Aurelia Butler

The ECB raised rates by 50 basis points to zero in July to fight inflation that is now approaching double-digit territory and another such move is now fully priced in by financial markets. Considered a centrist on the bank’s rate-setting Governing Council, Villeroy said that rates should keep rising until the ECB hits the neutral level, which is somewhere between 1% and 2%. At the neutral rate, the central bank neither stimulates nor holds back growth. “We could be there before the end of the year, after another significant step in September,” Villeroy told the U.S. Federal Reserve’s Jackson Hole Economic Symposium.While markets have been betting on a 50 basis point move in September, several ECB policymakers, including Dutch central bank chief Klaas Knot and Austria’s Robert Holzmann, have said that 75 basis points should also be part of the discussion. Villeroy said the ECB was willing to go higher than the neutral level, if needed.”Have no doubt that we at the ECB would if needed raise rates further beyond normalization: bringing inflation back to 2% is our responsibility; our will and our capacity to deliver on our mandate are unconditional,” he added.Specific forward guidance, as provided for years, is now viewed as unadvisable given global economic uncertainties. Villeroy did not openly acknowledge the increasing risk of a recession, but did note that growth prospects were receding while the inflation outlook is deteriorating.The banker said the ECB also needs to consider changes to how it handles excess reserves. Banks sit on trillions of euros worth of excess liquidity and an increase of rates into positive territory provides banks with large risk-free returns, leaving the central bank with similar losses. Villeroy promised a “swift and pragmatic” assessment of reserve remuneration, but did not provide specific proposals.”Just as we did with the tiering scheme, we have to think about a reserve remuneration system adapted to this new context,” he said. More

Governments around the world opened their coffers during the COVID-19 pandemic to prop up economies, but those efforts have helped push inflation rates to their highest levels in nearly half a century, raising the risk that rapid price growth will become entrenched.Central banks are now raising interest rates, but the new study, presented on Saturday at the Kansas City Federal Reserve’s Jackson Hole Economic Symposium argued that a central bank’s inflation-fighting reputation is not decisive in such a scenario. “If the monetary tightening is not supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflationary pressure,” said Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed.”As a result, a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise,” the paper argued. “In this pathological situation, monetary tightening would actually spur higher inflation and would spark a pernicious fiscal stagflation.”On track this fiscal year to come in at just over $1 trillion, the U.S. budget deficit is set to be far smaller than earlier projected, but at 3.9% of GDP, it remains historically high and is seen declining only marginally next year.The euro zone, which is also struggling with high inflation, is likely to follow a similar path, with its deficit hitting 3.8% this year and staying elevated for years, particularly as the bloc is likely to suffer a recession starting in the fourth quarter.The study argued that around half of the recent surge in U.S. inflation was due to fiscal policy and an erosion in beliefs that the government would run prudent fiscal policies.While some central banks have been criticised for recognising the inflation problem too late, the study argued that even earlier rate hikes would have been futile.”More hawkish (Fed) policy would have lowered inflation by only 1 percentage point at the cost of reducing output by around 3.4 percentage points,” the authors said. “This is a quite large sacrifice ratio.”To control inflation, fiscal policy must work in tandem with monetary policy and reassure people that instead of inflating away debt, the government would raise taxes or cut expenditures. More

The ECB raised rates by 50 basis points in July to zero and a similar move is being priced in for Sept 8 but some policymakers have started talking about an even bigger increase as the inflation outlook is deteriorating.”Frontloading rate hikes is a reasonable policy choice,” Kazaks, Latvia’s central bank chief, told Reuters. “We should be open to discussing both 50 and 75 basis points as possible moves.”From the current perspective, it should at least be 50,” Kazaks said in an interview on the sidelines of the U.S. Federal Reserve’s Jackson Hole Economic Symposium.The problem is that at 8.9%, inflation is more than four times the ECB’s target and it is still likely to go higher before a slow retreat. Underlying inflation, which filters out volatile food and energy prices, is also uncomfortably high, indicating that some of the inflation is now getting embedded in the economy via second round effects. With rates at zero, the ECB is still supporting the economy and Kazaks said the bank should reach the neutral level, which neither brakes not stimulates the economy, in the first quarter of next year.”If we see that we need to go beyond the neutral, I have no doubt we will,” he said. “If we don’t see significant decreases in core inflation, we may need to go beyond the neutral. But let’s not get ahead of ourselves.”He added that the ECB should reduce its balance sheet at some point but, for now, it should predominantly deal with interest rates. A complication for the bloc is a looming recession, due primarily to soaring energy prices fuelled by Russia’s war in Ukraine. While a recession will weigh on inflation, a short and shallow recession, as now expected by many, will not be enough get price growth under control without ECB action. “With this high inflation, avoiding a recession will be difficult, the risk is substantial and a technical recession is very likely. In Latvia, a recession is part of a baseline scenario,” Kazaks added. More

