Aurelia Butler

Not many central bankers get to be remembered as being truly great. You rarely see statues paying tribute to deft monetary policy. If the world rapidly manages to escape its current high-inflation, low-growth rut, the leaders of central banks in the UK, US and EU will certainly have earned some recognition. For now, that seems a distant prospect.There are grounds for thinking central bankers were too slow to tighten over the past year: inflation has been climbing out of the comfort zone for months. But the scale of the current surge in inflation — which stands at 8.3 per cent in the US, 7.5 per cent in the eurozone and 7 per cent in the UK (with an expectation it will hit 10 per cent by year-end) — is largely unrelated to those judgments. Monetary authorities, who think in months and years, have been hit by rapid-fire shocks from supply-chain blockages, China’s zero-Covid policy and Ukraine. Their challenge now is to bring inflation back into normal bounds in the medium term and to avoid drifting into a cycle where expectations lead to persistently higher inflation rates. It would be easier to tackle this sort of problem, and the higher policy interest rates it demands, amid robust growth. But we are where we are. This is the sort of moment for which independent central banks are built: they must be willing to tighten even as their economies dip.The US and UK have both started a rate-rising cycle. The Bank of England has set out plans for tighter policy despite also forecasting that Britain is heading into economic contraction. But rate-setting is only part of the answer to the issues central banks now face: they are fighting expectations as well as the present inflation surge — and that is a battle fought through communication. Last week, Jay Powell, chair of the Federal Reserve, was very clear: “Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.”This is a succinct statement. It is the sort of thing that news outlets pick up and communicate in clear language to business and workers that prices will not keep soaring for ever. Yes, he probably overstates his control of events — but he did better than Andrew Bailey, governor of the BoE, this week.Bailey told MPs that “We have to get [inflation] back to target. And that is clear.” But he also said: “To predict and forecast 10 per cent inflation and say there’s not a lot we can do about 80 per cent of it is extremely difficult”. He admitted that he sounded “apocalyptic” on food prices. This unthinking aside drowned out much of the rest of his messaging. And repeating a call for restraint on pay demands was not only crass, it highlighted his lack of tools.Bailey’s error is to forget that his job is not just to be an analyst; it is to manage and shape expectations. The UK faces particular inflationary danger. The BoE already expects a longer-running inflation problem than other economies. Its labour market is ultra-tight and price shocks have already spread far from food and energy. For ECB president Christine Lagarde, the mission is just as clear: keep expectations anchored. It will eventually need to stop stimulating the economy to show it is serious. Its job, though, is a little different. It is more exposed to the war in Ukraine — which will weigh on growth. And the eurozone’s underlying inflation is not as high as in the US. Monetary authorities have had a bad few months. But the job of central bankers is not just to worry about interest rates or the minutiae of asset sales. Their job is also to persuade and to lead. More

A near half-century low in unemployment would usually be good news for a central bank, but the latest fall in the UK’s jobless rate will make the Bank of England’s task of taming inflation even more difficult.With inflation expected to exceed 9 per cent for April in official data to be released on Wednesday, the BoE Monetary Policy Committee has signalled it is ready to engineer job losses and a weaker economy through interest rate rises so as to bring price increases under control.Stagflation is on the cards for much of the developed world in 2022, but the UK is especially exposed to a combination of persistently high inflation and low economic growth. Britain is contending with the same shock to energy prices as other European countries, but it also has a labour market more like that of the US, with widespread worker shortages fuelling wage pressures. Against this backdrop, those steering the UK economy are struggling to communicate clearly about the issues they face and the actions they think are necessary in response. BoE governor Andrew Bailey told the House of Commons Treasury select committee on Monday that although inflation was set to climb into double digits, there was “not a lot we can do about it”, as he also admitted sounding “apocalyptic” about food price rises that are contributing to the cost of living crisis. It earned him fresh criticism from Conservative MPs.The key problem for the BoE is not that it expects inflation to peak at over 10 per cent, but that price rises could persist in the UK for much longer than elsewhere in Europe. As Bailey and other BoE officials made clear to MPs, wages in Britain are increasing at an unsustainable pace and surveys of companies show they feel able to pass on such cost increases to customers. One of the main risks to the BoE’s ability to bring inflation back to the central bank’s target of 2 per cent, said Bailey, was “that the labour market does not cool down”.The latest official jobs data, released on Tuesday, contained little to reassure the MPC. It showed unemployment at a 47-year low of 3.7 