Aurelia Butler

Spanish prime minister Pedro Sánchez will discuss Chinese president Xi Jinping’s attempt to broker peace talks in Ukraine during an official visit to Beijing next week. Sánchez’s planned visit, and the move to put discussion of China’s Ukraine peace initiative on the agenda, add momentum to Beijing’s efforts to cast itself as a mediator in the war. Spain is due to assume the rotating EU presidency in July. “I am grateful for President Xi’s invitation. It is important to know his position on peace in Ukraine and to convey to him that it will be the Ukrainians who establish the conditions for that peace,” Sánchez said ahead of a meeting of EU leaders in Brussels on Thursday.“The most important thing is that we can guarantee a stable and durable peace. That means respecting the UN Rights Charter with respect to the territorial integrity of Ukraine that is being violated by Russia,” he added.Sánchez met Ukrainian president Volodymyr Zelenskyy in Kyiv last month and said Spain would support Ukraine “in every way we can” in the face of Russia’s full-scale invasion.The announcement comes a day after Xi returned from Moscow, where he backed Russian president Vladimir Putin in urging that any resolution of the Ukraine conflict needed to take the security interests of all sides into account. China published a position paper on the Ukraine war last month. It outlined 12 points ranging from calls to respect the sovereignty of all countries and cease hostilities to opposing unilateral sanctions. While some observers have called the paper a “peace plan”, it does not contain any concrete proposals for bringing Russia and Ukraine to the negotiation table. At the talks in Moscow, Putin praised China for “upholding an objective and fair position” on the conflict.On Thursday, Chinese foreign minister Qin Gang told state media that Xi’s Moscow visit had demonstrated China’s global image as a peacemaker.China has accused the US and its allies of fuelling the war with the aim of weakening Russia, but some Chinese foreign policy experts are sceptical about Beijing’s ability to mediate in the conflict. “We believe the US doesn’t hope to see peace talks but hopes the war will continue,” said Wu Xinbo, dean of the Institute of International Studies at Fudan University in Shanghai. “The Chinese side needs to assess the will of Russia and Ukraine to negotiate. But it is very troublesome, not as simple as mediating between Iran and Saudi Arabia,” he added, referring to China’s recent role in helping the two Middle Eastern powers agree to resume diplomatic relations. On a call with EU leaders Zelenskyy asked for “no more delays” to the delivery of long-range missiles and modern fighter jets and the implementation of a peace plan, without referring to Beijing’s initiative, according to an EU official.

Xi’s Russia visit has heightened tensions between former communist countries in the EU and China. Krišjānis Kariņš, prime minister of Latvia, once occupied by the Soviet Union, said: “China is moving overtly on the side of Russia and this is a big challenge and difficulty for all of us.”There should be a “joint European approach” to China, Kariņš told reporters in Brussels. “Combined we are very strong, individually it is divide and rule.”UN secretary-general António Guterres warned EU leaders meeting in Brussels against isolating China, according to a person familiar with the private discussion. Guterres also told them that Beijing considered it still had a positive relationship with the bloc, the person added.Additional reporting by Henry Foy More

Well, the Bank of England outcome was utterly boring, so let’s talk about something else.Société Générale’s global strategy one-man-army Albert Edwards — always interesting, sometimes correct — has taken a typically-engaging broad tilt at the dynamics of inflation (which he says believes is largely a product of the extended period of ultra-loose monetary policy before the pandemic/war in Ukraine). He writes:Instead of ranting about the current crisis I want to revisit a topic that goes straight to the hearts of both equity and bond investors, namely that the primary driver of this inflation cycle is soaring profit margins. Rather than calling this out as the primary cause of high inflation, central banks have instead chosen to focus on rising nominal wages as threatening to embed higher inflation – the so called ‘wage/price spiral’. Edwards previously looked at this “greedflation” dynamic in November, pointing out then that the comeback from Covid had produced a rebound in profit margins despite them having never fallen during the early days of lockdowns:As he wrote then:How has this happened? Well, it was to a degree entirely predictable given extremely loose fiscal and monetary policy in an environment of supply constraints. But companies have also exploited the inflationary backdrop. Customers expect price rises because of what they see in the press about surging commodity prices. Companies have clearly ‘taken advantage’ of rising inflation expectations to put through rises well in excess of cost increases. And this has not gone unnoticed.There’s also the similar framework of “excuseflation”, explored in a recent article from Bloomberg’s Odd Lots gang. In short, it’s the way in which input pricing shocks — such as the pandemic rebound supply snafus, and the Ukraine war (and, perhaps as importantly, the media coverage that surrounds them) — provides companies with the cover they need to raise prices without substantial customer pushback.A recent academic paper — Sellers’ Inflation, Profits and Conflict: Why can Large Firms Hike Prices in an Emergency? — looked at these dynamics (Further Reading fans will have seen it last month). Author Isabella Weber from the University of Massachusetts Amherst, provided a precis of her findings on Elon Musk’s microblog site:Second, sector-wide shocks can create tacit agreements between firms to hike prices, since all firms protect their profit margins and know that the other firms pursue the same goal. Firms that do not follow this rule can be penalized by financial investors. 6/— Isabella M. Weber (@IsabellaMWeber) February 27, 2023
Fourth, firms navigate demand as a ‘portfolio of risks’ and prices as a social relation with retail partners and customers. Emergencies can create a pretext to legitimize price hikes. 8/— Isabella M. Weber (@IsabellaMWeber) February 27, 2023
Weber and co-author Evan Wasner proposed a three-stage process (with overlaps) for how inflation occurs following a long period of price stability:First, the impulse stage of initial price increases in systemically significant sectors;Then, the propagation and amplification of the cost shock stage; andFinally, the conflict stage when labor tries to regain real wage lossesOr, in flowchart:

