Aurelia Butler

LONDON (Reuters) – The Bank of England is poised to raise interest rates for the 10th time in a row on Thursday to keep up its fight against rampant inflation, but it might also drop a hint about when the steep climb in borrowing costs will end.With Britain’s economy already forecast to go into recession and fare worse than its peers in 2023, Governor Andrew Bailey and his colleagues must judge how much of a delayed impact their run of rate hikes so far, starting in December 2021, will have.Unemployment is close to its lowest since 1974 but the housing market is cooling fast and confidence among consumers and employers is weak. Strikes by public service workers have added to the sense of gloom in an economy still struggling to adjust to Brexit and the coronavirus pandemic.Bailey has said there are hopes that the surge in prices was turning a corner after consumer price inflation dipped from a 41-year high of 11.1% in October to 10.5% in December.But underlying inflation has not fallen and wages are growing at the fastest pace on record apart from during the pandemic when state support distorted the data.BoE Chief Economist Huw Pill has warned of the risk that price growth will get stuck above the BoE’s 2% target.”I am more worried that underlying inflationary pressures are far from played out,” John Gieve, a former BoE deputy governor, told The Times. “Earnings in particular are growing strongly especially in the private sector and firms still expect to be able to raise prices.”Investors are largely pricing another half percentage-point rate hike at 1200 GMT on Thursday, taking Bank Rate to 4.0%, its highest since 2008, though some see a slim chance of a quarter-point move.On Wednesday, the U.S. Federal Reserve slowed the pace of its rate hikes with a quarter-point move but said it expected further increases would be needed.The European Central Bank looks set to raise rates by a half a percentage point on Thursday to 2.5% and the main question for investors is how much more tightening it will signal.LOWER RATES PEAKAs of Wednesday, investors were pricing a roughly two-in-three chance that BoE rates will peak at 4.5% by June, with the possibility of an earlier halt at 4.25%.In the run-up to the BoE’s November meeting, investors were expecting rates to peak at around 5.25%.The fall in those market expectations will feed into the BoE’s new projections on Thursday.It is expected to say the economy will contract by less in 2023 than its November forecast of a 1.5% hit. Earlier this week the International Monetary Fund said Britain’s economy would shrink by 0.6% this year.The BoE’s inflation forecasts are also likely to change with recent sharp falls in international gas prices and a rise in the value of sterling lowering inflation later this year. But the less dismal – albeit still weak – growth outlook could push up the BoE’s forecasts for inflation in two and three years’ time. Paul Dales, an economist with Capital Economics, said the central bank was approaching the moment when it would have to give new guidance about its rate plans, having promised up to now to act “forcefully” to combat inflation.”We think lingering inflation pressures will mean rates stay at their peak for around a year before being reduced in 2024,” Dales said.Bailey and other top officials are due to hold a news conference at 1230 GMT.The BoE is also due to update its estimate of the rate of unemployment that does not push up inflation. A rise in the non-accelerating inflation rate of unemployment would represent a lower speed limit on Britain’s already slow economy. More

