Aurelia Butler

The era of negative interest rates in Europe is set to end this week when Switzerland’s central bankers leave Japan as the sole proponent of one of the most controversial economic experiments of recent times. Surging inflation has led monetary policymakers to raise rates above zero and ditch a policy that — by paying borrowers and penalising savers — turned the principles of finance on their head. The Swiss National Bank, which for years used the policy to counter the threat of falling prices, is expected to raise its benchmark policy rate by as much as a percentage point from its current level of minus 0.25 per cent on Thursday after inflation climbed to a 30-year high in August. Watched with fascination by economists and consumers when it was introduced by Sweden’s Riksbank in 2009, the policy ultimately fell short of hopes that it would quickly vanquish the threat of deflation and revive growth. “It has not proven to be the holy grail that we were looking for,” said Katharina Utermöhl, senior European economist at German insurer Allianz.While central bankers have stuck to claims that the topsy-turvy policy boosted loan growth, it is best known for producing some bizarre results in practice. For years, investors paid to lend money to governments such as Germany’s, while housebuyers earned interest from banks on their mortgages in some countries such as Denmark.It also provoked fierce attacks in the eurozone after the European Central Bank implemented the policy in 2014, with savers voicing their frustration at banks charging them to hold deposits. Critics of aggressive monetary easing claim it inflated asset bubbles and widened inequality. Monika Václavková, a student from the Czech Republic, harangued a group of European central bank bosses at last month’s Alpbach conference in Austria for cutting rates to “artificially low” levels. Václavková said the policy pushed up share and property prices and asked: “How do you think a person like me will be able to finance my first home in the next decade of my life?”The Swiss decision will follow similar moves by Sweden, Denmark and the ECB, which ended its negative rates policy after eight years in July. The ECB’s last rate cut to minus 0.5 per cent in 2019 proved so controversial in savings-obsessed Germany that its top-selling tabloid newspaper portrayed the central bank’s then chief Mario Draghi as a vampire sucking savers’ accounts dry.“With the benefit of hindsight, it turned out to be a mistake, not only in theory but also in the internal politics of the ECB,” said Lorenzo Bini Smaghi, chair of French bank Société Générale, who left the ECB board before it cut rates below zero in 2014. The move caused bitter debates between officials, who argued over whether its side-effects outweighed the benefits. “The only significant effect of negative rates was to keep the euro lower, which in a deflationary world had limited impact in any case.”Markus Brunnermeier, an economics professor at Princeton University, noted that while the policy was not “a massive success” for the ECB, it worked in the sense that it managed to convince everyone that below-zero rates were another weapon in central bankers’ armoury. “It shows you can go negative,” he said. Sweden’s Riksbank became the first to ditch the policy two years ago. This month, the Danish central bank followed suit to shore up the krone and avoid importing more inflation via higher import prices. Switzerland’s expected rate rise is also aimed at boosting the franc — in contrast to its attempts to weaken the currency when inflation was low.Responding to the moves, a flurry of European banks have rushed to announce they will no longer charge customers for holding their deposits. The total amount of global debt with interest rates below zero — meaning creditors pay to lend money — has shrunk nearly 90 per cent from its peak of $18.4tn in late 2020. The one outlier is the Bank of Japan, which is unlikely to abandon sub-zero rates and a cap on bond yields at zero in the near future, despite higher prices and a fall in the yen. That is mainly because Japan’s headline inflation has remained low at 3 per cent, and there has been no pass-through from a rise in commodity prices to higher wages.Japan’s central bank, however, stands at a crossroads with its governor Haruhiko Kuroda’s 10-year tenure ending in April next year. His successor could shift the BoJ’s stance on rates, but a recession in the US could also force it to maintain its monetary policy. “The big question for next year is whether the BoJ will be able to shift towards normalisation even under a new governor,” said Masamichi Adachi, chief economist at UBS in Tokyo.The ECB has branded the experiment a success, estimating it caused an average 0.7 per cent of extra bank lending per year than there would otherwise have been, based on surveys of lenders. The ECB also said the policy produced an extra 0.4-0.5 percentage points of economic growth and found little evidence that big sums of money shifted into cash, lying dormant in bank vaults and safes — a key criticism levelled at the policy. However, German banks rushed to return a record €11bn of cash, mostly in €500 and €200 notes, to the ECB after its deposit rate rose to zero in July, suggesting the policy had caused some hoarding of hard currency. While German lenders complained that the policy ate into their profits and was hard to pass on to clients, Ralph Wefer at German price comparison site Verivox said 455 of the 1,300 banks it analysed had been charging retail depositors as well as business customers.Brunnermeier pointed to the “psychological difficulty” the policy created for his fellow Germans: “When you are growing up in Germany, you are taught it is a virtue to save money and then suddenly you are punished for doing so and it seems to make no sense.” More

