Aurelia Butler

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyIt has been a very long time since we have seen a G7 economy experience what the UK has in the past six days — disorderly moves in its currency and bond markets, a loss of confidence in policymakers, direct central bank intervention in the government bond market, pressures for an emergency rate rise, and a warning from the IMF.If the disorder is allowed to persist, the consequential adverse economic and financial effects for the UK, already concerning, are just starting.The catalyst for this momentous time in UK economic history was an overambitious policy package aimed at generating economic growth and lowering inflation. Structural reforms to boost economic growth and the stabilisation of energy prices, both welcomed moves, were accompanied by an unsettlingly large, relatively regressive and unfunded tax cut.Coming amid global market nervousness, this unleashed record-breaking rises in yields on UK gilts, a new record low for the currency and mounting risks of market malfunction and financial accidents. Also unusual, it triggered a disapproving IMF statement that is more familiar to developing countries than a G7 nation.The initial attempt to calm down the situation involved holding-operation statements from the Bank of England and the Treasury. These had some impact but not enough to counter the move higher in yields, which in the case of the 30-year went above 5 per cent to a level last seen in 1998. The intensification of already large and sudden market moves threatened both failures to meet collateral calls and other counterparty concerns among non-banks.The multiplying dislocation of the fixed-income markets forced mortgage providers to withdraw product offerings at an astonishing rate. The few homebuyers able to secure new mortgages saw their monthly payments surge. Meanwhile, the Bank of England resisted any emergency measures, leaving the spotlight to shine brightly on the Treasury.The central bank’s posture changed again on Wednesday as evidence grew of market stress. No longer able to just stand on the sideline, the BoE announced direct market interventions via the “temporary” purchases of long-dated government bonds.Forget the fact that this explicitly goes against its intention outlined in August to sell securities (the now delayed programme called quantitative tightening) and increase interest rates more aggressively as reiterated on Tuesday by the Bank’s chief economist. Worries about the further amplification of policy inconsistency in the UK gave way to the immediate priority of stabilising markets in turmoil.It was never going to be easy for central banks to exit too many years of repressed interest rates and massive liquidity injections, and the adverse market conditioning that they entailed. Now, this inevitably bumpy transition has become a lot more difficult and consequential.Having said that, what is at stake here goes well beyond a disorderly tightening of financial conditions and a significantly higher risk of market accidents. Real damage is being done to the UK economy. The longer this is allowed to continue, the greater the structural damage to the country’s ability to grow in a high, sustainable and inclusive manner.Already dealing with material inflationary and recession concerns — now heightened — British households and businesses face the prospects of significantly higher borrowing costs and damaged wealth. The combined result of all this is yet another stagflationary hit that is contrary to the basic objective of the government’s policy of promoting growth and containing the cost of living crisis.Fortunately, there is a way out — but the window for implementation is not big and is already closing. It consists of the government delaying the announced tax cuts well into next year and beyond; the BoE increasing interest rates before its scheduled November 3 meeting; the Treasury spending more time explaining how its structural reforms will stimulate sustainable growth; much more focused protection of the most vulnerable segments of the population; and close supervision of imbalances in the non-bank financial sector.The multiplying comparators of the UK economic situation to those in struggling developing countries is troubling, domestically and internationally. If left to persist, they will further damage policymaking credibility, making it even harder to re-establish financial stability in the context of a growing economy.The government and BoE need to move now before the situation gets even more problematic. More