FRANKFURT (Reuters) – The European Central Bank is set to raise interest rates again on Thursday and pencil in more hikes for the next few months, with the only open question being how big these will be. The ECB has been increasing rates at a record pace to fight a sudden bout of high inflation in the euro zone – the byproduct of factors including the aftermath of the COVID-19 pandemic and an energy crisis that followed Russia’s invasion of Ukraine.The central bank for the 20 countries that share the euro is seen raising its deposit rate by another half a percentage point to 2.5% on Thursday, in line with what it said in December.This would take the rate the ECB pays on bank deposits to the highest level since November 2008, after a steady climb from a record low of -0.5% in July.But ECB President Christine Lagarde is certain to face questions about smaller rises from next month after the U.S. Federal Reserve slowed the pace of its own hikes on Wednesday and some data pointed to a bleaker outlook for the euro zone. So far Lagarde has pushed back on any suggestion that the ECB is relenting in its fight against inflation and investors generally expect her and her policymaking colleagues to reaffirm that line on Thursday.”We suspect the ECB will reiterate its hawkish message in February as there are still uncertainties regarding underlying inflationary pressures and a change of tone would undermine the ECB’s credibility,” Annalisa Piazza, a fixed-income research analyst at MFS Investment Management, said. GRAPHIC: The race to raise rates – https://www.reuters.com/graphics/CANADA-CENBANK/dwvkdeaqopm/chart.png The ECB said in December that rates would be increased “at a steady pace” until it is happy inflation is heading back down to its 2% target. But that guidance is now proving a source of contention within the Governing Council.Policy hawks who favour higher rates, such as the Netherlands’ Klaas Knot, Slovakia’s Peter Kazimir and Slovenia’s Bostjan Vasle, have explicitly called for further 50-basis-point hikes in both February and March. But doves like Greece’s Yannis Stournaras and Italian board member Fabio Panetta have argued for smaller moves, or at least for the ECB to refrain from making commitments for March. This tension may result in a compromise on the language, as happened in December, whereby the ECB makes the size of its next rate hike dependent on incoming data, analysts said.”This week the doves will ensure Lagarde’s signal of another 50 bp in March is conditional,” Jim Reid, head of global fundamental credit strategy at Deutsche Bank (ETR:DBKGn), said. BNP Paribas (OTC:BNPQY) also thought the ECB might take out the reference to a “steady pace” of rate hikes or offset it so that a 50-basis-point increase would be “not predetermined (but) still a possible outcome”.MURKY OUTLOOKRecent economic data has painted a mixed picture.Headline inflation has been in rapid decline since peaking at a record 10.6% in October but core prices, which exclude volatile items such as food and fuel, have been rising at a steady or accelerating pace. The euro zone unexpectedly eked out growth in the final three months of 2022 but this was largely due to an exceptionally mild winter and a stellar performance by Ireland.And an ECB survey showed banks were tightening access to credit by the most since the 2011 debt crisis – usually the harbinger of lower growth and slowing inflation. To some observers, this meant the ECB would be wise not to commit to any future policy move. “In an environment with so many exogenous influences, forward guidance would be a recipe for disappointments that could ultimately weigh on the credibility of the ECB,” Karsten Junius, chief economist at J.Safra Sarasin, said.Financial markets expect the ECB’s deposit rate to peak at 3.5% by the summer, which would be the highest level since the turn of the century.The ECB is also set to reveal how exactly it plans to reduce the multi-trillion euro stock of bonds on its balance sheet, unwinding some of the asset purchases it made to boost inflation during almost a decade when it was too low. Barclays (LON:BARC) analysts estimate that 60 billion euros worth of maturing bonds the ECB will not replace between March and June will be split roughly evenly between government bonds and other debt, comprising corporate and covered bonds as well as asset-backed securities. More

Suad Durakovic, the owner of a truck driving school on the outskirts of the western German city of Duisburg, made it into Chinese newspapers in 2019 by testifying that Beijing’s Belt and Road Initiative had triggered a local logistics industry boom.Today, his business benefits from a shortage of qualified truckers, but not because of China’s global infrastructure development strategy.“The Silk Road has not developed for us,” Durakovic told Nikkei Asia. “First it was Covid, then it was the Ukraine war, so the boom is no longer about Silk Road logistics.”Duisburg, a city of half a million people, is located in Germany’s industrial heartland at the junction of the Rhine and Ruhr rivers. A downturn in the country’s steel and coal industries in the 1990s and early 2000s battered its economy.But the city found a saviour in Chinese president Xi Jinping, who visited Duisburg in 2014 to officially make its inland port Europe’s main Belt and Road hub. While this fuelled anticipation of a new heyday, recent events suggest the prospects are dimming.