Federal Reserve officials are under pressure to prove they are serious about stamping out elevated inflation by backing up their hawkish rhetoric with a new set of interest rate projections set to be published this week.Following its two-day policy meeting, the Federal Open Market Committee is on Wednesday expected to raise interest rates by at least 0.75 percentage points for the third time in a row as it tries to hit the brakes on the overheating US economy. The decision, which would lift the federal funds rate to a new target range of 3 per cent to 3.25 per cent at a minimum, will be accompanied by a fresh “dot plot” that compiles officials’ forecasts for interest rates until the end of 2025. “The message has to be that they don’t see an end of the tunnel in terms of rate hikes,” said Ethan Harris, head of global economics research at Bank of America. “It’s less about how big the rate moves are going to be than it is about how durable they are.”The new set of projections, the first since June, will also include officials’ estimates for inflation, unemployment and growth.Harris said the Fed’s June projections were “not plausible”. Those forecasts signalled the US central bank was confident of achieving a “soft landing” whereby inflation is brought under control without causing significant economic damage. The dot plot is expected to project more aggressive monetary policy running throughout this year and potentially into 2023, according to economist forecasts. Barbara Reinhard, head of asset allocation at Voya Investment Management, said: “The dot plot is going to have to show that once they raise rates to their terminal level, they are going to leave them there.”The terminal level refers to the point at which rates will peak in the Fed’s campaign to tighten monetary policy, which is the most aggressive since 1981. The median forecast for the policy rate is expected to rise to about 4 per cent in 2022 and peak even higher in 2023. In June, officials predicted the fed funds rate would reach 3.4 per cent by the end of the year and 3.8 per cent in 2023, before declining in 2024.Economists expect the near-term inflation forecast to rise marginally and for officials to more directly acknowledge that growth and employment will take a bigger hit than they predicted at the start of the summer. Back then, they estimated the unemployment rate would creep up to 4.1 per cent by 2024. It hovers at 3.7 per cent at present and, according to a recent Financial Times survey of top economists, is expected to top 4 per cent next year.The chief concern is that supply constraints will keep stoking inflation, meaning the Fed needs to do more to contain it.“Housing and labour supply are constraints that won’t be temporary, and they create a lot more distance that the Fed needs to travel,” said Betsy Duke, a former governor at the central bank. Bringing inflation back down to 4 per cent could occur “fairly easily”, she added, but it could be “much more difficult” to get it below 3 per cent.Many economists warn the Fed’s credibility is at stake, especially as some question its resolve to squeeze the economy sufficiently to root out inflation.Fed chair Jay Powell sought to snuff out those concerns last month when he delivered his most hawkish message to date at the annual symposium of central bankers in Jackson Hole, Wyoming.