The fourth stage here makes reference to the dreaded “wage–price spiral” that your grandma/local central bank warned you about. But Weber and Wasner focused much more on the dangers of what they called a “price–price spiral” – ie the third step in the flowchart. With our emphasis:In the propagation stage sector-wide cost shocks resulting from the price increases in the impulse stage function as coordinating mechanisms for price hikes. Firms can safely increase their prices to protect profit margins thanks to an implicit agreement among competitors that passing on costs is the way to react to cost shocks. Daily news reports on supply chain issues and high commodity costs in this stage not only aid in the emergence of an implicit pricing agreement among firms, but can also develop understanding on the part of customers for higher prices and thus render demand less elastic. To protect profit margins firms must increase prices by more than costs. If firms do manage to increase prices to protect margins, the next firm in the chain will do the same but now starts from a cost increase that incorporates both the initial upstream cost hike and the higher markup for the second firm in the chain. If all firms behave like this, there is a cumulative effect that increases the nominal value of profits even while profit margins stay constant…In cases where a sector furthermore experiences a supply-side bottleneck or a demand shock – granting firms within the sector temporary augmented monopoly power – profit margins may even be enhanced, thereby not only propagating but also amplifying the initial cost shocks down the supply chain…Given the nature of the economy as a network of input-output relations, once an environment of price-raising has been established throughout firms along the value chain, all firms have continual justification for further price hikes to offset costs. If firms with sufficient market power in systemically significant sectors continue not only to propagate but to amplify cost increases, one can imagine a self-sustaining ‘price-price’ spiral persisting. Furthermore, if labor manages to overcompensate for its losses and increase its share in national income in response to price hikes during the conflict stage, this can create another impulse in the form of a new cost shock that restarts the propagation process, as firms react again by protecting profit margins through price increases. That’s a painful dynamic, and one Edwards reckons could play out further in the current cycle, even as most places (ahem) see consumer price growth wane. He writes:…companies [have] under the cover of recent crises, pushed margins higher. And, most surprisingly, they still continue to do so even as their raw material costs fall away. Consumers are still ‘tolerating’ this ‘excuseflation’, possibly because excess fiscal largesse has provided households with a buffer. My own view remains that headline inflation will collapse below zero as food and energy comparisons turn deeply negative through this year. But beware corporate ‘greedflation’ still lurking in the undergrowth. More