The volatility comes after the new UK government announced huge tax cuts funded by borrowing, leading to a plunge in sterling and a surge in government bond yields as concerns mounted over its ability to fund the plan.Government bond yields influence the cost lenders have to pay to borrow money. “(Lenders) just don’t know where that is going to go, how higher it is going to go, where it’s going to stop, so it makes it very difficult to know where to price their mortgages,” mortgage expert Ray Boulger from broker John Charcol told BBC Radio, adding there would be a big impact the housing market.”I think we can expect to see a significant fall in house prices – I’m suggesting perhaps around 10% next year,” he said. CRASHING SYSTEMSMoneyfacts, which monitors mortgages, savings, loans and investment products in the UK, said the 935 figure was more than double the previous record of 462 at the start of the pandemic lockdowns.”We are seeing lenders across the market withdraw rates as headlines around interest rates soaring to 6% have spooked both lenders and borrowers,” said Karen Noye, mortgage expert at wealth management firm Quilter. Virgin Money (LON:VM) and Skipton Building Society temporarily withdrew their entire ranges at one point this week, according to emails sent to brokers seen by Reuters. The crisis in the bond market deepened on Wednesday, with the Bank of England intervening to say it would buy as much government debt as needed to restore financial stability. Finance minister Kwasi Kwarteng’s plans drew criticism from the International Monetary Fund, which said the proposals would add to a crisis of credibility. “Lenders’ systems have been crashing with long virtual queues for borrowers and advisers trying to get them or their clients a deal at current rates,” Quilter’s Noye said.”Rates that were available one hour are gone the next which is making it a tricky time for buyers.” More

CARACAS (Reuters) – Venezuelan business owners struggling to get access to credit amid their country’s continued economic crisis are seeking loans through foreign banks, business people and finance industry sources told Reuters.Local banks in the South American country offer few loans to the private sector because of efforts by Nicolas Maduro’s government to lower inflation by increasing the supply of foreign cash, limiting the expansion of credit, reducing public spending and raising taxes.Large companies in need of financing have begun seeking loans from foreign banks with local partners or connections, private sector and finance sources said. The loans have market-rate interest rates and a high collateral threshold, they said. Under law, local banks must retain 73% of their deposits in the central bank, which leaves little margin for loans.”Industries have to seek options to maintain their operations,” said one businessman, adding that because loans are costly due to interest and guarantees, only large companies can seek them. “Small and medium businesses can’t carry them.”Several companies seeking credit are from the agricultural sector and need the funds to purchase wheat, fertilizers and other goods from abroad, three sources said.Other businesses looking for loans are focused on export of food and drink, they added.Neither the central bank nor the banking regulator responded to requests for comment.U.S. sanctions imposed in 2019 are focused on limiting Maduro’s access to financing and do not prohibit private Venezuelan companies from operating abroad.Loans being sought in other countries by large Venezuelan companies are generally for more than $500,000, two of the sources said, asking that the names of the companies and the banks remain confidential for security reasons.”The government transfers the biggest burden of its adjustment plan to the private sector by restricting credit for companies and consumer credit, which partly affects households,” said economist Daniel Cadenas.Venezuelan banks’ credit portfolios total some $583 million, according to official figures from July, but economic analysts say financing needs for companies are 10 times that and the breathing room offered by loosened currency controls has not led to full economic recovery.”Banking has become more transactional, rather than giving credit,” said a finance source. More

LONDON (Reuters) -British government bond prices soared on Wednesday after the Bank of England said it would buy long-dated bonds in an effort to bring calm to the market and shelved plans to sell its stock of gilts for the time being.Finance minister Kwasi Kwarteng set out a new economic agenda last week, sparking a historic slide in sterling markets that sent the pound to an all-time low against the U.S. dollar, just above $1.03.Having failed to cool a sell-off with verbal interventions over the previous two days, the BoE announced an emergency move that it said would prevent the turmoil in markets from spreading through the country and seizing up credit flows.The central bank said it would buy long-dated gilts “on whatever scale is necessary” to restore order to the market.The BoE also said it was keeping its goal to reduce its 838 billion pounds ($892 billion) of gilt holdings by 80 billion pounds over the next year, but would postpone the start of sales – due to begin next week – because of the market conditions.Ahead of the BoE’s decision, strategists said the 2.1 trillion-pound gilt market was seizing up, with very poor liquidity and pricing quality being a clear sign of market dysfunction.Twenty- and 30-year gilt yields – which move in the opposite direction to prices – dropped around 40 basis points on the day after they rose above 5% in early trading – the highest level for 30-year yields since 2002.The 30-year benchmark gilt yield was trading at 4.579%, down 41 basis points on the day, at 1136 GMT.Capital Economics, a consultancy, said the sharp drop in gilt yields suggested the BoE’s plan was already working.”While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position,” said Paul Dales, chief UK economist.”It wouldn’t be a huge surprise if another problem in the financial markets popped up before long. Either way, the downside risks to economic growth are growing.”Yields fell sharply across the range of British maturities, but especially for long-dated debt. More