Some economists argue the most effective way to reinforce the Fed’s determination to bring down price pressures is for the central bank to implement a full percentage point rate rise this week, especially in light of August’s alarming inflation data.However, traders in fed funds futures contracts have priced in the odds of that outcome at just 20 per cent, according to CME Group. Most economists instead expect the string of large rate rises to be extended past September. The implementation of a fourth consecutive 0.75 percentage point increase at the November meeting is on the cards. Raghuram Rajan, the former governor of the Reserve Bank of India, said the Fed would face a big test if inflation stayed high while obvious “signs of malaise” started to emerge in the broader economy. “It becomes a much more problematic situation when the economy is very weak, but you still see reasons to actually do more,” he said. “That’s when you find the true character of the central bank emerging.” More

Another rise in UK interest rates was already on the cards before Queen Elizabeth’s death delayed the Bank of England’s decision. If anything, the pause has made the case for rapid monetary tightening even clearer — the only question is how far policymakers will go at their meeting on Thursday.The big change since the BoE Monetary Policy Committee last met in early August has been new prime minister Liz Truss’s plan to cap energy bills for households and companies, at an estimated cost of £150bn. This will lead inflation to fall faster in the next few months, but the plan amounts to a huge fiscal stimulus that will probably keep it higher in the medium term, unless the MPC acts to offset it.“We do have work to do,” BoE chief economist Huw Pill told MPs after Truss’s energy measures were announced, adding that the MPC’s focus would be on how they affected inflation “at longer horizons”.Financial traders are betting the MPC will act even more aggressively in response to high inflation this week than it did in August, when interest rates were raised by 0.5 percentage points to 1.75 per cent — the sharpest increase in 27 years. Now, market pricing implies a bigger, 0.75 percentage point rise, with rates peaking at 4.5 per cent next year.The MPC’s members, however, are likely to split on the scale of monetary tightening. With the UK economy hovering on the brink of recession, at least one member, Silvana Tenreyro, has taken a more dovish line, and could vote for a 0.25 percentage point rise, while others are likely to favour a second successive 0.5 percentage point increase. Analysts said it was unclear what the majority of MPC members will decide.One argument for the BoE to go big is that it risks looking irresolute compared with its peers. The European Central Bank raised interest rates by 0.75 percentage points this month for the first time since the euro’s launch. Meanwhile, the US Federal Reserve looks likely to deliver a third consecutive 0.75 percentage point increase on the eve of the MPC’s decision. If the BoE is seen as a laggard, it could worsen the sell-off in sterling — which hit a 37-year low against the dollar on Friday — adding to inflationary pressures.

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“The MPC is boxed into a corner right now and must raise bank rate quickly to prevent sterling from depreciating further, and to signal to households that it is serious about tackling inflation,” said Samuel Tombs, at the consultancy Pantheon Macroeconomics, who nonetheless argued the outlook for inflation was improving and that policymakers did not need to “strangle the economy” with a sustained series of big rate increases.Other analysts believe that inflationary pressures are still building in the UK economy, with data released over the past week showing that stagnant output and falling retail sales have not stopped service prices rising, or nominal wage growth accelerating in a buoyant labour market.“If persistent surprises in the wage and price data since August, hawkish developed market central banks, a weaker currency, a gilt market sell-off and . . . fiscal easing don’t push the MPC to up its tightening pace to 75 basis points . . . it’s hard to see what would,” said Allan Monks, economist at JPMorgan.Policymakers will also be worried by dwindling public confidence in the BoE’s response to surging inflation. Although UK consumer price inflation dipped a little to 9.9 per cent in August on the back of lower petrol prices, it remains the highest in the G7. The MPC “needs to be bolder to restore its credibility”, said Julian Jessop, fellow at the Institute of Economic Affairs, a think-tank, arguing that a 0.75 percentage point increase “would send a stronger signal that the bank is serious about getting inflation back down over the medium term”.Others, however, think policymakers will be more cautious and content themselves with a 0.5 percentage point rise for now. Although the new direction of government fiscal policy is clear, the MPC will be meeting before chancellor Kwasi Kwarteng outlines on Friday details of Truss’s proposed tax cuts and the Treasury’s costings of the energy support package, and policymakers will only be able to incorporate these into their forecasts in November.

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Fabrice Montagné, economist at Barclays, said a sudden turn for the worse in business sentiment showed that the economic slowdown was broadening, and that this “should make the arguments of the most dovish [MPC] members more palatable”. A further question is whether the MPC will still press ahead with plans to start reducing the stock of assets it amassed under quantitative easing programmes, as it had signalled in August — given the possibility of the government launching big bond sales as it relaxes its fiscal stance.

