Aurelia Butler

With price growth surging last month to a record-high 8.1% and broadening quickly, the ECB is rolling back stimulus measures it has had in place for most of the last decade. It aims to stop rapid price growth from seeping into the broader economy and becoming perpetuated via a hard-to-break wage-price spiral. Following up on a long-promised move, the ECB said it would end its Asset Purchase Programme, its main stimulus tool since the euro zone debt crisis, and said it would raise rates by 25 basis points in July, then move rates again in September, possibly by a bigger margin. “The Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting,” the ECB said.”The Governing Council expects to raise the key ECB interest rates again in September,” it said. “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.”The ECB’s deposit rate now stands at minus 0.5% and ECB chief Christine Lagarde has said it could be back at zero or slightly above by the end of the third quarter. Markets, however, expect even more aggressive action, pricing in 135 basis points of hikes by the end of this year, or an increase at every meeting from July, with some of the moves in excess of 25 basis points. The bank has not raised rates in 11 years and the deposit rate has been in negative territory since 2014. Attention now turns to Lagarde’s 1230 GMT news conference. More

European gas prices jumped on Thursday after an explosion at one of the biggest US liquefied natural gas export terminals, highlighting the fragility of global supplies as many countries attempt to cut their reliance on Russian energy.Freeport’s LNG facility in Texas will be closed for at least three weeks after the explosion on Wednesday, cutting off roughly a fifth of US liquefaction capacity, a process by which natural gas is supercooled and loaded on to tankers for delivery overseas.European wholesale gas prices jumped more than 10 per cent to €88 per megawatt hour, while UK prices for delivery in July surged by a quarter to 163p per therm.“As a result of today’s fire, Freeport LNG’s liquefaction facility is currently shut down and will remain shut down for a minimum of three weeks,” the company said on Wednesday. US natural gas prices fell sharply following the incident as traders fretted over the loss of a significant slice of the market. US futures for July delivery were trading at about $8.28 per million British thermal units on Thursday morning, down 11 per cent from Tuesday’s settlement price, as traders contemplated domestic supplies being trapped onshore.The Freeport terminal’s three trains have the capacity to process 2.1bn cubic feet of natural gas per day. That represents about 17 per cent of total US liquefaction capacity of 13bn cu ft/d and 2 per cent of the country’s total natural gas production. Natural gas needs to be liquefied before it is transferred into tankers that ship it across the world.The cause of the explosion and extent of the damage remained unclear on Wednesday night. Freeport LNG confirmed “an incident” had occurred at about 11.40am local time, adding that there had been no injuries and there was no risk to the surrounding community. It declined to provide further details.Located on the Texas Gulf coast, Freeport LNG is one of just seven terminals operating in the US, all of which have been running flat-out to supply shipments of fuel to a tight global market. The US, the world’s biggest natural gas producer, is trying to increase exports to Europe as the continent seeks to cut its dependence on Russian imports.

Under a deal announced by President Joe Biden and European Commission president Ursula von der Leyen, the US pledged to ensure an additional 15bn cu metres reaches Europe this year. Brussels said it would aim to increase annual demand for American LNG by 50bn cu m, equivalent to 4.8bn cu ft/d, by the end of the decade. The optimistic demand outlook has sparked a flurry of investor interest in the sector. Michael Smith, Freeport LNG’s chief executive, told the Financial Times in April that “the future for US LNG is off the charts”.The local police department could not be reached for comment regarding Freeport LNG. In a statement carried by local media, law enforcement said the facility had experienced “some sort of explosion” but that there was no evacuation under way. More

