Aurelia Butler

UK public sector borrowing rose more than expected in February, driven by the cost of the government’s energy support schemes, but was still on track to undershoot the new official forecast for the fiscal year. Public sector net borrowing was £16.7bn last month, the Office for National Statistics said on Tuesday. That was £9.7bn more than in February 2022 and higher than the £11.4bn forecast by economists polled by Reuters.It was also the highest February borrowing since monthly records began in 1993, largely because of substantial spending on energy support initiatives.Commenting on the figures, chancellor Jeremy Hunt said: “Borrowing is still high because we’re determined to support households and businesses with rising prices and are spending about £1,500 per household to pay just under half of people’s energy bills this winter.”Borrowing rose despite the government’s receipts increasing by £4.9bn compared with February last year, reflecting higher tax receipts on labour and raised revenues from the energy profits levy.

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Interest payments were also lower than in February last year following the decline in the retail price index that determines the cost of index-linked gilts.However, the energy price guarantee for households and the energy bill relief scheme for businesses boosted spending by £9.6bn compared with February last year, raising overall expenditures to £80.8bn. Better news came from the figures for the period between April 2022 and February 2023, when the public sector borrowed £132.2bn. With only one month of this fiscal year still to go, borrowing is on course to undershoot the £152.4bn forecast by the Office for Budget Responsibility for 2022-23, which was revised down last week from the £177bn forecast in November. The undershooting is more likely when taking into consideration the £8.6bn temporary difference between the ONS and OBR’s estimates because of the treatment of student loans. Accounting for that, the public sector could borrow an additional £28.8bn in March 2023, according to the ONS, a much larger sum than the £5.4bn borrowed in March 2022.

Figures for the fiscal year to February showed that tax receipts were 11.1 per cent higher than the same 11-month period a year earlier, reflecting the resilience of the economy and the labour market against the cost of living crisis. Last week’s official downward revision in public borrowing for the current fiscal year enabled Hunt to expand free childcare, offer a £9bn tax break for businesses and boost pensions for the higher earning at the Budget. With borrowing likely to undershoot the full-year forecast, Ruth Gregory, economist at the consultancy Capital Economics, said the chancellor “might have a bit of money to play with in the fiscal event in the autumn”, not least because of the year in which the fiscal rule requires debt to GDP to be falling is judged rolls on from 2027-28 to 2028-29.However, she added that “the big risk is that the turmoil in the banking sector deepens the economic downturn and the recent improvement in the public finances is blown away”. More

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The US Federal Reserve must make one of the most consequential decisions of its rate-raising campaign this week as it considers whether to implement another increase without knowing if efforts to shore up the banking sector will work in the long term.Central bank officials will gather on Tuesday for their latest two-day meeting, at which they must decide whether to press ahead with another quarter-point rate rise or forgo an increase.The dilemma comes as global authorities have acted swiftly to support the financial system in the wake of Silicon Valley Bank’s collapse, with the Fed rolling out a new facility to aid lenders and the Swiss government brokering a hasty takeover of a faltering Credit Suisse by UBS.However, it remains unclear whether these actions will be enough to stem the fallout from the crisis. The share prices of most regional US banks are languishing well below the levels seen before the implosion of SVB, while First Republic Bank’s stock is still plummeting following a second downgrade of its credit rating on Sunday.As a result, the Fed is to some extent flying blind as it decides whether to pause its aggressive campaign to curb persistent inflation in an effort to help stabilise the financial system.“It’s a tremendously challenging time,” said Ellen Meade, who served as a senior adviser to the central bank’s board of governors until 2021. “In this case, [Fed chair Jay] Powell has to be both a firefighter and a policeman.”Further complicating the high-stakes decision, due on Wednesday, is that it will be accompanied by fresh projections not just for the trajectory of interest rates, but also for growth, inflation and unemployment, at a time when the economic situation is changing rapidly.“This whole thing is a disinflationary event . . . but it’s very difficult to know at this point how disinflationary it is,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, referring to the turmoil in banking.Fuelling the uncertainty is the fact that regional banks are expected to sharply curtail their lending in response to the recent ructions. Torsten Slok, chief economist at Apollo Global Management, estimates that banks holding roughly 40 per cent of all assets across the sector could retrench, which would lead to a sharp recession this year.“What we do know is that the combination of both the lagged effects of monetary policy slowing things down and now magnifying that with this downside risk is just making things more complicated,” he said. Slok estimates the combination of tighter financial conditions and lending standards following the recent bank failures has in effect raised the federal funds rate — the rate at which banks lend to each other — by 1.5 percentage points from its current target range of between 4.5 per cent and 4.75 per cent.As a result, he now expects the Fed to forgo a rate rise on Wednesday. Economists at Goldman Sachs, who also project a pause this week, forecast the equivalent of roughly a quarter-point to a half-point increase in the fed funds rate following recent events. Other economists argue it is still too early to make a precise estimate.Pausing the rate-rising campaign altogether would mark an abrupt U-turn for the central bank, which had as recently as this month raised the prospect of accelerating the pace of rate rises with a half-point increase after last month shifting down to a more typical quarter-point cadence.In congressional testimonies before the release of February’s jobs and inflation figures, Powell said the decision would hinge in part on those closely watched pieces of data, neither of which showed much sign of a cooling economy. He also said the Fed would ultimately need to lift its benchmark rate higher than the 5.1 per cent projected by officials as recently as December.Most economists have since revised down their expectations for the so-called dot plot, which aggregates individual forecasts for the fed funds rate through to 2025.Before the implosion of SVB, many thought the median estimate for the so-called terminal rate would rise by half a percentage point to between 5.5 per cent and 5.75 per cent. Now, some forecast that to remain unchanged while others expect only a quarter-point increase.Traders in fed funds futures markets are even more hesitant, suggesting the Fed will only raise rates another quarter of a percentage point before reversing course and implementing cuts.“The Fed has got some more to do,” said Vincent Reinhart, who worked at the US central bank for more than two decades and is now at Dreyfus and Mellon, though he said officials were “less sure where they’re headed”.Economists polled in the latest Financial Times survey, conducted in partnership with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, said recent events had led them to scale back their expectations for the fed funds rate at the end of the year by a quarter of a percentage point. However most still see the Fed raising the rate at least to 5.5 per cent — and keeping it there until 2024.Reinhart warned that if the Fed were to pause its rate rises in an attempt to shore up financial stability, especially as further tightening is warranted by the economic data, it would face increased criticism for having failed to manage the banking sector sufficiently to prevent such a problem in the first place.Moreover, Meade cautioned that such a move could call into question Powell’s commitment to fighting inflation, adding she supported a quarter-point rise.“It preserves the notion of credibility that he’s gone to great lengths to restore over the past year,” she said. “I wouldn’t think he would want to let that go at this point.” More

