Aurelia Butler

LONDON (Reuters) – The Bank of England raised its key interest rate by a quarter of a percentage point to 4.5% on Thursday and Governor Andrew Bailey said the British central bank would “stay the course” as it seeks to curb the fastest inflation of any major economy.The BoE is no longer predicting a recession after it made the biggest improvement to its growth projections since it first published forecasts in 1997. But it now expects inflation – which remained above 10% in March – to fall more slowly than it had hoped, mostly due to unexpectedly big and persistent rises in food prices. It also saw stronger wage growth than it previously thought.”We have to stay the course to make sure inflation falls all the way back to the 2% target,” Bailey said at the start of a press conference before stressing that the BoE was not sending any signals about its next moves, which would depend on data.Policymakers voted 7-2 for May’s increase, in line with economists’ expectations in the Reuters poll, with Monetary Policy Committee members Silvana Tenreyro and Swati Dhingra again opposing further tightening. GRAPHIC: Bank of England raises rates for 12th time in a row https://www.reuters.com/graphics/BRITAIN-BOE/dwpkdnjgzvm/chart.png A Reuters poll last week showed most economists expected a 12th straight quarter-point rise in May – taking borrowing costs to their highest since 2008 – before a period on hold.But investors have been betting on more increases and shortly after Thursday’s decision they were pricing in a peak of almost 5% this autumn.”If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the BoE said, maintaining its message from earlier this year.The pound gained almost half a cent against the U.S. dollar, topping $1.26, while British government bond yields rose before settling back at roughly their levels before the announcement.Paul Dales, chief UK economist at Capital Economics, said he thought rates were probably now at their peak but they might stay there until 2024 before being cut.”We suspect that some stickiness in wage growth and domestic inflation will mean the holding phase of the cycle will be quite long and last until the first half of next year (by contrast we think the US Fed will cut rates this year),” Dales said.Luke Bartholomew, abrdn senior economist, said upcoming inflation data releases – starting on May 24 with figures for April – could be “a source of market volatility especially around currency, with sterling now pricing in more aggressive action from the BoE from here compared to other central banks”.The BoE was the first major central bank to start raising borrowing costs in December 2021, but was criticised by some for not moving aggressively enough as inflation headed towards a four-decade high of 11.1% struck in October.Last week, the U.S. Federal Reserve and the European Central Bank both raised their benchmark borrowing rates by 25 basis points. While Fed Chair Jerome Powell hinted at a pause, ECB President Christine Lagarde said it was too soon to stop. GRAPHIC: The race to raise rates https://www.reuters.com/graphics/GLOBAL-MARKETS/myvmowjmxvr/chart.png Britain’s high inflation problem stems largely from its dependence on imported natural gas for power generation, leaving it particularly exposed to the surge in energy prices after Russia’s invasion of Ukraine last year.Energy prices have now fallen sharply and the central bank expects inflation to drop to 5.1% by the end of this year from 10.1% in March. But this is less of a decline than the drop to 3.9% it forecast in February and the BoE predicts inflation will not return to its 2% target until early 2025.Higher forecasts for food prices added about 1 percentage point to future inflation compared with February, the BoE said.Most BoE policymakers saw “significant” upward risks to these inflation forecasts and inflation was not forecast to significantly undershoot its target at any point in the next few years, even if Bank Rate rises by another quarter point or more.PAY GROWTH PRESSURESThe BoE is worried that recent strong headline pay growth could turn into a long-lasting problem for the economy, and on Thursday it forecast much stronger wage growth and lower unemployment than three months ago.”Pay rates could plateau at rates above those consistent with the 2% inflation target sustainably in the medium term,” the central bank said.BoE Chief Economist Huw Pill said last month that British businesses and individuals had to accept that their earnings had fallen in inflation-adjusted terms, triggering criticism from trade unions and some former BoE rate-setters. The BoE forecast the economy would grow 0.25% this year – compared with its February prediction of a 0.5% contraction.Cheaper energy, fiscal stimulus and improved business and consumer confidence mean the BoE now no longer predicts a recession this year, and expects the economy to be 2.25% larger in three years’ time than it did before.The government’s budget announced in March was expected to boost economic output by around 0.5% over the coming years.The BoE estimated that around a third of past interest rate hikes had fed through to households and businesses, a slower pass-through than in previous tightening cycles because of a higher share of homeowners with fixed rate mortgages.Bailey said the extent of the impact on the economy of the BoE’s previous rates hikes was a “very lively subject of debate” among MPC members. More

