Aurelia Butler

The Bank of England is set to raise its benchmark interest rate to 4.75 per cent on Thursday as it battles an inflation problem that has become more difficult and persistent over the past month. The expected quarter-point rise will mark the 13th consecutive increase in borrowing costs since the central bank’s Monetary Policy Committee started to push rates higher in December 2021. The UK’s inflation rate stood at 8.7 per cent in April — higher than most comparable economies and far exceeding the BoE’s 2 per cent target. Financial markets increasingly believe that it will come down only if interest rates rise sharply, hitting mortgage borrowers in ways not seen since the early 1990s. This means that Britain’s protracted cost of living squeeze is now accompanied by a mortgage “time-bomb”, with hundreds of thousands of households set to face spiralling costs as they come off fixed deals in 2024, when a general election is expected. The pressure that the state of the economy has placed on Rishi Sunak and his government increased further on Monday when the two-year fixed mortgage rate hit 6 per cent.BoE governor Andrew Bailey is also in the spotlight over the central bank’s performance in controlling inflation. Over the past six weeks, he has been forced to admit that the bank has underestimated short-term inflation and that its forecasting model is not working properly. He has also acknowledged that the bank has “lessons to learn” in the conduct of monetary policy, and has ordered a rushed review of its forecasting and communications.

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In light of this, traders and economists will be listening to what the central bank says, as much as examining what it does, on Thursday, and will be searching for clues as to how far interest rates will rise. One of the most important elements in how the bank communicates its decision will be the May inflation figures, which are published on Wednesday. Economists expect a decline in the headline CPI inflation rate from 8.7 per cent in April to 8.5 per cent on the back of price cuts, especially in diesel prices. But core inflation is expected to remain sticky at 6.8 per cent, far above the central bank’s 2 per cent target. Strong inflation and wage data over the past month have already transformed the outlook for interest rates in the eyes of financial markets. Although official figures last month showed that CPI inflation fell from 10.1 per cent in March to 8.7 per cent in April, the rate was far above the BoE’s internal expectations and showed that underlying inflationary pressure was much stronger than hoped. Core inflation, excluding food, energy and alcoholic drinks, rose from 6.2 per cent to 6.8 per cent over the same period. Wage figures last week compounded the sense that the BoE had failed to understand price setting, with average earnings growing at a near-record pace of 7.2 per cent on an annual basis between February and April. This showed that there was almost certainly a stronger ratchet effect between wages and prices in the UK than in other countries. Traders betting on the future of the BoE’s benchmark interest rate now expect it to peak at 5.75 per cent by the end of this year, a full percentage point higher than they expected when the MPC last met on May 11. On the back of the bad data and market moves over the past month, economists have also sharply revised higher their expectations of interest rates and are more than usually confident that the MPC will raise them on Thursday.

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Robert Wood, UK economist at Bank of America, said: “All indicators of persistent inflation pressure that the Bank of England said it would monitor closely have surprised on the upside or printed in-line with BoE forecasts.”Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that the April wage and price data left the BoE little option but to act. “It’s almost a foregone conclusion that the MPC will hike the bank rate by 0.25 percentage points to 4.75 per cent on Thursday,” he added. If the rise in interest rates is universally expected, economists, politicians and mortgage borrowers will also want to know on Thursday how much further the central bank thinks it needs to go. Normally, the BoE would not have a news conference after the June meeting. However, the market movements over the past month have been so large, that they could force Bailey to comment.He could push back against expectations of further increases if the MPC thinks that financial markets have made borrowing costs too expensive, as he did last November when he said he expected rates to “go up by less than currently priced into financial markets”. However, this would risk the bank appearing too complacent about inflation and undermining its credibility.If, by contrast the central bank says little, the absence of guidance could mean that mortgage rates will remain elevated, causing unnecessary financial pain for many households and the government, and it could push the economy into recession. BoE watchers think the MPC is unlikely to comment on Thursday and will leave in place its current guidance that it will raise rates further if there is evidence of persistent inflation.Bruna Skarica, UK economist at Morgan Stanley, said she did not “anticipate a forceful pushback against market pricing”, even though in her view BoE officials did not think interest rates needed to rise over 5 per cent. More

