Aurelia Butler

Boris Johnson’s plans to cut taxes and support UK households with the soaring cost of living have increased the chances that the Bank of England will raise interest rates by 0.5 percentage points this week, according to those who watch the central bank. Even though many central banks have implemented half point rate rises in recent weeks, including in the US, New Zealand and Australia, most economists still expect the BoE’s Monetary Policy Committee to vote for a smaller 0.25 percentage point rise on Thursday. But with the public’s net satisfaction with the BoE’s control of inflation at the lowest level since records began, the bank could feel it needs to demonstrate it is taking stronger action. The most delicate decision for the MPC will be to determine whether the government’s package of support for energy bills announced last month will be inflationary and require a monetary policy response. Chancellor Rishi Sunak delivered a £400 reduction in energy bills for all households and a £650 increase in benefits for the poorest in a package worth £15bn. This was offset by a £5bn windfall tax on profits from North Sea energy providers.The BoE’s May forecast highlighted its view that unemployment had to rise and growth had to slow growth to a crawl in order to bring inflation back down to its 2 per cent target in the medium term. Any more government borrowing and spending would require an additional monetary policy response, according to many economists. Allan Monks, chief UK economist at JPMorgan, who expects a 0.25 percentage point rate rise, with an “outside chance” of a larger increase, said the government’s fiscal package would “strengthen the MPC’s conviction about [monetary] tightening”. Paul Dales, chief UK economist at Capital Economics, went further than most BoE watchers and predicted there would be a half point rise. With Johnson in political peril and seeking to shore up his position by splashing cash, “the net result is that politics is adding to the current inflationary pressure by lending some support to demand and contributing to a weaker pound”, he said. “As a result, the Bank of England will have to work harder if it is going to bring CPI inflation from April’s 40-year high of 9 per cent back down to the 2 per cent target,” he added. Most economists think there will be a split vote on interest rates, as there has been on other rate decisions in recent months. Some believe there could even be a three-way split, with four members voting for a 0.5 percentage point rise, three for a 0.25 per cent increase and two for no change. The BoE has confirmed that in these circumstances, the four members voting for the largest rate rise would prevail even though there was a majority on the committee for less monetary tightening. Since the central bank’s last meeting in early May, the economic data on inflation have been much as the bank expected, rising to a 40-year high of 9 per cent in April. But the labour market has been stronger than predicted, with unemployment falling to an almost 50-year low and wage growth rising sharply. With the cost of living crisis dominating the headlines, the BoE, which has responsibility for controlling prices, has seen its normally sky-high popularity tumble. Its monthly survey found that net satisfaction with its efforts to control inflation had fallen to -3, the lowest score since the survey started in 1999.The public are also now expecting higher inflation rates to persist, raising fears inside the BoE that companies will keep increasing prices and be willing to pay staff more, creating a loop of persistently high price and wage inflation. According to Krishna Guha of investment bank Evercore ISI, “increases in household inflation expectations in one, two and five years time reinforces the rising likelihood that the Bank of England will end up joining its peers with a ‘new normal’ 0.5 percentage point rate hike, most likely in August”.Highlighting the potential consequences of rising inflation expectations, economists expect the UK to have the highest inflation in the G7 for the next three years. To ensure that rising inflation expectations do not result in a wage price spiral, the likelihood is that whatever the policy decision, the BoE will sound more willing than previously to take difficult action to bring down inflation. Over the past few weeks, the Federal Reserve in the US has emphasised its “resolve” to defeat inflation with Jay Powell, its chair, telling US citizens that “we understand the hardship [inflation] is causing and we’re moving expeditiously to bring it back down”. Likewise, last week, Christine Lagarde, president of the European Central Bank, stressed how she would “stay the course and be determined” in bringing down inflation. Until now, Andrew Bailey, the BoE’s governor, has been much more equivocal, talking about a “narrow path” between too much and too little action on inflation. This has left the impression that the UK’s central bank has gone soft in comparison with its big brothers in Europe and the US. Bailey will not be giving a news conference after the meeting on Thursday because there are no quarterly forecasts accompanying the meeting, but the MPC’s minutes will be published with its decision at noon on Thursday. More