Whatever the MPC decides on Thursday, many analysts think it will need to keep raising interest rates for longer than looked likely in August, as a result of developments in energy markets and the government’s fiscal stimulus.“Even if the bank doesn’t hike as far as markets expect, we do think the arrival of government stimulus means the BoE won’t be racing towards rate cuts next year, unlike some of its developed market counterparts,” said James Smith, economist at ING. “Liz Truss’s policy will probably make the bank more likely to hike rates faster and further,” said Paul Dales, at the consultancy Capital Economics, which now expects interest rates to rise to 4 per cent. More

Anahita Thoms has spent years cautioning clients about the dangers of not doing due diligence on suppliers. Her efforts are finally paying off.“We’ve seen double the amount of interest in this topic in the past two years than we did the previous five,” says the lawyer who runs Baker McKenzie’s international trade practice in Germany. “It’s not just about the legal risk, but the commercial and reputational risk.”After years of neglect, companies and their investors are now having to ask more awkward questions about their suppliers — addressing what Nikolai Badenhoop, a fellow at the European University Institute, describes in a recent paper as “a blind spot of the green finance debate”.The answers, however, are often difficult to come by.To properly address supply-chain risk, companies need information about the carbon footprints, biodiversity impacts, and working conditions of suppliers which, for a big multinational, can number in the “tens of thousands” according to Thoms. They will often be based in parts of the world where information may be scant, and labour and environmental laws far removed from European standards.Marie Navarre, head of sustainable research at Allianz Global Investors, thinks events such as the Covid pandemic and Russia’s invasion of Ukraine revealed how woefully unprepared the corporate world was for a big supply chain shock — but may, in turn, help address some of the information gaps.Shortfalls in the just-in-time model, where supply chains have to be as efficient as possible in terms of delivery times and cost — often regardless of the political, social and environmental risks — are now clear for all to see.“These two events have properly tested the supply chains of many companies and sectors for the first time, prompting significant expansion of the depth and breadth of internal and external supply chain audits,” Navarre says. “The measurability of supply chains has developed significantly in the last two years and [that] will continue.”

Along with law firms, the Big Four accounting firms, tech firms, and rating agencies offer advice to those wanting to invest in companies with greener supply chains. Navarre’s team uses data from analytics firms such as MSCI, Sustainalytics, Moody’s-Vigeo, ISS ESG, S&P Global Trucost and RepRisk to accompany its own research. “We use multiple providers since each tends to have specific areas of strength,” Navarre said. “The data is diverse and [offers] different coverage.”The onus on European firms to invest more time and resources into supply chain due diligence will rise as the continent’s lawmakers — who have increasingly led the way on setting rules to bring about a greener economy — look to raise standards.In Germany, a new supply chain law comes into force at the start of next year. Companies with at least 3,000 workers must put in place systems to check whether or not their suppliers are abusing human rights, at the risk of fines of up to €8mn or 2 per cent of annual global turnover.“The authorities will want to know if you’ve acted on red flags,” says Thoms. “If one of your suppliers is in Bangladesh, for instance, and you are a clothing manufacturer, you are expected to ask more questions than if you’ve been working for the past years with a reputable business in Japan.”Brussels is also working on a corporate sustainability due diligence directive. This would require any EU business with more than 500 employees and a global turnover of €150mn to come up with a strategy to manage environmental and human rights standards across their supply chains, and ensure their business model is compatible with the limiting of global warming to 1.5C, in line with the Paris Agreement.While the US has legislation requiring companies based there to ensure their suppliers do not use forced labour, the measures taken by European lawmakers are pioneering in their scope.Once the EU’s proposal is finalised — something that is expected to occur in 2023 — and becomes an EU act, the next step is for each member state not only to pass the legislation nationally, but also to task an official body with monitoring compliance.Badenhoop believes the EU directive will help place supply chains “front and centre” of the green finance debate — and could have an impact far beyond Europe.The prevalence of mobile phones may also make data easier to come by, meaning “information about supply chains can be gathered quickly and to an arguably higher standard,” says Tom Adams, co-founder of data firm 60 Decibels.However, Thoms says the capacity to compile and analyse data is still not good enough. “When it comes to due diligence, we need better digital tools to manage it.” More