WASHINGTON (Reuters) -Bank deposit withdrawals following the collapse of Silicon Valley Bank were concentrated in around 30 “super-regional” institutions in the $50 billion to $250 billion range, similar to SVB, New York Fed researchers concluded in a newly released study.Deposits among thousands of “community and smaller regional banks… were relatively stable by comparison” during March, the researchers found, with the largest, systematically important firms receiving the deposits that left the super-regional group.Though there were concerns about a broader run on bank deposits after the failure of SVB on March 10 and Signature Bank (OTC:SBNY) on March 12, the NY Fed study points to what Fed officials themselves seemed to conclude early on — that the problems were focused in a discrete set of institutions. There were fears banking sector weakness might touch off a wave of mergers that would wipe out smaller institutions – to the potential detriment, for example, of small business lending.But even banks up to $100 billion in size “were relatively unaffected,” with the smallest institutions seeing virtually no change in deposits after the events of mid-March. Smaller firms tend to have higher levels of their deposits insured by the Federal Deposit Insurance Corp. The high level of uninsured deposits at SVB was a factor in its collapse.The study is the latest effort to understand the impact of recent bank failures, and more broadly how Federal Reserve interest rate increases since March, 2022, have reshaped the financial landscape. According to the study, roughly $950 billion in deposits left the banking system in the year before SVB failed, as customers sought better returns in the rising interest rate environment, with the outflow spread proportionately across all banks.But what seemed to be crisis-like dynamics in mid-March turned out to involve a nearly dollar for dollar shuffle of money from the super-regional banks to even larger institutions.Concern about the stability of regional banks continues, with First Republic Bank (OTC:FRCB) recently taken into FDIC receivership and sold to JPMorgan (NYSE:JPM).Evidence of a festering crisis, however, seems to have diminished. Emergency borrowing from Fed facilities has declined, and the study concludes that much of it was “precautionary.” Super-regional banks borrowed the most, but banks of all sizes tapped Fed and other facilities, which “suggests demand for precautionary liquidity buffers across the banking system, not just among the most affected institutions.” More

The presidential and parliamentary votes, set for May 14 with a possible May 28 run-off, will decide not only who leads Turkey but also how it is governed, where its economy is headed, and the shape of its foreign policy. Modern Turkey’s longest-serving leader, Erdogan has championed religious piety and low interest rates at home while asserting Turkish influence in the region and loosening the NATO member’s ties with the West. The election takes place three months after earthquakes in southeast Turkey killed more than 50,000 people. Erdogan’s main challenger is Kemal Kilicdaroglu, the leader of the secularist Republican People’s Party (CHP), who has the backing of an alliance of six opposition parties. WHAT’S AT STAKE FOR TURKEY … The most powerful leader since Mustafa Kemal Ataturk founded the modern Turkish republic a century ago, Erdogan and his Islamist-based AK Party have shifted Turkey away from Ataturk’s secular blueprint. Erdogan has also centralised power around an executive presidency, based in a 1,000-room palace on the edge of Ankara, which sets policy on Turkey’s economic, security, domestic and international affairs. Erdogan’s critics say his government has muzzled dissent, eroded rights and brought the judicial system under its sway, a charge denied by officials who say it has protected citizens in the face of unique security threats including a 2016 coup attempt. Economists say Erdogan’s calls for low interest rates sent inflation soaring to a 24-year high of 85% last year, and the lira slumping to one tenth of its value against the dollar over the last decade. … AND THE REST OF THE WORLD? Under Erdogan, Turkey has flexed military power in the Middle East and beyond, launching four incursions into Syria, waging an offensive against Kurdish militants inside Iraq and sending military support to Libya and Azerbaijan. Turkey also saw a series of diplomatic clashes with regional powers Saudi Arabia, Egypt, the United Arab Emirates and Israel, as well as a stand-off with Greece and Cyprus over eastern Mediterranean maritime boundaries, until it changed tack two years ago and sought