Soaring food prices caused by the war in Ukraine have increased the risk of famine, raising pressure on producers of low-carbon fuels derived from crops and sparking a “food versus biofuel” debate. Before Russia’s invasion, global biofuel production was at a record high. In the US, the leading biofuels producer, 36 per cent of total corn production went into biofuels last year, while biodiesel accounted for 40 per cent of soyabean oil supplies.But some food companies and policymakers are calling for an easing of mandates for blending biofuels into petrol and diesel to increase global grain and vegetable oil supplies. “Now is not the time [for governments] to be encouraging the conversion of food crops to energy through artificial policy incentives or mandatory blending targets,” said the Washington-based International Food Policy Research Institute.Between them, Russia and Ukraine produce nearly a fifth of the world’s corn and more than half its sunflower oil, but crop exports from the countries are at a fraction of prewar levels. Hundreds of millions of people are at risk of “hunger and destitution” because of food shortages caused by the war, the UN’s secretary-general warned last week. The total amount of crops used annually for biofuels is equal to the calorie consumption of 1.9bn people, according to data firm Gro Intelligence, highlighting the volume of agricultural commodities that could be diverted from energy use if the food security crisis worsened. Do biofuels cause problems in food markets?Biofuels — ethanol made from corn and sugarcane and biodiesel made from vegetable oils including soyabean oil and palm oil — have been blended into motor fuel since the early 2000s to boost energy supplies and reduce the environmental impact of fossil fuels. Biofuels were blamed in part for the last food crisis in 2007-08. Studies, including from the World Bank and IMF, suggested that the growth of biofuels contributed 20-50 per cent to the price increase of corn during the crisis. Their rising use was described as “a crime against humanity” by the UN’s then-food rights rapporteur.

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But biofuel producers argue they have played a minimal role this time around. “Biofuels didn’t cause this crisis — either the price or the contraction in supply,” said James Cogan of Ethanol Europe, an industry lobby group. High prices are not about demand but reflect “erratic trading conditions and high energy prices”, he added. Reducing biofuel production “wouldn’t materially ease the price crisis”.Would limits on biofuels reduce world hunger? A 50 per cent reduction in the grain used for biofuels in Europe and the US would compensate for all the lost exports of Ukrainian wheat, corn, barley and rye, according to the World Resources Institute, a Washington think-tank.Although crop production has risen along with biofuel output, meaning the amount available for food supplies has not decreased, biofuel usage cannot rise exponentially without damage to the environment, campaigners said. “In a world that is food insecure, we need to be thinking really critically about these limited resources as we try to feed the world and solve the climate crisis,” said Oliver James, a researcher at Princeton University who helped compile the WRI data.Maik Marahrens, of Brussels-based environmental campaign group Transport & Environment, said that in the EU, about 10,000 tonnes of wheat, equal to 15mn loaves of bread, are burnt daily as ethanol in cars. The ethanol industry says such comparisons are unfair. Most of the grain used to produce fuel is feed wheat, which goes into animal food, rather than milling wheat, which is made into bread, the industry has argued.Biofuel sector executives said the amount of wheat used for biofuels was negligible — about 2 per cent of the total crop, according to industry association UFOP.“In that context, it’s a bit surreal to be elevating wheat ethanol even to a topic of conversation in the current crisis about bread,” said Eric Sievers, director of investments at ClonBio, which owns Europe’s largest grain biorefinery, located in Hungary, as well as at Ethanol Europe. A Russian missile in a winter wheat field in Soledar, in Ukraine’s eastern Donetsk region © Gleb Garanich/ReutersWould it be more harmful to limit biofuels?Industry executives argue that biofuels create efficiencies that nourish animals and, indirectly, humans.The industry is a significant producer of animal feed since the process of turning grains into ethanol creates protein and fat by-products that are fed to chickens, cows and pigs. Citing the impact on the EU alone, Cogan said limits on biofuel production “would result in lost renewable energy, lost energy independence, lost jobs, lost farm income security, increased fossil fuel imports, increased carbon emissions and increased soy meal imports [for animal feed] from the Americas”. Are biofuel policies changing? In the EU, Belgium and Germany are considering easing biofuel blending mandates to address food security. The International Energy Agency cut its biofuels growth forecast for this year by 20 per cent, forecasting global demand to increase 5 per cent from 2021 to 8.5bn litres.In the US, where cheaper corn-based ethanol is the main biofuel, Washington has tried to tamp down rising gasoline prices by allowing the higher blending level, normally cut during the summer months because of polluting concerns, to temporarily continue. But government incentives for biodiesel and the decline in global exports from Ukraine have added to competition for soyabean oil, squeezing supplies for US food groups. “[Soyabean oil suppliers] can’t give me a [price] quote because they can’t take my business. There’s not enough oil to go around,” said Ed Cinco, purchasing director at Schwebel’s, a bakery in Ohio.While China has warned ethanol producers that it will “strictly control processing of fuel ethanol from corn”, India is pushing ahead with targets to raise blending quotas. Prices for sugar, the country’s main bioethanol feedstock, have increased less than other crops. Although co-ordinated action on food security has moved swiftly up the agenda, there has been little debate on limits to biofuels at an international level.Instead, countries using biofuels must balance food security and sustainability with energy costs and independence, said Nicolas Denis, a partner at McKinsey. Governments need to decide “what sustainable use of land looks like, given the different priorities”, he added. More