The decision was made at a meeting of Prime Minister Fumio Kishida’s cabinet. ($1 = 143.1800 yen) More

TOKYO (Reuters) -Japan’s core consumer inflation quickened to 2.8% in August to hit the fastest annual pace in nearly eight years, data showed on Tuesday, as pressures from higher raw material costs and a weak yen broadened.While core consumer inflation has exceeded the central bank’s 2% target for five straight months, the Bank of Japan (BOJ) is unlikely to raise interest rates any time soon as wage and consumption growth remain weak, analysts say.The data highlights the dilemma the BOJ faces as it tries to underpin a fragile economy by maintaining ultra-low interest rates, which in turn are fuelling an unwelcome slide in the yen that is driving up households’ cost of living.The rise in the nationwide core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, was slightly bigger than a median market forecast for a 2.7% increase and followed a 2.4% gain in July. It was the fastest pace of rise since October 2014.The so-called “core core” index, which strips away both fresh food and energy costs, rose 1.6% in August from a year earlier, accelerating from a 1.2% gain in July and marking the fastest annual pace since 2015.The core core index is closely watched by the BOJ as a gauge on how much of the inflationary pressure is driven by domestic demand.Headline inflation hit 3.0% in August, the highest since 1991, underscoring the pain consumers are suffering from rising living costs.”Headline inflation jumped in August to yet another high since 1991 and it still has a stretch higher to climb. That said, the Bank of Japan will remain steadfast in maintaining its ultra-easy monetary policy,” said Darren Tay, Japan economist at Capital Economics.Once welcomed for giving exports a boost, the yen’s weakness has become a headache for Japanese policymakers because it hurts retailers and consumers by inflating the already rising prices of imported fuel and food.The world’s third-largest economy expanded an annualised 3.5% in the second quarter, stronger than the preliminary estimate. But its recovery has been slower than many other countries as a resurgence in COVID-19 infections, supply constraints and rising raw material costs weighed on consumption and output.While inflation is still modest compared with many other advanced nations, a global slowdown and high energy prices are clouding the outlook. The BOJ has pledged to keep interest rates ultra-low and remain an outlier in a global wave of monetary policy tightening. More

Britain’s 19% corporation tax rate – the lowest in the Group of Seven (G7) large, rich nations – had been due to rise to 25% in 2023 under plans announced last year by former finance minister Rishi Sunak.However, opposing the rise formed a major part of Liz Truss’s successful campaign to defeat Sunak in the contest to succeed Boris Johnson as Conservative Party leader and Britain’s prime minister.New finance minister Kwasi Kwarteng is expected to confirm this in an emergency fiscal statement on Friday, where he gives more details about Truss’s plan to support the economy in the face of surging energy bills.Truss said during her campaign that keeping corporation tax low was vital to attract investment, but a report from the Institute for Public Policy Research (IPPR) showed past reductions in the tax rate had not led to more investment.Britain cut its headline rate of corporation tax rate from 30% in 2007 to 19% in 2017, but in 2020 private-sector investment was the lowest in the G7 at 9.8% of gross domestic product. Across 31 mostly wealthy nations in the OECD, Britain had the fourth-lowest business investment in 2020.”Slashing corporation tax is just a continuation of a failed race to the bottom that hasn’t delivered for the UK economy,” said George Dibb, head of the Centre for Economic Justice at the IPPR, which describes itself as a progressive think tank.Headline corporation tax rates do not always give a clear sense of the overall business tax burden in a country, and some countries with high rates offer widespread exemptions.Before he resigned as finance minister last month, Sunak had been working on measures to reshape business taxation to promote investment.Low business investment is one of the main reasons economists give for poor productivity and very slow growth in living standards since the late 2000s.Weak demand after the global financial crisis, followed by years of uncertainty over the consequences of Brexit, are among the reasons economists give for Britain’s poor investment performance, alongside difficulties measuring investment in some services industries Britain specialises in. More