rapprochement with some of its rivals. Erdogan’s purchase of Russian air defences triggered U.S. arms industry sanctions against Ankara, while his closeness to Russian President Vladimir Putin led critics to question Turkey’s commitment to the NATO Western defence alliance. Ankara’s objections to NATO membership applications from Sweden and Finland have also raised tensions. However, Turkey also brokered a deal for Ukrainian wheat exports, underlining the potential role Erdogan has staked in efforts to end the Ukraine war. It is not clear that a successor would enjoy the same profile he has created on the world stage, a point he has made in the election campaign. WHAT IS THE OPPOSITION PROMISING? Two main opposition parties, the secularist CHP and centre-right nationalist IYI Party, have allied themselves with four smaller parties under a platform that would reverse many of Erdogan’s signature policies. They have pledged to restore independence to the central bank and reverse Erdogan’s unorthodox economic policies. They would also dismantle his executive presidency in favour of the previous parliamentary system, and send back Syrian refugees. They also aim to improve relations with Western allies and including the United States, and to return Turkey to the F-35 fighter jet programme, from which it was blocked after buying Russian missile defences. Analysts believe the policies promised by the opposition could spur foreign investment. Erdogan supported failed efforts to topple Syrian President Bashar al-Assad, while hosting at least 3.6 million Syrian refugees who have become increasingly unwelcome at a time of economic hardship in Turkey. The opposition has echoed Erdogan’s plans to return some refugees to Syria, but neither has set out how that could safely take place. JUST HOW CLOSE IS THE RACE? The latest survey by the closely-watched pollster Konda showed Kilicdaroglu more than five percentage points ahead of Erdogan, whose popularity has been hit by a cost-of-living crisis caused by rampant inflation. The united face presented by the opposition alliance has buoyed its chances, analysts say. In a further boost for Kilicdaroglu, candidate Muharrem Ince, one of four contesting Sunday’s vote, withdrew on Thursday. But Erdogan is still in the running, and the presidential race may well go to a runoff between him and Kilicdaroglu. Initial polls after the Feb. 6 earthquake had suggested that he was able to largely retain support despite accusations the government had been slow to respond and had laxly enforced building regulations that may have saved lives. How the opposition will garner support among the Kurdish voters, accounting for 15-20% of the electorate, remains key. The pro-Kurdish Peoples’ Democratic Party (HDP) is not part of the main opposition alliance but fiercely opposes Erdogan after a crackdown on its members in recent years. More

Financial markets nevertheless believe the most aggressive tightening cycle in decades may soon be over, a sense increased by recent banking sector turmoil that has added to global recession risks.     To date, 10 developed economies have raised rates by a combined 3,515 basis points (bps) in this cycle.         Japan is the holdout dove.     Here’s a look at where policymakers stand, from hawkish to dovish.      GRAPHIC: The race to raise rates https://www.reuters.com/graphics/GLOBAL-MARKETS/myvmowjmxvr/chart.png 1) UNITED STATES The Fed raised rates by a quarter point to 5.00-5.25% last Wednesday, continuing its most aggressive series of hikes since the 1980s. The U.S. central bank offered markets some succour, dropping from its policy statement language that it “anticipates” further rate increases. Fed chief Jerome Powell said inflation remains the chief concern, and that it is therefore too soon to say with certainty that the rate-hike cycle is over. GRAPHIC: Fed hikes and opens door to pause https://www.reuters.com/graphics/GLOBAL-MARKETS/zgpobygrmvd/chart.png 2) NEW ZEALAND The Reserve Bank of New Zealand shocked markets in April by unexpectedly raising its cash rate by 50 bps to 5.25%, the highest in over 14 years. Not one economist polled by Reuters had predicted the move. The central bank said inflation was still “too high” with employment beyond “maximum sustainable levels”. Analysts revised their forecasts for the peak in interest rates up to 5.5%. GRAPHIC: RBNZ stuns market with bigger rate rise https://www.reuters.com/graphics/NEWZEALAND-ECONOMY/mopakbgjapa/chart.png 3) CANADAThe Bank of Canada in March became the first major central bank to halt monetary tightening during this cycle. The BoC’s key overnight rate remains at 4.50%, with the aim to hold it there as long as inflation drops to 3% at about mid-year. Market participants believe there’ll be no change until next year, according to a central bank survey released on April 24. GRAPHIC: Bank of Canada holding off on hikes https://www.reuters.com/graphics/GLOBAL-CENTRALBANKS/byvrlewjqve/chart.png 4) BRITAIN The Bank of England raised its key interest rate by 25 basis points to 4.5% as