Vladimir Putin and Xi Jinping will place their growing economic ties at the heart of talks in the Kremlin on Tuesday, highlighting Moscow’s dependence on Beijing after its economy was largely severed from the west. The Russian president hailed China’s economic model as “much more effective” than that of other countries, a recognition of the lifeline Beijing has extended since Moscow’s full-scale invasion of Ukraine last year — with bilateral trade reaching a record $190bn in 2022.“The sanctions have exacerbated the already asymmetrical relationship between Russia and China,” said Maria Shagina, a senior research fellow at the International Institute for Strategic Studies. “It’s hard to hide the fact that Russia is now a junior partner.” Moscow sees its economic reliance on China as crucial to its prospects of winning the war, a person close to the Kremlin said. While China’s help in weathering the effects of US sanctions is irreplaceable, Russia’s wealth of natural resources will secure Beijing’s continued support, the person added.The most hotly anticipated topic for discussion on Tuesday is the planned Power of Siberia 2 gas pipeline, which would give Russia a vital new way to reroute exports from reserves no longer being sent to Europe.“The logic of events dictates that we fully become a Chinese resource colony,” the person said. “Our servers will be from Huawei. We will be China’s major suppliers of everything. They will get gas from Power of Siberia. By the end of 2023 the yuan [renminbi] will be our main trade currency.”Western sanctions left Moscow with a Rbs2.58tn ($34bn) budget deficit in the first two months of this year alone as it ramped up military spending. Last year, China’s imports of Russian energy — which make up more than 40 per cent of the Kremlin’s budget revenue — grew from $52.8bn to $81.3bn. Russia was China’s second-largest supplier of crude oil and coal, according to Columbia University’s Center on Global Energy Policy (CGEP). In January, Russia overtook Qatar, Turkmenistan and Australia to become China’s biggest gas supplier, delivering 2.7bn cubic metres that month, according to Chinese customs data.In Washington, the view is that Moscow and Beijing are “trying to check” America’s global influence. John Kirby, a spokesperson for the US National Security Council, said on Monday: “It’s a bit of a marriage of convenience, I’d say, less than it is of affection.”Russia’s urgent need to find buyers for its energy could play into China’s hands again during this visit, just as it did in 2014 when Moscow faced sanctions over its annexation of Crimea. Back then, Russia and China signed a deal for the Power of Siberia pipeline, offering Beijing a low-cost supply of gas. The project came on stream in 2019.“For the Chinese side, this could be a good opportunity,” said Moritz Rudolf, a research scholar at Yale Law School’s Paul Tsai China Center. He compared it with 2014, noting that now “Russia is more dependent on China”.A decision to engage “in the next huge project with Russia while Russia is bombing Ukraine” would send a critical message about Beijing’s deepening ties with Moscow, said Tatiana Mitrova, a research fellow at the CGEP. With imports of microchips, 5G equipment and heavy industrial machinery now subject to US export controls, Russia has turned to Chinese manufacturers. Moscow imported $4.8bn in electric machinery and parts from China last year as supplies from other countries plummeted, according to Bruegel, a Brussels-based think-tank.