Kazakhstan is to monitor goods that pass through the country for re-export, tracking them until they reach their final destination amid a drive by western capitals to prevent foreign companies and individuals from helping Russia circumvent sanctions. The Central Asian nation, which shares the longest land border with Russia, saw exports to its neighbour — such as consumer electronics — surge last year as sanctions stymied Russia‘s access to western markets.Kazakhstan, one of Moscow’s closest partners thanks to its historical and cultural ties, has not imposed any sanctions or restrictions on its trade with Russia. But it also enjoys a close trading relationship with the EU, meaning it has to walk a diplomatic tightrope in the wake of Russia’s invasion of Ukraine last year.Kazakhstan officials insist there are reasons other than the re-export of goods to Russia behind many of the spikes in the export data. But they are also keen to emphasise measures the country has taken to ensure businesses comply, such as the new customs tracking system. First reported by Eurasianet, the new online tool will be launched on April 1, and “allow real-time tracking of the entire chain of movement of goods from border to border,” a senior Kazakh official told the Financial Times.“We understand all the risks of secondary sanctions, so we closely monitor our mutual trade with all partners,” the official said, adding that the country “is constantly working to reduce the risks of re-export.”Data from Kazakhstan’s Bureau of National Statistics showed a 25 per cent increase in exports to Russia last year, compared with the previous year. For example, the number of washing machines exported to Russia from Kazakhstan rose from zero in 2021 to almost 100,000 in 2022. But officials in Kazakhstan highlight rising energy prices and other factors to explain the rise in value terms of some trade. They also point to the fact that many products, for example from Europe, that have arrived for re-export to Russia come from countries such as Turkey and China which have not imposed any limits on trade with Russia. The re-export practice, commonly referred to as “parallel imports” in Russia, is reported to involve companies in countries that share a customs union with Russia, such as Kazakhstan and Armenia.The companies, whether locally owned or set up by Russian nationals, buy goods from western firms that have either boycotted Russia since the start of its invasion of Ukraine, or have stopped exporting to Russia because of sanctions. Often, these items are western consumer goods, such as mobile phones. After receiving the goods in these third countries, the companies re-export them to Russia. The Kremlin has a long list of items with legalised parallel imports, meaning companies moving such goods on to Russia no longer need approval from the original producer, for example from Apple for the import of its latest iPhones. More

Speaking at a Politico economic conference, Gentiloni said the new rules, which the EU hopes to agree on by the end of this year, should have some common standards and benchmarks that would set the frame for the different debt cutting schemes.Until the COVID-19 pandemic, EU rules obligated governments to reduce public debt by 1/20th of the excess above 60% of GDP every year. But the surge in borrowing to keep economies alive during pandemic lockdowns made that rule unrealistic, prompting a review of the whole EU fiscal framework. Key to the proposed revision is the option that each government negotiates an individual debt reduction path with the Commission – an option that Germany is concerned could end up in discretionary decisions undermining the common euro currency.”If we are more differentiated, more gradual and more capable of enforcement, we will also be more effective,” Gentiloni said of the proposed changes to the rules.”This should not, in any way, send a message that we have fiscal policies ‘a la carte’, decided by each country, negotiated with the Commission without any common reference.” Work on establishing what that common reference could be was now under way, he said, adding the Commission would present legal proposals on the changes in coming weeks. More

Switzerland has raised interest rates by half a percentage point, despite the financial turmoil that this week led to a rescue-takeover of one of the country’s largest lenders. The Swiss National Bank opted to plough ahead with its fourth consecutive interest rate rise, saying the chances of inflation becoming entrenched had risen. It follows a half-point rise by the European Central Bank last week. Inflation in Switzerland, at 3.4 per cent in February, remains far lower than elsewhere in Europe. But the SNB said it was concerned about upward price pressures becoming entrenched even as the global economy stagnates.It now expects inflation of 2.6 per cent in 2023 and 2 per cent in 2024 and 2025. The central bank targets inflation of below 2 per cent. “Ensuring price stability is and will remain the core objective of the SNB,” central bank chief Thomas Jordan said following the decision, which leaves the policy rate at 1.5 per cent. Jordan spent last weekend brokering discussions between Credit Suisse and UBS, which was forced by the authorities to launch a rescue-takeover of its Swiss rival. “Our monetary policy assessment has taken place in an exceptional situation,” Jordan said, referring to the near-collapse of Credit Suisse, adding that the SNB’s efforts had “put a halt” to the crisis in Switzerland. Analysts expect further rises. “Without the turmoil, the SNB may have accelerated the rate hike cycle . . . In the circumstances, a steady pace was probably safer, but significantly more is needed,” said Christian Schulz, economist at Citi. “The economy is resilient, probably also to the domestic financial turmoil, so we expect 50 basis points in June and another 50 basis points at the remaining meetings this year.”Others disagreed with Jordan’s view that the banking turmoil had been contained, saying there were likely to be economic repercussions.“There is little doubt that fears about financial stability will have an impact on the availability of credit and thus on the economic situation and the inflation environment in the coming months, which will ultimately influence the path of interest rates,” said Charlotte de Montpellier, senior economist at Credit Suisse.

