated.””Bottom line: We think tight policy is likely here to stay as sticky inflation compels major central banks to keep policy tight – and likely tighten even further,” BlackRock concludes.(Translated from Spanish) More

UK inflation remained stuck at 8.7 per cent in May, worse than the 8.4 per cent expected, raising pressure on the Bank of England to ramp up interest rates.Wednesday’s data marked the fourth month in a row that price rises have exceeded forecasts, adding to the gloom afflicting rate-setters, Rishi Sunak’s government and many households.The BoE is set to raise rates on Thursday by at least 0.25 percentage points to 4.75 per cent but traders now put the odds of a larger 0.5 percentage point rise as high as 40 per cent and predict rates will peak at 6 per cent early next year.Despite the higher rates expectations, sterling fell 0.4 per cent against the dollar to $1.271 on growing recession fears.“We have an inflation problem that is not associated with economic growth,” said Lyn Graham-Taylor, a senior rates strategist for Rabobank. “The market is saying that the Bank of England will have to push the UK economy into recession to get on top of this problem.” Analysts said there was next to no good news in the inflation data. Core inflation, which excludes volatile food and energy prices, rose again in May to 7.1 per cent from 6.8 per cent the previous month, the highest rate since March 1992. Services prices were also up 7.4 per cent, also the highest rate in more than 30 years.

The monthly increase in overall prices of 0.7 per cent in May alone suggests that the current rate of price rises is not slowing down.Paul Dales, chief UK economist at Capital Economics, said the BoE would have to “fight tougher” to bring down inflation because “the acceleration in core inflation leaves the UK looking increasingly like the global outlier and the stagflation nation”. Kitty Ussher, chief economist at the Institute of Directors, said the only question for the BoE now was how much to increase the cost of borrowing. She said the failure of inflation to come down was probably caused by “the continuing impact of high energy costs and strong wage pressure being passed through to prices, all overlaid with high demand for leisure activities among households with disposable incomes”.Two-year gilt yields hit 5.1 per cent in early trade, their highest level since 2008, before easing to 5.03 per cent.

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In the detail of the figures, price rises again easily offset price cuts with significant increases in the cost of air fares, package holidays, live music events, games and toys. These were partially offset by falling prices for petrol and diesel. Food price inflation dipped from 19 per cent in April to 18.3 per cent in May, but the cost of food itself in supermarkets still rose 0.9 per cent in the month of May alone. The UK’s inflation rate of 8.7 per cent in May compared poorly with those in other countries. The equivalent figures are 6 per cent in France, 6.3 per cent in Germany, 7.1 per cent across the whole of the EU and 2.7 per cent in the US, using the most comparable measure.

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Chancellor Jeremy Hunt acknowledged the numbers were difficult for families and businesses across the UK and challenging for the government.“We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy, while also providing targeted support with the cost of living,” he said. Adding to fears for the UK outlook, net government debt rose above 100 per cent of gross domestic product for the first time since 1961, separate data on Wednesday showed. More

1. Powell starts congressional testimonyFederal Reserve chief Jerome Powell starts his two-day congressional testimony later Wednesday, addressing the House Financial Services Committee just a week after the U.S. central bank paused rate increases but signaled it could raise rates again this year.The Fed projected that the benchmark rate could reach 5.6% by the end of the year, which would imply at least two increases of 25 basis points.With this in mind, investors will be looking to see how strongly Powell stresses the need to resume rate hikes and whether they will restart as quickly as next month.”The focus is on whether the July meeting is truly ‘live’ and if the Fed dot plot of two more hikes is a true base case depending on the data, or doom-mongering on inflation in an effort to ensure no premature easing in financial conditions,” said Tapas Strickland, head of market economics at NAB.2. U.K. inflation remains elevatedU.K. inflation surprised on the upside earlier Wednesday, as headline CPI rose 8.7% in May, the same as the month before, and above the expected 8.4%.Additionally, core inflation, which excludes food and energy, accelerated unexpectedly to 7.1% from 6.8%, heaping pressure on the Bank of England to ratchet up its interest rate hikes when it meets on Thursday.The BOE is expected to raise rates by 25 basis points to 4.75%, though this inflation data increases the risk of a half-point increase as the central bank continues its quickest tightening cycle in 40 years.Adding to the country’s woes, a separate report showed that U.K. government debt climbed above 100% of GDP for the first time since 1961 after the government borrowed a greater-than-forecast £20 billion (£1 = $1.2708) in May.3. Futures flat; FedEx stock weakensU.S. futures traded largely unchanged Wednesday, with investors awaiting testimony from Federal Reserve Chair Jerome Powell [see above] for some insights on what lies ahead for interest rates.At 05:00 ET (09:00 GMT), the Dow futures contract had dropped just 3 points or less than 0.1%, S&P 500 futures traded flat, and Nasdaq 100 futures dropped 6 points or 0.1%.The main indices closed lower Tuesday as investors took money off the table in the wake of last week’s strong gains after the Fed paused its prolonged rate-hiking cycle.The broad-based S&P 500 last week hit its highest level since April 2022 and posted its fifth consecutive positive week.In corporate news, quarterly earnings are due from the likes of home builder KB Home (NYSE:KBH) and recreational vehicle maker Winnebago Industries (NYSE:WGO), while delivery giant FedEx (NYSE:FDX) stock fell premarket after ongoing “demand challenges” prompted its plans to ground 29 more aircraft in the fiscal year that started on June 1.4. Tesla looks toward IndiaElon Musk is turning his eyes once more towards India, the world’s most populous country, after the Tesla (NASDAQ:TSLA) CEO met with Narendra Modi during the Indian Prime Minister’s visit to the U.S.“I’m confident that Tesla will be in India and we’ll do so as soon as humanly possible,” Musk told reporters after the meeting. “We don’t want to jump the gun on an announcement, but I think it’s quite likely that there will be a significant investment.”Tesla and India have had discussions about investment into Asia’s third-largest economy before, but they were shelved last year after the Indian government insisted Tesla make cars locally, while the EV manufacturer said it wanted to export to India first so that it could test demand.5. Oil edges higher ahead of U.S. inventoriesCrude prices edged higher Wednesday, bouncing after two straight losing sessions, ahead of the latest weekly U.S. inventory data.By 05:00 ET, U.S. crude futures were 0.3% higher at $71.39 a barrel, while the Brent contract rose 0.2% to $76.03 per barrel.U.S. oil inventory data from the American Petroleum Institute industry group will be released later on Wednesday, delayed by a day following Monday’s public holiday, and a drawdown is possible after last week’s hefty one million barrel build.That said, the oil market is struggling to find support, even after Saudi Arabia decided to limit its supply, amid growing concerns over an economic recovery in China, the world’s largest crude importer, as well as tightening monetary policy through much of the west limiting economic activity.“OPEC+ action from several weeks ago has done little to propel prices higher and demand concerns continue to put a cap on the market,” analysts at ING said, in a note. More