The ECB lifted interest rates by a combined 125 basis points at its past two meetings, the fastest pace of policy tightening on record, but inflation may still be months from its peak, pointing to even more tightening from a bank that started hiking well after most of its top peers.”I have to say that 75 bps is a very good candidate for (our next move to) maintain the pace of tightening, but it is also necessary to wait for fresh data,” Slovak central bank governor Peter Kazimir told a news conference.”We have to be vigorous, even ruthless, regardless of the looming recession,” Kazimir added. Finnish central bank chief Olli Rehn, considered a moderate swing voter, also said that 75 basis points could be among the options.”There is a case for taking a decision on another significant rate hike, be it 75 or 50 basis points or something else,” Rehn told Reuters without elaborating on what ‘something else’ may entail. “There is a stronger case for frontloading and determined action.” Outspoken policy hawk Robert Holzmann, Austria’s central bank governor, also backed a 75 basis point move in an interview with Bloomberg TV, arguing that 100 basis points would simply be too much.Markets see the ECB’s 0.75% deposit rate rising to 2% by the end of the year, then to around 3% next spring. Inflation is forecast to stay above the ECB’s 2% target through 2024 and even longer term expectations are above target.ECB President Christine Lagarde said the “first destination” in the rate hiking cycle will be the “neutral” rate, which neither stimulates not slows growth.”We have return inflation to 2% in the medium term, and we will do what we have to do, which is to continue hiking interest rates in the next several meetings,” she told a conference. While the neutral rate is a loosely defined concept, economists see it in the 1.5% to 2% range, a mark Rehn said should be hit this year.”In my view, we are heading towards the range of the neutral rate by Christmas,” Rehn said. “Once we get there, we’ll see if there’s a case to move into restrictive territory.”Kazimir added that there was consensus on the 25-member Governing Council that the “neutral” must be hit but there was no consensus on what precise level this meant. As part of normalisation, Kazimir said the ECB could also start a debate this year on reducing its balance sheet but a discussion did not automatically mean that such action is imminent. More

The European Central Bank is likely to raise interest rates by 0.75 percentage points next month ahead of a further move in December to a level that no longer stimulates economic growth, several of its policymakers said on Wednesday.“We will do what we have to do, which is to continue hiking interest rates in the next several meetings,” ECB president Christine Lagarde told an Atlantic Council event in Frankfurt, adding that the bank’s “first destination” was to lift rates to the “neutral rate” that neither boosted nor restricted growth. The ECB has raised its deposit rate at its past two meetings from minus 0.5 per cent to 0.75 per cent in an effort to tackle record eurozone inflation. But Lagarde said this level was still below the neutral rate, which officials have estimated is 1-2 per cent in the euro area. Other members of the ECB’s rate-setting governing council also spoke out on Wednesday to say it could raise rates by 0.75 percentage points for a second consecutive meeting next month, followed by a further rise before the end of the year.“There is a case for taking a decision on another significant rate hike, be it 75 or 50 basis points or something else,” Finnish central bank chief Olli Rehn, a moderate on the ECB council, told Reuters. “There’s a stronger case for front-loading and determined action.”Peter Kažimír, Slovakia’s central bank governor and a more hawkish ECB council member, said: “Seventy-five basis points is a very good candidate for [us to] maintain the pace of tightening, but it’s also necessary to wait for fresh data.” Austrian central bank chief Robert Holzmann, another hawk, also expressed his support for a 75 basis-points rise.Eurozone government bond prices have fallen sharply this week on expectations that the ECB could raise its deposit rate higher than 3 per cent next year. Goldman Sachs has predicted two consecutive 0.75 percentage point rate rises in the final two meetings of this year. But bond prices, which move inversely to yields, rallied on Wednesday with the rate-sensitive German two-year bond yield dropping below 2 per cent to as low as 1.9 per cent after Lagarde spoke.“Our primary goal is not to reduce growth, our primary goal is not to put people on the dole, our primary goal is not to create a recession, our primary objective is price stability and we have to deliver on that,” Lagarde said. “If we’re not delivering it would hurt the economy far more than if we do deliver.”The ECB defines price stability as inflation of 2 per cent, but price growth in the euro area is expected to rise to a new record of 9.7 per cent when September data is released on Friday.Lagarde said inflation had been “more persistent and of a magnitude that nobody expected”. There have been some worrying signs for the ECB recently. Hourly salaries increased 4.1 per cent in the eurozone in the second quarter from a year ago — the strongest surge in at least a decade. The central bank’s own survey of consumers in July found on average they expected inflation to be 7 per cent in a year’s time — up from 5 per cent in February.Trade unions are also demanding much higher wages. IG Metall, Germany’s biggest union, has demanded an annual wage rise of 8 per cent for 3.8mn metal and electrical workers — among them many in the country’s huge car industry. In Austria, unions this month demanded a 10.6 per cent wage increase for the nation’s 200,000 metal workers. More