The European Central Bank has said it will stop buying billions of euros of bonds in early July and raise interest rates by a quarter of a percentage point for the first time in more than a decade at its meeting a few weeks later.The announcement, made after the ECB governing council met in Amsterdam, is a major step towards ending the ultra-loose monetary policies of negative interest rates and massive bond purchases that it has pursued over the past eight years.The ECB said: “High inflation is a major challenge for all of us. The governing council will make sure that inflation returns to its 2 per cent target over the medium term.”The bank last raised rates in 2011 and its deposit rate now stands at minus 0.5 per cent. There is broad agreement among the ECB’s 25 governing council members on the need to raise rates to tackle eurozone inflation that has risen at a record rate of 8.1 per cent in the year to May, more than quadruple its target of 2 per cent. However, there is less consensus on the pace of tightening. ECB president Christine Lagarde and chief economist Philip Lane have signalled rate rises of a quarter of a percentage point as the benchmark for its meetings in July and September — the two that follow the June decision. The central bank said it expected to “raise the key ECB interest rates again in September”. It added: “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.”The pace at which price pressures have intensified over recent months has left hawks calling for more aggressive moves, in line with the Federal Reserve’s strategy of raising rates by 50 basis points at a time.With Russia’s invasion of Ukraine already driving up food and fuel prices for European consumers, there are growing fears among economists that if Russian gas supplies are cut off it could plunge the eurozone into recession.The ECB slashed its growth forecasts and raised its projections sharply for inflation. Eurozone inflation would increase from 2.6 per cent last year to 6.8 per cent this year, before declining to 3.5 per cent next year and 2.1 per cent the following year – remaining above the 2 per cent target for the entire forecast period.Growth would hit 2.8 per cent in 2022, 2.1 per cent in 2023 and 2.1 per cent in 2024.

In March, the central bank projected inflation would increase from 2.6 per cent last year to 5.1 per cent this year, before tailing off to 2.1 per cent next year and 1.9 per cent in two years’ time. The ECB had expected the economy to expand by 3.7 per cent in 2022, 2.8 per cent in 2023 and 1.6 per cent in 2024.There has been speculation about how quickly the ECB could start shrinking its balance sheet by not reinvesting the proceeds of maturing bonds. The ECB said such reinvestments would continue “for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance”.The euro was little changed after the announcement, trading at $1.073 against the dollar. Eurozone government bond prices weakened, pushing Germany’s 10-year yield up by 0.05 percentage points to 1.41 per cent.Investors will be watching the press conference with Lagarde, which is set to begin at 1.30pm UK time, for any clues on how fast it is likely to raise interest rates and whether its rate-setters are more worried about inflation staying high or a sharp downturn in growth.Additional reporting by Tommy Stubbington More

Armed with fresh forecasts signaling a faster path for euro-zone prices than previously thought alongside a weaker rebound from the pandemic, officials agreed to halt net bond-buying as of July 1 under a crisis-era program that began in 2015.The deposit rate — currently -0.5% — will then be lifted by a quarter-point next month, and again by either that amount or more if inflation warrants a tougher stance. Moves at the next two meetings would conclude an eight-year stint of subzero borrowing costs in the third quarter, affirming a plan laid out earlier by President Christine Lagarde.“Beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate,” the ECB said in a statement.The euro fell against the dollar, sliding 0.2% to $1.0692, having traded little changed ahead of the policy outcome.While Thursday’s decisions crystallize the ECB’s exit from years of stimulus, they still leave it lagging behind the more than 60 other global central banks that have already raised rates this year.The announcements follow another unexpectedly steep surge in euro-area inflation, which stood at 8.1% in May — more than four times the official target. Soaring prices are squeezing households across the continent, with governments spending billions of euros to shield people from a spike in energy costs driven by Russia’s invasion of Ukraine.The relentless inflation is feeding a fierce debate among ECB officials over the size of July’s rate increase, with a sizable contingent pushing to consider a half-point hike matching the most recent move by the Federal Reserve. Lagarde may offer some insight into the Governing Council’s preference when she briefs reporters at 2:30 p.m.She’ll speak in Amsterdam as the ECB returns to holding one policy meeting a year outside its Frankfurt base following the pandemic.Follow the press conference on our live blogThe hawks may feel they have the momentum at present and have been vocal in recent weeks in floating an outsized rate move to keep inflation expectations in check. While Lagarde and her vice president, Luis de Guindos, are among officials who haven’t ruled out such a step, the majority seems to favor a smaller increase for now.Highlighting the uncertainty, investors this week priced the chance of a half-point hike in July at 50/50. As price pressures linger and the economy loses steam, the ECB’s new outlook showed medium-term inflation above or at target.This week has already seen World Bank and OECD forecasts reinforcing stagflation fears as the Ukraine war saps confidence and supply-chain disruptions in Asia restrain factories. While peak global inflation may have passed, Barclays predicts a mild euro-area recession after a splurge on summer vacations fades. Economists surveyed by Bloomberg are less gloomy, though they do expect sharp cuts to the ECB’s outlook for the next two years. During that time the currency bloc is poised to expand to 20 members as Croatia joins on Jan. 1.©2022 Bloomberg L.P. More