The average price of petrol in the US hit $5 a gallon for the first time in history on Saturday, adding further pressure to decades-high inflation that has become politically costly for the Biden administration. The new $5 milestone, reported by the AAA motor club, means US petrol prices have risen by more than two-thirds in the past year and have more than doubled since Joe Biden entered office.Rising energy prices have fuelled a substantial part of the continuing inflation surge, which accelerated once again in May and is now running at the fastest annual pace since December 1981. The latest consumer price index, released on Friday, showed prices up 1 per cent last month alone, or 8.6 per cent compared to the same time last year.

The administration has repeatedly sought to pin the blame on Russian president Vladimir Putin, pointing to the country’s invasion of Ukraine as a main reason for the sharp uptick in crude prices, which have in turn pushed up fuel costs. International oil benchmark Brent has risen to more than $120 a barrel since Moscow ordered troops into Ukraine — up from lows near $10/b during the depths of the pandemic two years ago.In recent months, the White House has announced the release of record volumes of oil from a federal emergency stockpile in order to ease the supply crunch, and has also called on Saudi Arabia and other Opec+ countries to significantly increase supply.The White House has also blamed US oil companies for their reluctance to drill. Speaking in Los Angeles on Friday, the president took aim at ExxonMobil, the US’s biggest oil company, saying it had “made more money than God this year”.US oil company executives say Wall Street investors’ demand that they spend a windfall from high oil prices on dividends, not new production, has held back spending on new supplies.Biden and other top officials, including Treasury secretary Janet Yellen, have repeatedly said tackling high inflation is the administration’s “number-one priority”, a message they have homed in on as the president’s approval ratings have plumbed record lows.Republican lawmakers seized on the opportunity to grill Yellen this week in congressional testimonies, forcing her to defend the Biden administration against charges it has stoked price pressures through its spending. Biden has also encouraged the Federal Reserve to do what it takes to counteract high inflation, emphasising its independence as it proceeds to rapidly raise interest rates. Since March, the US central bank has lifted its benchmark policy rate by 0.75 percentage points and next week is slated to implement yet another half-point rate rise, after delivering the first since 2000 in May. A string of such increases is now expected through the latter half of 2022 as the Fed aims to “expeditiously” shift its monetary policy to a “neutral” setting that no longer stimulates demand.At $5 a gallon, US petrol prices — equivalent to £1.07 or €1.26 per litre — remain well below retail prices across the Atlantic. Petrol in the UK in recent days was selling on average for £1.83 per litre, according to the RAC. More

Speaking to businesses in the southern city of Gaziantep, Nebati also said fight against rising inflation, which hit a 24-year-high of 73.5% last month, remained top priority.The government launched a series of steps meant to harness its banks and bond markets to cool soaring inflation and stabilise a sliding currency, doubling down on President Tayyip Erdogan’s aversion to raising interest rates. More

ISLAMABAD (Reuters) – Pakistan’s finance minister said on Saturday that the International Monetary Fund (IMF) has expressed concern about the country’s recently unveiled budget, but the government is confident it can make changes to satisfy the lender.Pakistan is looking to getting a staff level agreement with the IMF this month, Miftah Ismail said.It unveiled a 9.5 trillion Pakistani rupee ($47.12 billion) budget for 2022-23 on Friday aimed at tight fiscal consolidation in a bid to convince the IMF to restart much-needed bailout payments.”There are still some concerns the IMF has about our budget and numbers and stuff like that,” Ismail said in an interview at his office in Islamabad.He said the IMF was concerned about fuel subsidies, a widening current account deficit, and the need to raise more direct taxes.Fuel subsides have been cut in the last two weeks, and the remaining support is expected to be removed in coming days.Proposed budget estimates also seek to rein in the current account deficit, but direct tax revenues remain a concern and Ismail said “slight differences” remain there.IMF’s resident representative in Islamabad did not immediately respond to a request for comment. Ismail said Pakistan would seek to allay the concerns before the budget has to be passed by parliament. Pakistan’s financial year runs from July 1 to June 30. “If there are some changes that we need to make to bring them onboard, we shall do so,” he said.Pakistan is halfway through a $6 billion, 39-month IMF programme which has stalled over the lender’s concerns over the status of some of its objectives, including fiscal consolidation. Pakistan urgently needs funds in the face of dwindling foreign exchange reserves, which have reached $9.2 billion – enough for less than 45 days of imports.($1 = 201.6000 Pakistani rupees) More