Much of this stems from the Ukraine war and Germany’s awkward relationship with China.Chancellor Olaf Scholz was the first European leader to visit Beijing after Xi secured a third term as party leader at the Communist party congress in October. But German attitudes have soured recently over China’s cozy relationship with Russia, Taiwan and human rights, as well as Germany’s growing trade deficit with the world’s second-biggest economy.Germany is currently reviewing its relationship with Beijing, with the unveiling of Berlin’s new basic guidelines for its China policy expected in the next few weeks.Draft excerpts show lawmakers urging a significantly toughened stance and a reduction of economic reliance on China. The more drastic prescriptions include limiting investment in China and stricter monitoring of companies overdependent on China for business.

Chancellor Olaf Scholz met President Xi Jinping last November but German attitudes towards China have soured © Kay Nietfeld/Reuters

Plans were buried in 2021 for a sprawling China business centre on the banks of the Rhine, from where hundreds of Chinese companies were meant to grow their European distribution networks.In November, Duisburg cited China’s ties with Russia as a reason for letting expire a memorandum of understanding for a sweeping “smart city” project with Chinese tech giant Huawei.Russia’s sudden reduction of natural gas exports to Germany fuelled a notion among German policymakers that it was not a good idea to let critical infrastructure fall into the wrong hands.Around the same time, it became known that Chinese state-owned Cosco Shipping Holdings had in June quietly returned a 30 per cent stake in a €100mn ($108mn) Duisburg port terminal project.“As state-owned Cosco pulls out, other privately owned Chinese logistics players stay engaged, which suggests that Cosco pulled out of the port terminal project over political headwinds,” said Markus Taube, the University Duisburg-Essen’s professor for East Asia economics and China. “That event and the expired Huawei deal nurture doubts among Duisburg’s Chinese business community whether Duisburg still is a good place for them to do business.”

The mood has certainly changed since 2011, when the first train on the China Railway Express — an alternative to container shipping — arrived in Duisburg and opened a new chapter in China-Europe land transportation.The line constituted a key part of China’s efforts to entice electronics-makers to move their manufacturing away from China’s coastal provinces to the Chinese inland, where cities are served by the new train services.Data by Duisport, the port’s owner and operator, show that pandemic-related disruptions to maritime trade boosted the Silk Road freight rail business, with the geopolitical upheaval stemming from the Ukraine war causing the opposite.While the annual number of trains rose by 12 per cent to 2,800 in 2021, bookings dropped by about 30 per cent in the spring of 2022, as businesses that adopted rail freight faced reputational, insurance, sanction and confiscation risks along the Russian route.In late 2022, a port spokesman told Nikkei Asia that although momentum has since improved, figures remain below pre-pandemic days — the share of the China-Europe freight rail business in the port’s overall turnover is now 3-4 per cent.

Duisburg has Europe’s largest inland port but plans for a sprawling Chinese business centre on the banks of the Rhine have not materialised © Jens Kastner

Nanjing High Accurate Drive Equipment Manufacturing Group (NGC) in 2015 opened its European headquarters in the city for design, testing, maintenance and refurbishment of gearboxes for wind turbines and industrial equipment. The company cited direct train services between Duisburg and its headquarters in Nanjing as one of the main factors for choosing the city.But one complaint among opposition Duisburg council members is that Chinese companies are not contributing to the local economy.Nikkei Asia’s research of local trade registers suggests that nearly all of the 100 or so Chinese companies that opened bricks-and-mortar presences in Duisburg are engaged in either logistics or cross-border ecommerce. For example, a company with the Germanic-sounding name Hermann Commerce distributes Chinese instant food, soy sauce and food seasonings to more than 20 European countries.Chinese-owned Lisstec markets a cosmetics brand with the similarly Germanic-sounding name Hermuna, which is pitched as “Made in Germany”. But the brand only appears to be available for consumers in China despite the company’s Chinese-language Weibo social media account suggesting its products are made in a German factory for sale in German cosmetics stores and pharmacy chain stores.“The Chinese ecommerce companies that have set up here are not known to be big local job creators or tax contributors,” said Sven Benentreu, the deputy chair of the local chapter of the pro-business Free Democratic Party (FDP), an opposition party in Duisburg.“We as the FDP appreciate the presence of Chinese companies here, but the strong China focus of the city government is obviously not paying off as expected,” he added.NGC and the other Chinese-owned companies approached by Nikkei Asia for this article either declined to be interviewed or did not return calls.Kai Yu, director of the China Business Network Duisburg, also declined to be interviewed, just saying in November that “the Chinese managers I know are unavailable, because they have already travelled back to China for the Chinese new year holiday”.China is currently celebrating the lunar new year, two months after Nikkei Asia approached Yu.