per cent in the first quarter, although employment was still below pre-pandemic levels, because large numbers of people have chosen to leave the workforce. This has left employers competing for scarce workers, with vacancies at a record high of almost 1.3mn, and earnings growth running at 7 per cent, once bonuses were factored in.Growth in average total earnings for the single month of March was even higher, above 10 per cent. Economists said evidence that wage pressures had intensified — even as economic activity stalled — would cement the case for the MPC to raise interest rates again in June and August, and could lead it to continue tightening policy for longer.The BoE has already signalled it will take action to keep the economy weak, taking the view that higher unemployment and financial pain for households and companies are necessary to squeeze inflation out of the system.The central bank’s latest forecasts show that if it left interest rates at the 1 per cent level set at the MPC meeting in May, inflation would still be 3 per cent in two years’ time, even though gross domestic product would be growing at an annual rate of only 0.7 per cent.This would not be seen as price stability and prompted Steffan Ball, economist at Goldman Sachs, to predict that rates would have doubled by this time next year, “despite the expected GDP growth slowdown due to the war in Ukraine”. The consultancy Capital Economics went further, predicting rates would reach 3 per cent next year.The BoE has forecast unemployment will rise to 5.5 per cent if rates climb to the sort of levels predicted in the City of London. Although inflation would in this scenario fall below the central bank’s target of 2 per cent, it does not expect price pressures to be tamed without people losing their jobs. “The business world at the moment . . . does not see [the economic downturn] coming, because they are worried about how they recruit and retain,” said Bailey. Some economists think the BoE will now need to engineer an even-sharper slowdown in economic growth in order to cool the labour market. “Worker shortages are likely to remain an issue for businesses and that suggests there’s a big incentive for firms to hold on to staff even if demand falters,” said James Smith, economist at ING. “For the Bank of England’s higher unemployment rate forecast to come to pass, we would probably need to see a more severe downturn, as opposed to stagnation.”Tony Wilson, director of the Institute for Employment Studies, a research body, said the tight labour market was probably why ministers were willing to press ahead with a controversial increase in employers’ national insurance contributions, and a cull of civil service staff, because “for inflation hawks in the Treasury, this probably looks like the perfect time to destroy jobs”.Other economists think labour shortages, and the resulting wage pressures, are likely to ease of their own accord because the squeeze on household incomes will prompt some people to return to the workforce. Meanwhile the BoE faces increasing criticism for failing to be clear enough that the central bank is prepared to inflict financial pain on Britons — via higher interest rates — to bring inflation under control.Bailey in particular is accused of making fumbled comments on important issues. On Monday he used the word “apocalyptic” as he expressed concern about rising food prices because Ukraine, a big producer of wheat, is unable to export.Andrew Sentance, senior adviser at Cambridge Econometrics and a former MPC member, said the BoE’s communication difficulties stemmed from Bailey speaking “as if he is in an academic debating society”. “I don’t think [BoE officials] have really grasped the challenge they face,” he added. “They say ‘We’ve investigated this’, ‘We’ve investigated that’ and they form an intellectual opinion rather than doing something.”  More

China’s top economic official met dozens of executives and industry experts on Tuesday, pledging “support” for technology companies amid a deepening economic slump. Liu He, a vice-premier and President Xi Jinping’s closest economic adviser, said China “must support the platform economy, and sustain the healthy development of the private economy”.He added that China should better “balance the relationship between the government and the market, and support digital companies to list on domestic and foreign exchanges”, according to state media.Video footage from state broadcaster CCTV showed Baidu founder Robin Li and Qihoo 360 founder Zhou Hongyi at the meeting.Markets were closely watching news of the meeting put on by China’s top political consultative body in the hope it could signal an end to Beijing’s regulatory crackdown on internet companies.But in remarks aired by the state broadcaster on Tuesday evening, Liu made pledges similar to those he had made two months ago, when he first intervened to urge a quick conclusion of China’s tech crackdown and pledged to boost the ailing economy.Shares of Chinese companies such as Alibaba and Pinduoduo were up more than 5 per cent in early trading in New York. Since Liu’s March 16 remarks, little public progress has been made on resolving the national security investigation into ride-hailing giant Didi or the restructuring of Jack Ma’s fintech company Ant Group. Didi’s apps have been stripped from online stores for nearly 11 months. The company will next week hold a vote on delisting from the New York Stock Exchange, a step the company said was necessary to wrap up the government probe, while its Hong Kong IPO is also on hold.China’s top political consultative body, the