expected on Thursday, seeking to curb the highest inflation in any major economy.The central bank said it no longer expects a recession, but anticipates inflation will take longer to fall than it had hoped, mostly due to unexpectedly big and persistent rises in food prices. GRAPHIC: Bank of England raises rates for 12th time in a row https://www.reuters.com/graphics/BRITAIN-BOE/dwpkdnjgzvm/chart.png 5) AUSTRALIAAustralia’s central bank confounded expectations of a pause with a 25 bps hike in May.The cash rate now stands at a 12-year high of 3.85% and the RBA said “some further tightening” may be required to ensure inflation returns to target in a “reasonable timeframe”. GRAPHIC: An unexpected rate hike https://www.reuters.com/graphics/GLOBAL-MARKETS/THEMES/znvnbqkqzvl/chart.png 6) NORWAY Norway’s central bank raised its main interest rate by 25 bps last Thursday to 3.25%. It said another hike in June was likely – and that more could be needed if the currency stays weak.The Norwegian crown has had a terrible year, with the dollar up almost 9% against the currency in 2023. Meanwhile, inflation remains hot, with the core rate picking up to 6.3% in April. GRAPHIC: Norges Bank continues hiking rates Norges Bank continues hiking rates https://www.reuters.com/graphics/GLOBAL-CENTRALBANKS/zjpqjolmrvx/chart.png 7) EURO ZONE The ECB raised its deposit rate by 25 bps last Thursday to 3.25%, its seventh successive hike but the smallest since it started lifting rates last summer.The central bank kept its options open on future moves as it continues fighting stubbornly high inflation in the euro zone. President Christine Lagarde said while monetary policy is no doubt restrictive, it is not yet “sufficiently restrictive”, noting that the “inflation outlook is too high and has been so for too long.” GRAPHIC: ECB eases the pace of interest rate hikes https://www.reuters.com/graphics/GLOBAL-CENTRALBANKS/znvnbqwdqvl/chart.png 8) SWEDENThe Riksbank raised borrowing costs by 50 bps in April to 3.5% but said it was nearly finished with policy tightening, prompting a drop in the Swedish crown.Sweden’s underlying rate of inflation stripping out energy prices eased to 8.9% in March but remains well above the central bank’s 2% target. While investors had previously expected rates to peak at 4%, the Riksbank suggested only one more 25 bps hike is likely. GRAPHIC: Riksbank says nearly done with hikes Riksbank says nearly done with hikes https://www.reuters.com/graphics/GLOBAL-CENTRALBANKS/gkplwajqevb/chart.png 9) SWITZERLANDThe Swiss National Bank raised its main interest rate by 50 bps in March to 1.5%, saying UBS’s emergency takeover of Credit Suisse had “put a halt” to the chance of a banking crisis.Swiss inflation cooled to 2.6% in April, from 3.4% in February, but remained above the SNB’s target band for the 13th straight month.Traders expect a further 25 bp hike in June, market pricing suggests. GRAPHIC: SNB hints at further rate hikes ahead https://www.reuters.com/graphics/CEN-WRAP/lgpdkaboevo/chart.png 10) JAPAN The Bank of Japan looks set to remain the world’s most dovish central bank under new governor Kazuo Ueda. At Ueda’s first meeting in late April the BOJ maintained its ultra low rates and its yield curve control policy that caps interest rates on longer term government bonds. The BOJ also announced a plan to review its past monetary policy moves but said this exercise will take one-and-a-half years. GRAPHIC: Ueda maintains ultra-low interest rates https://www.reuters.com/graphics/GLOBAL-MARKETS/THEMES/akveqjkzqvr/chart.png More

Initial claims for state unemployment benefits increased 22,000 to a seasonally adjusted 264,000 for the week ended May 6, the highest reading since October 2021, the Labor Department said on Thursday. Economists polled by Reuters had forecast 245,000 claims for the latest week. Claims had leveled off after surging in March as high-profile layoffs in the technology sector in late 2022 finally filtered through the data. There have also been job cuts in interest-rate sensitive industries like housing. Claims, which remain below the 270,000-300,000 level that economists said would signal a deterioration in the labor market, are expected to rise considerably in the second half of the year as the cumulative and lagged effects of the Federal Reserve’s interest rate increases broaden out in the economy.The labor market remains tight, with 1.6 job openings for every unemployed person in March, well above the 1.0-1.2 range that is consistent with a jobs market that is not generating too much inflation.The Fed has raised its benchmark overnight interest rate by 500 basis points to the 5.00%-5.25% range since March 2022 and last week signaled it could pause its fastest monetary policy tightening campaign since the 1980s.The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 12,000 to 1.813 million during the week ending April 29, the claims report showed. The so-called continuing claims remain low by historical standards as some of the laid-off workers are quickly finding employment. More