Aurelia Butler

The European Central Bank’s chief economist has said it should increase borrowing costs at a “steady pace”, casting doubt over whether he will support calls to raise interest rates by a record 0.75 percentage points next week.Philip Lane told an event in Barcelona it would be better to “chop up” the expected path of rate rises over the coming months into “smaller increments” as this would give it time to “learn more” about how the economy is progressing.His comments on Monday represent a mild pushback against more hawkish comments by other members of the ECB governing council, some of whom have anonymously called for it to consider a three-quarter percentage point rate rise for the first time in its history at next week’s meeting.However, economists noted that Lane left the door open to a more aggressive rate rise, while investors continued to price in a strong probability of the ECB increasing its deposit rate by a record 75 basis points next week. Eurozone government bonds sold off earlier in the day — pushing 10-year yields on German and Italian bonds to two-month highs — and did not recover after Lane spoke. The euro rebounded slightly above the value of the US dollar, indicating investors expect a bigger rate rise.The ECB raised rates for the first time since 2011 in July, lifting its deposit rate out of negative territory to zero in a bigger move than it had signalled as it sought to bring inflation back towards its 2 per cent target. But inflation growth has consistently outstripped its forecasts and on Wednesday consumer prices are expected to set another new eurozone record, rising to 9 per cent when the latest inflation data are published by Eurostat, driven higher by record gas prices. Lane said inflation was “extremely high” and “many people’s pay levels may not be aligned with costs to put it mildly”, which meant “there is still some adjustment on costs to come and that is going to keep inflation high for some time”.

The ECB chief economist, one of the more dovish members of the rate-setting council, said the central bank had entered “an important new phase” after exiting negative rates in which it identifies how high it thinks rates need to go to bring inflation back to its target — the so-called terminal rate.“A steady pace (that is neither too slow nor too fast) in closing the gap to the terminal rate is important for several reasons,” said Lane. Such a “calibrated” approach to rate rises would allow markets to absorb higher borrowing costs and leave it room to target a lower terminal rate if the inflation outlook changed.However, he did not express firm opposition to the idea of a bigger rate rise next week, saying: “The appropriate size of the individual increments will be larger the wider the gap to the terminal rate and the more skewed the risks to the inflation target.”Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said: “Inflation is likely to deteriorate, not improve, in the next couple of months. This should keep the 75 basis point option live [for the ECB].”“At the start of Lane’s ‘new phase’, the gap between policy rates and the neutral rate is larger by definition,” added Ducrozet. “Hence I suspect he may not oppose a 75 basis point move in September.” More

“A steady pace – that is neither too slow nor too fast – in closing the gap to the terminal rate is important for several reasons,” he said. “The appropriate size of the individual increments will be larger the wider the gap to the terminal rate and the more skewed the risks to the inflation target.”Several policymakers have made the case in recent days for a 75 basis point rate hike next month after a 50 basis point move in July. Lane’s comments did not make clear his own preference. More

Belousov said Russia’s gross domestic produce would fall by “a little more than 2%” this year. That will be followed by a decline of “no more than 1%” in 2023, Belousov predicted.Some economists were predicting a 15% collapse in GDP this year in the face of Western sanctions imposed because of the Ukraine crisis and designed to cripple the Russian economy. More

LONDON (Reuters) – Worsening droughts, storms and torrential rain in some of the world’s largest economies could cause $5.6 trillion in losses to GDP by 2050, according to a report released Monday.This year heavy rains have triggered floods that inundated cities in China and South Korea and disrupted water and electricity supply in India, while drought has put farmers’ harvests at risk across Europe.Such disasters are costing the global economy hundreds of billions of dollars. Last year’s extreme droughts, floods and storms led to global losses of more than $224 billion, according to the Emergency Events Database maintained by the Brussels-based Centre for Research on the Epidemiology of Disasters.But as climate change fuels more intense rainfall, flooding and drought in coming decades, these costs are set to soar, warns the report by engineering and environmental consultancy firm GHD.Water – when there’s too much or too little – can “be the most destructive force that a community can experience,” said Don Holland, who leads GHD’s Canadian water market programme.GHD assessed the water risks in seven countries representing varied economic and climatic conditions: the United States, China, Canada, the United Kingdom, the Philippines, the United Arab Emirates and Australia. Using global insurance data and scientific studies on how extreme events can affect different sectors, the team estimated the amount of losses countries face in terms of immediate costs as well as to the overall economy.In the United States, the world’s biggest economy, losses could total $3.7 trillion by 2050, with U.S. gross domestic product shrinking by about 0.5% each year up until then. China, the world’s No. 2 economy, faces cumulative losses of around $1.1 billion by mid-century.Of the five business sectors most vital to the global economy, manufacturing and distribution would be hit hardest by disasters costing $4.2 trillion as water scarcity disrupts production while storms and floods destroy infrastructure and inventory.The agricultural sector, vulnerable to both drought and extreme rainfall, could see $332 billion in losses by 2050. Other sectors facing major challenges are retail, banking and energy. At this year’s World Economic Forum in Davos, Switzerland, a global group of experts launched a new commission to research the economics of water that aims to advise policymakers on water management.We must “transform how we govern water and the climate together,” said commission co-chair Tharman Shanmugaratnam. “The costs of doing so are not trivial, but they are dwarfed by the costs of letting extreme weather wreak havoc.” More