Chinese students in Duisburg are also not integrating into the city, local academics say.About 2,000 Chinese nationals are enrolled at University Duisburg-Essen, the largest intake among German universities, due mainly to a city partnership signed between Duisburg and Wuhan in 1982 that encouraged academic exchanges.Duisburg’s Chinese student population is concentrated in the streets near the university, where there are a handful of Chinese restaurants and shops. Several part-time student restaurant workers said they mainly came from Shandong province under academic exchange arrangements.“It has always struck me how isolated Duisburg’s Chinese student population is compared to those of other Asian countries, with Chinese community groups effectively shielding new arrivals by assisting in all the initial tasks such as arrangement of accommodation,” said Antonia Hmaidi, an analyst at the China think-tank Merics in Berlin, who previously taught at University Duisburg-Essen.“China’s deteriorating image as an autocratic rival also made China-centred career planning unpopular among German students,” she added. “The relationship with China has become more politicised than a few years ago.”“After the German government releases its new China strategy, the overall climate will probably further worsen, which will probably further cool Duisburg’s business relationship with China.”A version of this article was first published by Nikkei Asia on January 24, 2023. ©2023 Nikkei Inc. All rights reserved.Related storiesGermany eyes ‘China lite’ future that is less dependentGermany struggles to get China parts to replenish ammo stockpileRoad to nowhere: China’s Belt and Road Initiative at tipping pointGermany blocks Chinese stake in 2 chipmakers on security fears More

(Reuters) -Peru’s consumer prices rose less than expected in January despite the impact of growing political tensions, but the 12-month rate ticked up as the Andean nation battles the highest inflation in a quarter of a century, with fresh rate hikes still on the table.Government data showed on Wednesday that consumer prices in the Lima metropolitan region, seen as the national benchmark, were up 0.23% in the first month of the year, well below the median forecast of 0.43% in a Reuters poll of economists.It was the lowest monthly increase since January of last year, slowing from the 0.79% rise seen in the previous month, although not enough to prevent annual inflation from hitting its highest since July.Data from statistics agency INEI showed that consumer prices rose 8.66% in the 12 months through January, remaining near a quarter-century peak reached last year, though below a projection made by Economy Minister Alex Contreras last month.Contreras said annual inflation would likely soar over 8.8% in January after protests and road blockades pushed up food prices. He did note that the move would be temporary due to stimulus measures the government was proposing for regions roiled by protests.Peru, the world’s No. 2 copper producer, has been embroiled in political turmoil since December, with anti-government protests blocking roads and clashes with security forces leading to the deaths of dozens of people.Economists at BBVA (BME:BBVA) Research said they expect year-on-year inflation to continue at high levels in the short term, even above 8%, as the persistent unrest affecting food supply, alongside lack of rains and high fertilizer costs, takes its toll on local prices.The latest monthly inflation increase was mainly due to higher food and non-alcoholic beverage costs, as well as rising hotel and restaurant prices, INEI said in a report. Decreasing transportation costs partially offset those rises.The fresh data also follows aggressive monetary tightening, as Peru’s central bank has raised its benchmark interest rate periodically since the second half of 2021 to combat inflation that surged well ahead of its 1%-to-3% target range.The latest 25 basis-point hike to 7.75% happened in January, when the central bank said a downward trend in inflation was projected from March, and a return to the range in the fourth quarter.BBVA economists, however, noted that inflation expectations for 2023 remain above 4%, saying in a report that “despite the weakness of economic activity, we do not rule out that the central bank finds it prudent to raise its interest rate a little more, to 8.0% in February”. More