LONDON (Reuters) – If Moscow carries out a threat to sanction Ukrainian energy firm Naftogaz one of the last functioning Russian gas supply routes to Europe could be shut, exacerbating the energy crisis just as the crucial winter heating season begins. Naftogaz initiated a new arbitration proceeding against Gazprom (MCX:GAZP) earlier this month, saying the Russian company has not paid transit fees for sending its gas to Europe via pipelines that cross Ukraine. Gazprom this week rejected all the claims, adding that Russia may introduce sanctions against Naftogaz in the case that it further pursues the matter. Such sanctions would prohibit Gazprom from paying Ukraine transit fees, which analysts say could end Russian gas flows to Europe via the country.Yuriy Vitrenko, chief executive of Naftogaz, says the company will continue with arbitration proceedings against Gazprom regardless.”(Sanctions) would make into reality the worst-case scenario that European governments have been preparing for all summer, a European gas market without Russian gas,” said Natasha Fielding, head of EMEA gas pricing at Argus Media.”Transit through Ukraine is the only Russian gas delivery route to Europe still in use besides the Turkish Stream pipeline, which serves southeast European countries,” she added.Dutch wholesale gas prices, the European benchmark, shot up after Gazprom’s talk of sanctions on Tuesday, and rallied as much as 13% on Wednesday to stand around 120% higher since the start of the year. Gas flows via the only operational Ukraine transit route through Sudzha are currently around 42 million cubic metres a day. Kyiv had already in May suspended the Sokhranivka route which delivered almost a third of the fuel piped from Russia to Europe through Ukraine, declaring force majeure.Leaks detected on the Nord Stream 1 pipeline this week make a resumption of flows on that route unlikely after they were cut to a fraction of capacity and finally suspended last month with Moscow citing the need for maintenance.Meanwhile the Yamal-Europe pipeline has been flowing eastbound from Germany to Poland for much of this year, although it has been in stop-start mode for weeks. WINTER RISKShould the Sudzha flows come to a halt, the only Russian gas being piped to Europe would be via Turkey and the Black Sea through TurkStream, which has an annual capacity of around 31.5 billion cubic metres.Gazprom ramped up supply to Hungary via the pipeline in August but overall Europe has been preparing for months for a complete stoppage of Russian gas deliveries this winter. Governments have been scrambling to diversify supply, buying more liquefied natural gas from suppliers such as the United States, Qatar and Egypt, as well as introducing measures to curb demand domestically and save energy.As a result, European gas storage was 88% full as of Sept. 26, although there are variations between countries.”There needs to be a combination of ‘ifs’ to threaten Europe’s energy supplies this winter, including a harsh winter, prolonged French nuclear outages, and other infrastructure issues,” said Norbert Rücker, head of economics and next generation research at investment bank Julius Baer.However, a greater risk remains for next winter as countries will end this year’s winter gas season with very low stocks and have less Russian pipeline gas available than ever before to replenish stocks during the spring and summer. More