The op-ed article came a day after the two countries took a major step towards ending a dispute that threatened to boot Chinese companies, including Alibaba (NYSE:BABA), from U.S. stock exchanges, signing a pact to allow American regulators to vet accounting firms in China and Hong Kong.In the op-ed, published with no named author, Global Times wrote that the deal shows that while it is normal for the two countries to have disagreements, they “should not be an excuse for the two countries to move toward full-scale confrontation”.The article went on to note how both sides made adjustments during consultations, with the Chinese side respecting overseas regulators’ efforts to ensure the quality of the financial information of companies that list.While the United States needs to strengthen corporate supervision, China must maintain national security, the Global Times added.”It is commendable that the concerns of both sides have been understood and respected by each other, and their needs have been met through wise arrangements.”The agreement marks a milestone in a years-long dispute between the two governments over how much oversight U.S. regulators have into the finances of Chinese enterprises that intend to go public in America. More

A loaf of branded, white sliced bread costs about £1.20 at Tesco. The retailer’s own-label equivalent costs 70p, or 42 per cent less. It is not surprising that Tesco’s chief executive, Ken Murphy, recently flagged bread as one of the categories where customers are starting to trade down to cheaper alternatives.That trend is already being felt by the companies that make own-label products — and they expect it to accelerate. “We are seeing an increase in our own-label volumes, especially in bread where the value for money gap is very clear,” said the managing director of one bakery products group.“The increase in the energy price cap is likely to focus minds even more,” he added, noting that the soaring cost of energy in the UK meant this downturn was “moving at a far quicker pace” than previous ones and that “a lot of households will have to batten the hatches down”.During the pandemic and before inflation took off, people sought the reassurance of branded goods. But Mike Watkins, head of retailer and business insight at consultancy NielsenIQ, said that habits were shifting again, with own-label sales outgrowing branded in recent months amid the biggest squeeze on UK wages in two decades.Last month Unilever, one of the world’s largest producers of branded goods, warned that sales had been hit by consumers choosing cheaper versions as prices of its products rose.Fraser McKevitt, head of retail and consumer insight at another consultancy, Kantar, said own-label goods now made up 51.6 per cent of grocery sales by value, the highest level it had ever recorded.Its figures show own-label sales rising 7 per cent in the 12 weeks to August 7, while a recent survey by consultancy Retail Economics suggested that half of all shoppers were planning to buy more own-label products.Much of the growth in own label over the past decade has been driven by the expansion of discounters Aldi and Lidl, which between them have an 18 per cent market share, compared with 8 per cent in 2011. Both sell almost entirely own-label products under names such as Village Bakery for bread and Baresa pasta.Some own-label products are made by big companies that also make branded goods. Hovis and Kingsmill, for example, both make own-label bread. But the sector is dominated by relatively small and usually privately owned companies. Some are significant producers in particular categories, such as Veetee in rice and Lovering Foods in canned fish. The shift to own label is broader than just trading down on staples. The growth of Tesco’s Finest, J Sainsbury’s Taste the Difference and other ready-meal offers as a cheaper alternative to restaurants and takeaways has been a big factor in the higher than average sales of own-label food in the UK compared with Europe and the US.Loaves of white bread at a Tesco store in Northwich, Cheshire. Own-label sales have outgrown branded in recent months amid the biggest squeeze on UK wages in two decades © Christopher Furlong/Getty Images“This is where own label comes into its own,” said Lydia Gerratt, a consultant and former buyer at a big supermarket chain. “These products are not developed to be the cheapest, but to offer your core customers something they want that they are not getting elsewhere.”However, higher demand for own-label products is unlikely to translate into bigger profits for manufacturers, because they are already working on thin margins and face rampant inflation.The bakery products manufacturer said that rising sales were “in no way offsetting the rises in prices of almost everything we touch”. “Wheat is up but the big thing is gas,” he added.James Logan, UK commercial director at Refresco, which supplies water, fruit juice and fizzy drinks to supermarkets across Europe, agreed the cost increases were across the board. “In the past you might have got a spike in one particular commodity because of something like El Niño affecting harvests,” he said. “This time there is no respite, costs are rising everywhere in the supply chain.”The question of how the extra costs are shared has led to high-profile stand-offs between retailers and suppliers of branded goods, such as a recent dispute between Tesco and Heinz that temporarily took some products off shelves. Disagreements with own-label suppliers are less likely on the whole.“A good own-label supplier will have close contact with the retailer and keep them informed about any developments that might require a difficult conversation,” said Logan.Clive Black, head of research at Shore Capital, said asking suppliers to take the hit on price was no longer an easy option. Previous pressure from retailers had led to consolidation, he added, meaning there were fewer alternatives, while switching supplier is also not as easy as it was.The bakery executive said he was having “sensible and constructive dialogue” with customers while McBride, a listed supplier of own-label household cleaning products, recently said it had secured “significant” price increases to help offset the higher costs of chemicals and energy. Tesco and Sainsbury’s have indicated they will sacrifice some profits this year to absorb price increases from suppliers.Logan said media coverage of the cost of living crisis had made price discussions easier to initiate. “Nobody can argue they were unaware of what is happening.” More