Aurelia Butler

VILNIUS/FRANKFURT (Reuters) -ECB policymakers continued to line up on Thursday behind another big interest rate hike as inflation in the euro zone’s biggest economy hit double digits, blasting past expectations and heralding another record reading for the bloc as a whole.The European Central Bank has raised rates by a combined 125 basis points over its last two meetings and promised further increases as sky-high food and energy prices filter into the rest of the economy and intensify underlying price pressures.Strengthening the case for another 75 basis point increase, German inflation jumped to 10.9% this month, far beyond expectations for a reading of 10%. That suggests the figure for the wider 19-country euro zone, due on Friday, is also likely to exceed the predicted 9.6%.”My choice would be 75 (basis points),” ECB policymaker Gediminas Simkus told Bloomberg TV on the sidelines of a conference in Vilnius “But 50 is the minimum.” Colleagues including Slovakia’s Peter Kazimir, Austria’s Robert Holzmann and Finland’s Olli Rehn have all put 75 basis points on the table in recent days, even though the ECB’s next meeting on Oct. 27 is still nearly a month away. But Simkus, like Holzmann a day earlier, pushed back on suggestions of a 100 basis point move, suggesting that a repeat of this month’s 75 basis point hike is the upper limit of hawks’ appetite even if price pressures are far from abating.”There is no easing in sight, and next year the inflation rate is only likely to fall because energy prices are unlikely to rise again as strongly as this year, partly due to government intervention,” Commerzbank (ETR:CBKG) economist Ralph Solveen said of the German inflation figures. BALANCE SHEET RED LINESimkus also said the ECB should start talks “as soon as possible” on reducing its balance sheet, a view echoed by his Estonian peer Madis Müller at the same event.This would probably be done by not replacing some of the trillion euros’ worth of bonds the ECB bought over the past decade – when it was trying to raise price growth that was too low – as they mature. But Portugal’s Mario Centeno and Spain’s Pablo Hernandez de Cos pushed back on that idea, fearing it would destabilise the bond market.”Quantitative tightening could potentially cause market turmoil,” de Cos said in a speech in Bilbao. “This could imperil the policy normalisation path at a time in which all our efforts should be focused on it.”While few governors ventured to estimate where interest rate hikes could end, de Cos said that models suggest a significantly lower terminal rate than markets now expect.”On the basis of current information, the median terminal rate value across models is at 2.25%-2.50%,” de Cos said.Markets currently expect rates to hit 2% by the end of the year then rise to around 3% next spring. De Cos said that if the ECB started to run down its balance sheet sooner than markets now expect, that would lower the terminal rate, which suggests a trade-off between rate hikes and balance sheet operations. Rate hike talk is intensifying even as recession fears rise. The European Commission’s economic sentiment indicator, released on Thursday fell more sharply than feared, reinforcing expectations that the bloc could be in recession by the fourth quarter. More

“Real interest rates judged — by the expectations over the next year of inflation — have to be in positive territory and held there for a time,” she said Thursday in an interview on CNBC. “We’re still not even in restricted territory on the funds rate.”Fed officials raised interest rates by 75 basis points on Sept. 21 for the third straight meeting, bringing the target for the benchmark federal funds rate to a range of 3% to 3.25%. The Fed’s quarterly Summary of Economic Projections shows a median forecast of rates reaching 4.4% by the end of this year, implying a further 1.25 percentage points of tightening over their remaining two meetings in November and December.“In my SEP I have inflation coming down, but we have to bring interest rates up to get that downward shift in inflation,” she said, calling her forecast probably a bit above the median projection.©2022 Bloomberg L.P. More

If the amount of money sent home by Mexicans working in the US offers a gauge for the health of the American economy, then there is some good news for President Joe Biden.Remittances to Mexico hit a new high of $5.3bn in July, according to data from the Mexican central bank. That takes the total since January to $32.8bn, or 16 per cent higher than the year ago period.After falling at the start of the pandemic, remittances to Mexico proved surprisingly resilient. They rose year-on-year in 2020 and hit record levels in 2021. Those are likely to be surpassed again this year. About 11mn Mexican-born immigrants live in the US. There are an additional 25.5mn US-born Hispanics of Mexican origin. The money they send back accounts for about 95 per cent of all remittances to Mexico. Compared with its southern neighbour, the US has recovered more quickly from the pandemic — in employment terms at least. The US labour market remains tight. The unemployment rate, despite ticking up to 3.7 per cent in August, remains near historic lows. In the services sector, in which many Mexican immigrants work, increases in hourly and weekly wages have outpaced the national average. Still, remittance trends are an imperfect economic indicator. For starters, it is a lagging measure. The numbers could also be bumped up by a shift to electronic transfers during the pandemic. These transfers, as opposed to cash brought over the border, are more likely to appear in official data.Altruism matters too. Some studies have shown that remittance flows can run counter-cyclically too, regardless of the health of the host country’s economy. Mexicans living in the US could be sending more funds home to help their families cope with surging inflation.The fact that remittances now account for 4 per cent of Mexico’s GDP, exceeding the combined value of oil production and tourism as a source of foreign currency, speaks as much to the relative strength of the host country as the weakness of the Mexican economy itself. More

Investing.com — The German government said it will throw up to 200 billion euros at bringing down sky-high gas and electricity prices, its latest tactic in what Finance Minister Christian Lindner called an “energy war” with Russia.The federal government has authorized up to 200 billion euros in borrowing by the Economic Stabilization Fund, a vehicle set up originally to help the economy absorb the shock of the coronavirus pandemic. It will use the available funds, among other things, to compensate gas importers and suppliers for the losses they incur in being unable to pass on the price of gas that they buy internationally on to their domestic consumers.”Germany is showing its financial power in an energy war,” Lindner said in a joint press conference with Chancellor Olaf Scholz and Economy Minister Robert Habeck.”Prices must come down, that is our conviction,” Scholz said in his opening remarks. “We are setting up a big defensive shield to bring them down.”As a result, the government is abandoning its previous plans to impose a levy on customers’ bills that had provoked public anger at a time when inflation is running at its highest level in over 40 years. The Federal Statistics Office said earlier that consumer prices were 10% from a year earlier in September, as this year’s surge in energy prices took root ever more broadly in Europe’s largest economy.Berlin’s steps are part of an increasing pattern in Europe that is seeing governments put the burden of this year’s energy price surge onto future taxpayers through a big increase in current borrowing. In the last couple of weeks, both the U.K. and France have proposed similar schemes, but the cost of Germany’s is much larger, not just because of the size of its economy but also because it is suffering more than the other two from the loss of Russian gas supplies due to the war in Ukraine.As with the other two schemes, the German scheme risks keeping demand at levels that may be unsustainable, given the loss of Russian supplies, which typically accounted for around a quarter of Europe’s total before the war. While the continent has made progress in replacing them with more supply from Norway, North Africa, and liquefied natural gas from the U.S. and elsewhere, analysts warn that it doesn’t have enough import capacity to offset the Russian losses completely. More