JACKSON HOLE, Wyo. (Reuters) – In 2019, the U.S. unemployment rate averaged 3.7% and consumer prices rose at an annual rate of around 1.8%.Fast forward to 2022, and while the unemployment rate has averaged the same 3.7% for the first seven months of the year, prices are sky-rocketing at an annual rate of more than 8% – touching off a potentially intense debate at the Federal Reserve over whether the “hot” labor market policies embraced before the COVID-19 pandemic can survive in the economy that is emerging.U.S. central bank officials acknowledge their battle to tame raging inflation is likely to cost jobs as rising interest rates slow the economy and companies retool staffing plans in response, though whether the loss of employment will be modest or massive is unknown.More contentious: Whether the combination of a tight job market and high inflation is a coincidence of the pandemic or a sign that labor and the economy have changed in fundamental ways that mean efforts to control inflation may require higher unemployment than before.That’s a controversial issue. When Gita Gopinath, the first deputy managing director at the International Monetary Fund, suggested at this year’s Jackson Hole central banking conference that hot labor market policies now carried a risk of higher prices, there was quick pushback.Today’s U.S. job market “isn’t hot. This is a raging inferno,” said Minneapolis Fed President Neel Kashkari, arguing that efforts to curb the imbalances don’t mean officials need to forever abandon monetary policies meant to coax more workers into the labor force and push unemployment lower.St. Louis Fed President James Bullard countered that the Fed should be cautious in assuming indicators like the labor force participation rate should always go higher. “People do value leisure and you want them to get the right tradeoff,” he said.In the wake of the pandemic, it remains an open question whether those preferences have changed. There’s growing evidence they did. Retirements rose, and while some retirees went back to work, not all did. Labor force participation for younger workers remains lower than pre-pandemic levels as well.Recent research has suggested a decline also in the hours people want to work.The implication is the economy may remain labor-constrained, with continued pressure on wages, and that for any given unemployment rate there may be even less available labor than headline numbers indicate.For the current inflation debate, that may mean that policymakers have to accept a relatively larger rise in joblessness if they wish to lower the rises in prices.In the Fed’s most recent economic projections, the median estimate tagged a long-run unemployment rate of 4% as consistent with inflation at the central bank’s 2% target. Joblessness is seen increasing as part of the inflation battle, but only gradually to 3.7% by the end of this year, 3.9% next year, and 4.1% in 2024 – in effect a “soft landing” for the job market in response to the highest inflation and most aggressive interest rate increases in 40 years.Many analysts regard that outlook as too optimistic, and argue that the Fed will need to create much more economic slack – lower demand and slower growth – to get the needed response on prices. That may mean broader job losses.’A LITTLE PREMATURE’The Labor Department on Friday will issue its employment report for August, with analysts polled by Reuters forecasting that the unemployment rate will remain unchanged at 3.5%. Less than three weeks later, Fed policymakers will issue new economic projections at their Sept. 20-21 meeting.One estimate from San Francisco Fed economists posited that an unemployment rate consistent in the short-run with lower inflation to be as high as 6%. That would imply roughly 4 million lost jobs. “Economic disruptions appear to have pushed up the short-run noninflationary rate substantially,” the research concluded.There are contrary theories. If inflation is driven less by resource slack, including labor, and more by recent global supply problems or by public expectations, it may come under control with minimal job losses. That case has been argued by Fed Governor Christopher Waller. In a recent paper, he concluded that shifts in the relationship between job openings and joblessness may mean a drop in vacancies could do much to ease labor market pressure – a point rebutted by former U.S. Treasury Secretary Lawrence Summers’ projections of a sharp rise in unemployment.Fed Chair Jerome Powell stuck with the euphemistic “some softening of labor market conditions” in his keynote speech on Friday at the Jackson Hole conference in Wyoming as he promised a tough fight against inflation.Cleveland Fed President Loretta Mester told Reuters in an interview that the unemployment rate may only need to rise as high as 4.25%.”I don’t think anybody can be very precise now about where the sustainable rate of unemployment is,” she said on the sidelines of the Jackson Hole conference on Saturday. If there was a wide range before, there is a wider range now because of the nature of work changing … But it is a little premature to say we have to get unemployment up to 6%. That is not in my forecast.” There also is a longer-run consideration for the Fed. Under Powell, the Fed conceded that in the past it had sometimes overstated the risk of inflation, and kept monetary policy stricter than necessary at a cost of needless unemployment. To avoid that error, the Fed adopted a new strategy in 2020 that pledged to fight “shortfalls of employment from its maximum level.” In practice, that meant looser policy that took greater risks with inflation in favor of pushing up employment – the very hot labor market strategy Gopinath warned about.There was a sense at the time that the unemployment rate consistent with low inflation had fallen far below Fed estimates, and ignoring that to chase phantom inflation would foster unnecessary joblessness. The unresolved issue now is whether that so-called “natural” rate of unemployment has risen either temporarily or permanently, and whether tradeoffs between inflation and unemployment – thought to have faded as a concern – will now bind policymakers.”People are concerned that these tradeoffs will be more pointed … There are still unresolved pandemic issues layered on top of the long-run demographics,” that would tend to decrease labor force participation, said Janice Eberly, an economist at Northwestern (NASDAQ:NWE) University. “Nobody really wants to put a stake in the ground on what the unemployment rate is going to look like in the long run.” More

(Reuters) – Russia’s First Deputy Prime Minister Andrei Belousov said inflation will come in at 12-13% in 2022, below earlier expectations, as the economy looks set to defy the gloomiest predictions of a near collapse in the face of Western sanctions.In a televised government meeting, Belousov also said consumer goods imports had largely rebounded thanks to parallel import schemes designed to replace Western goods that firms have pulled from the Russian market. More