The ECB now sees inflation over its 2% target throughout its projection horizon, accepting that rapid price growth is not nearly as temporary as it had forecast for the past year.The ECB failed to predict the recent inflation surge and its projections have been raised sharply quarter after quarter, leading to criticism of the bank’s forecasting methods and a large internal study on how they got the outlook so wrong. Inflation is seen averaging 6.8% this year, well above the 5.1% predicted in March, while it is seen at 3.5% in 2023 and 2.1% in 2024.Inflation rose over 8% last month and could peak in the third quarter before a slow retreat. Sky-high energy prices are the key reason for the inflation surge but food prices are also rising quickly and underlying price growth, which filters out volatile food and fuel prices, is also well above 2% now. Expensive food and energy will be a drag on growth, holding back an economy which had just recovered from a deep, pandemic-induced recession. The following are the ECB’s quarterly growth and inflation projections through 2024. Figures in brackets are previous forecasts from March.The ECB targets inflation at 2%.2022 2023 2024GDP growth 2.8% (3.7%) 2.1% (2.8%) 2.1% (1.6%)Inflation 6.8% (5.1%) 3.5% (2.1%) 2.1% (1.9%) More

The price of food, energy and other necessities is soaring globally. But in Singapore, the rich still want luxury cars.People in the city-state are paying the highest amount in decades just for the right to own a premium car, official data showed on Wednesday. The cost of the most exclusive certificates of entitlement, which residents must obtain before they are allowed to purchase a car, breached six figures in June for the first time in at least 20 years, according to official data.Open category COEs, which allow the purchase of vehicles other than motorcycles, rose 5 per cent to S$100,697 ($73,230) in the most recent round of bidding, compared with the previous auction in mid-May. Certificates for larger cars increased by a similar margin to S$100,684.The car market is heating up as prices rise across Singapore, reflecting broader increases in the cost of living globally. Core inflation in the city-state reached 3.3 per cent in April, its highest level since 2012.The real income of households in Singapore has been hit particularly hard by regional events and the rise in commodity prices following Russia’s invasion of Ukraine.Malaysia imposed a sweeping ban on exports of live chickens to protect domestic stocks last week. Singapore imported more than a third of its chicken from Malaysia in 2021, so purveyors of chicken rice, the national dish, have been forced to increase prices as they rush to secure supplies, according to local media.The decision was made after Indonesia temporarily banned exports of palm oil, putting pressure on cooking oil prices in Singapore.Meanwhile, a wave of foreign professionals seeking to escape Hong Kong’s stricter pandemic restrictions has descended on the island in recent months, driving up demand and prices for homes. The vast majority of citizens and permanent residents live in public housing, leaving expats racing to compete for the much smaller selection of private properties.Singaporeans have long faced high fees to acquire COEs, which were introduced to curb traffic. As the price of these certificates can exceed the cost of a typical vehicle, many middle-income residents have been put off car ownership.“Everyone thinks it is cheaper” in Singapore, said Heather Thomas, a small-business owner who recently relocated from Hong Kong. “I don’t think that at all. I don’t think I would get close to buying a car.”But wealthy residents, who are particularly likely to purchase the open category COEs and certificates for larger vehicles, are still seeking out luxury cars. Certificates have to be renewed every decade and are sold through regular auctions, meaning prices fluctuate according to supply and demand. June’s auction took place three weeks after the previous one, instead of the usual two, so received more bids than normal.“I am not going to stop collecting,” said one multi-millionaire. It is still “beautiful for rich people” in Singapore. More

A partial oil embargo was finally agreed as part of the EU’s sixth sanctions package, and the pressure is now on to include gas imports as part of a seventh. The main argument is that paying for oil enables Russian president Vladimir Putin’s capacity to wage war and commit atrocities in Ukraine.But does it? My former colleague Matthew Klein writes: “The oil boycott likely won’t do much additional damage to Russia because the economic measures already in place have been extraordinarily effective at degrading Putin’s warmaking capacity.” Therefore an oil boycott should “be understood mainly as a moral gesture rooted in self-denial, rather than as a serious escalation of the pressure on Russia’s beleaguered military”.This has the sound of a highly inconvenient truth. If an oil boycott would have little impact on Moscow’s capacities, then continuing to buy oil does not, in fact, pay for Putin’s war. So is Klein right? My answer is: In two important ways, yes, but the argument is incomplete. Completing it shows that the case for energy boycotts remains strong.First, the two things that I agree with Klein on. One is that exports are ultimately only worth the imports you can buy with them. This simple statement is true but counterintuitive and exceedingly difficult to accept. But it has significant implications. Namely, that Moscow does not need to sell oil or gas abroad to acquire the things it can source within Russia; and that for foreign supplies, it is not enough to have the hard cash to afford them if you cannot actually import. Here is where Klein’s second important insight comes in: the sanctions regime has already significantly curtailed Russia’s ability to import things. Product-specific restrictions have put a lot of high-tech goods out of reach, and financial sanctions restrict Russians’ access to hard currency to buy anything else. This is clear from trade data. Moscow has stopped publishing them, but analysts such as Klein have looked at the export data of its main trading partners to estimate how much Russian imports have fallen. Below I reproduce his chart (see the original here), which shows that they have fallen by . . . a lot! On Klein’s calculations, Russia imported only half as much in March as it had on average in the preceding six months, and early figures for April showed shipments falling further by double-digit percentages from Germany, South Korea, Japan and Taiwan.