Norges Bank, the first leading western central bank to start tightening monetary policy after the Covid-19 pandemic, also raised rates on Thursday, warning that more increases were to come despite the recent financial upheaval.Norway’s central bank increased borrowing costs by 0.25 percentage points to 3 per cent and suggested they would go higher at its next meeting as it tries to bring inflation under control.“There is considerable uncertainty about future economic developments, but if developments turn out as we now expect, the policy rate will be raised further in May,” said Norges Bank governor Ida Wolden Bache.The Bank of England also raised rates by a quarter point, leaving the benchmark bank rate at 4.25 per cent. The US Federal Reserve on Wednesday voted to lift the federal funds rate by a quarter point to a target range of 4.75 per cent to 5 per cent, the highest level since 2007. More

“The most important aim of this finance bill is to ensure that we fight inflation and don’t add fuel to the fire,” Finance Minister Nicolai Wammen told reporters at a presentation of the government’s budget proposal for 2023. Inflation, which reached a 40-year high of 7.7% last year, is expected to fall to 2.8% next year, according to a finance ministry report published on Thursday. “The fiscal policy we are planning for this year will generally take activity out of the economy. That is necessary,” Wammen said. The bill would have a negative effect of 0.9% on the Danish economy, he said. The government expects the economy to grow by 0.2% this year, down from an August forecast of 0.8%, it added. By contrast, the central bank has said it expects the economy to grow by 0.9% this year.”The scope of possibility for the economy is extraordinarily large at the moment, as we are potentially standing on the edge of a recession,” Arbejdernes Landsbank chief economist Jeppe Borre said in a note. The relatively weak growth forecast follows two years of strong economic growth in Denmark characterised by low unemployment and high industrial activity.Last week, the central bank raised its key interest rate to 2.6%, the sixth rate hike since July last year, closely tracking other central banks across the globe that are tightening monetary policy to combat inflation.In February, the government agreed to spend 2.4 billion Danish crowns ($346.12 million) on an aid package aimed at easing the blow from higher prices on vulnerable Danes. More

ZURICH (Reuters) -The Swiss National Bank raised its benchmark interest rate by 50 basis points on Thursday and said UBS’s takeover of Credit Suisse had averted a financial disaster, adding it was now critical the merger took place in a smooth and fast way.The multi-billion Swiss francs rescue package brokered by the SNB, government and regulator on Sunday prevented a systemic crisis, SNB Chairman Thomas Jordan said. “If this solution hadn’t worked, Credit Suisse would have failed, with extreme consequences for Switzerland but also the global economy,” he told a press conference. “In the last few weeks there was a real erosion in confidence in the banking world and in order to halt it – we needed another solution besides liquidity,” Jordan said.The SNB Chairman said it was vital for UBS’s takeover of the 167-year-old Credit Suisse to go through as smoothly as possible in order to maintain financial stability.”UBS made a full commitment to the takeover of Credit Suisse… now it is extremely important that both parties do everything possible that the takeover will be successful,” he said, adding the next two weeks would be crucial. His SNB governing council colleague Martin Schlegel declined to comment on when he expected the deal to go through.Schlegel also declined to comment on whether UBS and Credit Suisse had used any of the 200 billion Swiss francs in emergency liquidity offered by the SNB.Jordan told Reuters in a separate interview he didn’t see the banks needing more liquidity, saying the current instruments were “very big, they are bold”.Switzerland’s financial market regulator FINMA on Thursday defended its decision to impose steep losses on some Credit Suisse bondholders under the deal, saying the decision was legally watertight. RATE HIKEThe dramatic events of the last 10 days overshadowed Thursday’s fourth interest rate hike in succession by the SNB as it seeks to battle stubborn Swiss inflation, which at 3.4% in February – remains outside the SNB’s target band of 0%-2%.The central bank said further rises could not be ruled out.”If you look at our newest inflation forecast, we see there is some necessity to continue to tighten monetary policy,” Jordan told Reuters. “Of course we will look in three months if this is still the case or not.The SNB also said it was willing to be active in the foreign exchange market if necessary.It recently switched from selling Swiss francs to buying the currency to increase its value as a way to dampen the effect of imported inflation.Central banks around the world have been hiking rates in recent weeks to check inflation.The Swiss move on Thursday matched the European Central Bank’s (ECB) 50-basis-point increase last week, while Norway’s central bank also raised its benchmark interest rate on Thursday The U.S. Federal Reserve on Wednesday raised its main interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases. The Bank of England is expected to increase its interest rate by a quarter percentage point later on Thursday.The Swiss hike was in line with the majority of economist forecasts according to a Reuters poll.Economists expect further hikes as the SNB fights Swiss inflation, which last year hit its highest since 1993.”Further moves could be in the pipeline,” said Gero Jung, an economist from Mirabaud. “In sum, a hawkish hike from the SNB.” More