In the Chinese city of Yiwu, home to the world’s largest wholesale market for small manufactured goods, socks exporter John Zhu is heartened by the rising number of Russian traders willing to settle their bills in renminbi. “Russia’s break-up with the west leaves the country no choice but to rely on the renminbi to keep its economy afloat,” said Zhu, noting that clients in Moscow sent renminbi payments via WeChat, the Chinese social media app. “We are a beneficiary of the trend.”With its 75,000 stores, Yiwu has been nicknamed China’s trinket town, the centre of a multibillion-dollar trade in everything from Christmas decorations to toys and umbrellas to pencils. It is also at the heart of a decade-long experiment to internationalise the renminbi as Beijing seeks to strengthen the role of the world’s second-largest economy in the global financial system. While progress has been slow, more people are settling contracts in the renminbi since Moscow was cut off from dollar financing by western sanctions following its invasion of Ukraine, traders in Yiwu said. There has been a fivefold surge in annual renminbi trade settlement since 2019 in Yiwu to about Rmb56.5bn ($8bn) last year, according to official statistics. This far outpaced the national average, which increased more than 80 per cent in the same period.“Yiwu is leading the pack in China’s efforts to make the renminbi an international currency,” said Dan Wang, chief economist at Hang Seng Bank China. Just over a tenth of trade in the export hub last year was settled in the Chinese currency, with the dollar accounting for more than 80 per cent of trade, according to official statistics. China’s export-oriented renminbi trade settlement accounts for less than 7 per cent of total exports, compared with almost 12 per cent in Yiwu, said an adviser to the central government on foreign policy.Beijing has encouraged renminbi use and by the end of last year, it had signed currency swap agreements with 40 countries including Argentina and Brazil. The swap agreements allow central banks to provide renminbi liquidity to commercial banks in the event of a shortage, helping shore up confidence among companies nervous about conducting trade in China’s currency. Several factors have influenced the rising use of the renminbi in Yiwu, not all of which can be easily replicated. Yiwu was one of the first cities in China to allow individual merchants to settle larger cross-border deals in renminbi. Most cities have an annual cap of $50,000. Given Yiwu’s reputation for cheap goods and flexible terms, helped by the fact that wholesalers do not pay either corporate tax or market rent, exporters have sufficient bargaining power to request settlement in renminbi.“When you have only one place to go to purchase something, the seller sets the terms on how transactions are settled,” said James Wu, a Yiwu-based furniture exporter who began demanding renminbi payments from Middle Eastern clients last year.Yiwu has long had strong trading connections with emerging economies, more open to dealing in the renminbi, traders said. Senegalese trader Mouhamadou Pouye largely eschews the US dollar to settle most of his trade in renminbi. “I can’t say renminbi is going to replace the US dollar,” said Pouye, who buys Chinese electronics and medical equipment in Yiwu to sell in his native Senegal. “But the amount of dollar transactions is getting lower and lower year by year.”Analysts have warned, however, that limited offshore reserves and China’s stringent capital controls will limit the renminbi’s adoption. “The institutional support for renminbi to go global is not strong enough,” said Tan Xiaofen, a finance professor at Beihang University in Beijing. To spur greater global use, China would need to relinquish control over the renminbi’s exchange rate and drop capital controls, allowing the currency to circulate freely, as with the dollar. But policymakers prize those controls and have shown little willingness to give them up. Many foreign central banks have stockpiled their renminbi reserves for emergencies such as paying down foreign debt, according to a Beijing-based adviser to the People’s Bank of China. “Some policymakers in developing countries don’t want to make full use of offshore renminbi even when local merchants are keen to do so,” the person said.The lack of renminbi settlement abroad means many Yiwu merchants use underground money shops, which exchange currencies such as West Africa’s CFA franc for renminbi at low cost, to facilitate trade.Wu, the furniture exporter, said a quarter of his renminbi sales were paid out through third-party brokers.Such arrangements carry their own pitfalls. Authorities have frozen tens of thousands of bank accounts belonging to Yiwu merchants in recent years over money laundering risks, according to local lenders and state media reports.

Rising trade with Russia in the wake of the Ukraine conflict can also bring compliance issues. “If we get caught by the US government for a Rmb200,000 trade settlement with Russia that breaks sanction rules, we may get a fine of Rmb2bn,” the official said.Other obstacles are more prosaic. Back at his stall in the giant Yiwu International Trade City, Zhu, the socks exporter, said he stopped seeking renminbi payments from an Ethiopian client this year because the lack of currency reserves meant he had to wait a long time to obtain renminbi. “I am not going to wait for an extra three weeks to receive renminbi when I can get paid in dollars right away,” he said. More

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.The People’s Bank of China takes center stage on Tuesday with a near-certain interest rate cut, according to the expectations of investors, who are also trying to read the political tea leaves from U.S. Secretary of State Antony Blinken’s visit to Beijing.Trading volume across the region should pick up after U.S. markets were closed Monday for the Juneteenth holiday, and Malaysian trade, Japanese industrial output, and Hong Kong inflation data could all move asset prices in these countries.All eyes, however, are on Beijing.All 32 market watchers in a Reuters poll said the PBOC will cut key lending benchmarks for the first time in 10 months, as authorities battle to shore up a slowing recovery in the world’s second-largest economy and ward off the threat of deflation.The PBOC last week lowered short- and medium-term policy rates, paving the way for lower benchmark borrowing costs. Most poll participants expect the one-year loan prime rate to be cut by 10 basis points to 3.55%, and half said they forecast a deeper cut of at least 15 bps to the five-year LPR.The weakness of recent economic data suggests the anticipated loosening of policy on Tuesday will be on the aggressive side and will be followed with further easing in the coming months.Several major banks have cut their 2023 GDP growth forecasts for China to a 5.1% to 5.7% range from an earlier range of 5.5% to 6.3%.Chinese stocks on Monday posted their biggest fall in two weeks, but the weakness was not confined to China. The MSCI World index came off last week’s 14-month high, Japan’s Nikkei lost 1%, and Hong Kong tech and the MSCI Asia ex-Japan index both had their biggest falls in three weeks.That’s the economic and market backdrop to U.S. Secretary of State Blinken’s visit to Beijing, which ended on Monday with all the diplomatic courtesies and protocols one would expect, but with no major breakthrough for investors to cling to.The two countries agreed to stabilize their rivalry so it doesn’t veer into conflict, hailed “progress” and stressed the importance of a more stable relationship. But they appeared entrenched in their positions over everything from Taiwan to trade, including U.S. actions toward China’s chip industry, human rights and Russia’s war against Ukraine.The yuan remains under pressure, anchored near seven-month lows against the dollar, and sentiment toward the Chinese currency will not have been boosted by the auspicious start to yuan-denominated trading in certain Hong Kong stocks on Monday.The 24 companies that debuted the yuan-denominated stock trading scheme attracted a small fraction of their stocks’ trading volume, as interest in using the new currency option was dwarfed by the Hong Kong dollar.It is early days, of course, but perhaps another reminder that the yuan’s road to internationalization is a very long one.Here are key developments that could provide more direction to markets on Tuesday:- China interest rate decision- Japan industrial production (April)- Malaysia trade (May) (By Jamie McGeever; Editing by Lisa Shumaker) More