So it seems clear that Russia is already struggling mightily to import what it needs. But does that mean an energy boycott is merely a moral gesture of self-denial, in Klein’s words? It does not. First, because the earnings from oil and gas exports are still Moscow’s to spend at some point in the future, if not now. It is not as if the accumulated earnings are worthless; they are real claims that may well one day be redeemed for imports from the west or for capital transactions and acquisitions there. (This, of course, is at a minimum an argument for freezing the cumulative earnings of Russia’s state-owned energy exporters in the same way as the central bank’s assets have been frozen, and even an argument for confiscating all that wealth outright, to help fund Ukraine’s reconstruction.)Second, because even today cutting hard currency earnings will have economic effects at home. The government’s revenues depend heavily on taxes on natural resource exports. Rosneft and Gazprom pay taxes in roubles, but how much they pay (and how they acquire the roubles to pay with) depends on their foreign sales. If those sales stop, a big hole appears in the Russian state budget. That is all the more true as revenue from other taxes is falling fast with the economy going into deep freeze.It can be met by cutting spending, raising taxes, or borrowing. It is easy to see how the former two come with a political cost. Of course, the Russian state can expropriate and confiscate whatever domestic resources it likes — but forcing Moscow to do this is to impose a political economy cost on it. Somebody in Russia is, after all, at the losing end. As for borrowing, it is doubtful how much truly voluntary credit would be forthcoming. Again, Moscow can obviously force banks to issue loans to it — but that is essentially monetary financing and can be counted on to increase inflation, which, in turn, redistributes resources and creates losers. So while I said earlier that “Moscow does not need to sell oil or gas abroad to acquire the things it can source within Russia”, it is still a big difference whether it obtains those domestic resources in exchange for foreign currency claims (even if it is hard to spend those on imports at the moment) or in return for nothing at all. In short, there are important differences between a world where entities controlled by Putin are flush with hard currency and a world where they are not flush — even when it is hard to spend that foreign exchange. I would also surmise that Putin has more uses for these hard currency earnings than it may look. After all, non-frozen money sitting in Gazprom’s and Rosneft’s western accounts can be directed to many non-Russian entities not placed under sanctions. And there is, of course, an inordinate incentive for smuggling.So I do not accept that a European oil or gas boycott will mostly hurt Europeans while making only a negligible difference to Moscow. In any case, there is another reason for a speedy boycott: you don’t want to be at Putin’s mercy for your energy needs. If it is painful to wean yourself off Russian imports now, it would be much more painful to remain dependent and suddenly find yourself cut off at a time of Putin’s choosing.Other readablesOne joy of working at the FT is the camaraderie with colleagues — even after they leave for other pastures. This week I reconnected with two former colleagues who now produce an economics podcast — do tune in to The New Bazaar’s episode on the economics of belonging and what to make of the US’s high-pressure economy.The EU has agreed to ensure “adequate minimum wages” in each of the bloc’s countries. In the UK, a think-tank report calls for a £15/hour minimum wage “to restructure the labour market away from low-paid and insecure work”.The ECB looks set to promise it will keep financial fragmentation between eurozone countries in check. The FT’s editorial column welcomes the central bank’s embrace of its responsibility for the euro’s integrity. The FT’s Europe Express sets out what else to look for in today’s ECB announcements.Airships are a thing again!Numbers newsLondon is the UK’s only region to exceed its pre-pandemic economic output levels, apart from Northern Ireland (thanks, single market membership).The OECD lowered its growth forecasts and predicted that the UK economy will grind to a halt next year. More