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Chinese customs data shows that exports of certain semiconductors to Turkey — including basic items such as diodes and transistors — more than doubled in 2022, while Turkey, whose high-tech exports were previously negligible, increased sales to Russia.“While China became by far the leading exporter of semiconductors to Russia after the war, exports often had either a Turkish or a [UAE] connection,” Shagina said. This tactic aimed to create “layers that can protect China from sanctions risks”, she added.The surge has come even though many leading Chinese technology companies such as Huawei have wound down exports to Russia for fear of US sanctions. Instead, obscure Chinese manufacturers have taken their place.“These are mostly Chinese companies that just don’t work on foreign markets in anything like the volumes that major brands do,” said Vita Spivak, associate consultant at specialist risk consultancy Control Risks. While Russia’s cutting-edge imports were “more or less diversified” before the war, she said, “now they are reorienting towards Chinese suppliers to the extent that the Russian market is very often totally dependent on the Chinese market”.

The results have often been mixed. “There are all these shitty Chinese companies supplying 5G [telecommunications] equipment. It’s the second and third tier. It’s more like 4.2G. But it’s not nothing,” said a senior Russian technology investor.Chinese technology is also Russia’s only option for continuing to produce much of the energy that China is importing. Yakov & Partners, McKinsey’s former Russian arm, described Russia’s previous dependence on western oilfield service groups such as Halliburton and Baker Hughes as an “Achilles heel”, because production was expected to decline 20 per cent after their departure. High-tech projects such as Novatek’s Arctic LNG project in western Siberia are also affected. But Russian executives insist there are workarounds.“Let’s say you are missing a compressor . . . because Siemens makes it,” said one executive. “Maybe you do without the compressor. Maybe you get two compressors from China that are less good. But for most things it is workable.”Additional reporting by Yuan Yang in London and Felicia Schwartz in Washington More

WASHINGTON (Reuters) – Hardline Republicans in the House of Representatives on Monday vowed to oppose any universal federal guarantee on bank deposits above the current $250,000 limit, throwing a major roadblock to a key tool regulators could deploy if bank runs re-emerge as financial confidence wobbles.The Republican House Freedom Caucus said in a statement the Federal Reserve “must unwind” its extraordinary funding facility created on March 12 that allows banks to boost borrowing from the Federal Reserve to cover deposit outflows. “Any universal guarantee on all bank deposits, whether implicit or explicit, enshrines a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules,” the group said.Some bankers and banking trade groups have asked for universal guarantees from the Federal Deposit Insurance Corp (FDIC) to weather the crisis touched off earlier this month by the failure of Silicon Valley Bank. The upheaval has been marked by uninsured business depositors fleeing smaller community and regional lenders toward the largest banks perceived as “too big to fail.”The Mid-Size Banks Coalition of America said in a letter to U.S. Treasury Secretary Janet Yellen and key regulators they should extend FDIC insurance to all deposits for two years to “restore confidence among depositors before another bank falls,” echoing a similar step taken during the financial crisis that erupted in 2008. The group is identified as a political action committee by government transparency group OpenSecrets.org. Independent Community Bankers (NASDAQ:ESXB) Association President Rebeca Romero Rainey said in a statement that depositors in safely run small banks should get the same guarantees that uninsured depositors in SVB and Signature Bank (NASDAQ:SBNY) received.Such a move, also recommended last week by former FDIC chief Sheila Bair, was done swiftly in 2008 but now requires approval by Congress in a streamlined resolution process – a change put in place in the 2010 Dodd-Frank financial reform law.U.S. officials were studying ways they might temporarily expand FDIC coverage to all deposits, Bloomberg News reported on Monday, citing people familiar with the matter.APPROVAL DIFFICULTYWith at least 37 Freedom Caucus members in the closely divided but Republican-controlled House of Representatives, the secretive group of conservative Republicans could make passage difficult, especially with tensions running high over a debt ceiling standoff with Democrats.Paul Kupiec, a former FDIC, International Monetary Fund and Fed official, said the Fed’s actions to provide liquidity were helping to calm markets and bank customers, but pressures from a widening interest rate mismatch between bank deposits and bonds and loans on bank books would continue.”My opinion is that this may be a lull,” Kupiec, now a senior fellow at the American Enterprise Institute, said of the relative calm on Monday.Runs could re-emerge if another bank falters, and if the institution is large enough, regulators will again declare a systemic risk exception and guarantee its uninsured deposits, he added.U.S. officials acknowledge the volatility in the market, including another big drop in First Republic Bank (NYSE:FRC) shares, but say the outflow of deposits from many banks has stabilized or reversed – an indication that the need for emergency action may be waning.Following deposits of $30 billion by large banks into First Republic last week, one U.S. official said discussions were continuing with banks and other private sector actors who were “looking at ways to provide both capital, deposits or looking at potential transactions in the banking sector, because they have confidence in the resilience of the banking sector.””Given the stabilization in deposits and the fact that many institutions have liquidity to meet the needs, their uninsured depositors if they decided to leave, we feel better about where things are now, but we’re of course going to remain vigilant during the next week,” the official added. More