Chinese People’s Political Consultative Conference, routinely holds meetings to bring together leaders in the private sector, religious and academic spheres who serve on the ceremonial body. Tuesday’s meeting focused on China’s digital economy, a reference to the tech sector. Amid the economic downturn caused by Xi’s zero-Covid policy and regulatory tightening, China’s state media and leaders have used pledges of support for the economy to boost market confidence. “It’s not accurate to say the crackdown is going to ‘end’, how can it end?” said an investment manager at a leading Chinese tech company, adding that Liu’s remarks served only to stabilise market expectations.Larry Hu, chief China economist at Macquarie, said that “what’s more important is the meeting itself as a gesture, in order to boost the confidence among investors and corporate”.Wang Yang, a member of the politburo standing committee, told the conference the tech sector should study Xi’s words on the digital economy and balance the need for “development and security”.  More

The writer is director of the Open Society European Policy Institute and one of the authors of the International System Change Compass, written with Systemiq and the Club of RomeThe EU has a commendable story of leadership on climate, having made legally binding commitments to climate neutrality and created an ambitious policy framework to meet them. Unlike the US and other global players, Europe has put its money — and its policies — where its mouth is.But this story will start to look less praiseworthy if the EU does not address the worldwide implications of its transition, as set out in the recently published International System Change Compass. To put it bluntly, the EU cannot be a green island in a dirty world. Unless its trade, aid and other external policies help other regions to achieve their own green transitions, the EU’s ambitions will fail.There is only one climate, so emissions reductions on one continent do not help if it continues importing products made with dirty energy elsewhere in the world. By 2030, the EU is likely to be responsible for less than 5 per cent of global emissions, thanks to its “Fit for 55” package. But European demand drives a big chunk of the other 95 per cent of emissions because of the CO₂ embedded in imports from other regions.Carbon emissions are not the only problem. The EU is a massive importer of virgin resources that are extracted in other parts of the world. Global extraction of natural resource materials tripled over the past 50 years, according to the UN’s International Resource Panel, while global material productivity has declined and material consumption is forecast to double by 2060. To avoid outsourcing the emissions and ecological damage from that consumption, high-income countries need to use resources much more efficiently by moving to a circular economy.Resource efficiency has grown more urgent now that Europe’s decarbonisation drive is pushing up demand for critical raw materials, such as lithium for batteries. If the US and Europe were to maintain the same levels of consumption, currently known resources or planned mines could supply only about 50 per cent of the lithium and 80 per cent of copper needed for humans to move to electric mobility and renewable energy generation, according to the International Energy Agency.Renewables buildout is Europe’s solution: it is the best way to decarbonise the economy and provide long-term energy security, far better than finding new sources of oil and gas. Renewables are freedom fuels because sun and wind are abundant and well distributed across the globe. But the critical raw materials to make solar panels and other clean tech are concentrated in specific places, and most of the supply is controlled by just one country — China. Shortly after Europe’s huge effort to escape reliance on Russian hydrocarbons, it will find itself more dependent on China. Moreover, the mining boom for renewable tech could start new resource conflicts. A significant challenge for the next phase of the European Green Deal is to develop a comprehensive plan to ensure good governance of natural resources.The EU has to drive forward its investments in the demand side as well as the supply side. Along with the US and China, the EU needs to see the move to more efficient use of materials as a security imperative, both for energy security but also as a conflict avoidance strategy. A circular economy would be more resilient because higher reuse and recycling of materials means less vulnerability to external supply chains. It would also mean less competition for virgin resources among these three big economies.However, the EU needs to cushion the impact on its lower-income trade partners of cuts to imports and the introduction of climate-motivated trade barriers. Before introducing the carbon border adjustment mechanism planned for 2026, the EU needs to bring in parallel commitments for finance and technology transfer to help its lower-income trade partners to develop their own sustainable industries and move up the value chain.Europe’s global reputation is at stake. To be a leader on climate, the EU has to avoid starting a new era of extractivism reminiscent of its colonial past, and instead make its own economy more resource and energy efficient. It needs to help other regions to change their economic systems, not only threaten them with measures that they see as protectionism in a green wrapper. The European Green Deal will succeed only if it fosters a global green deal that advances Europe’s trade partners along their own paths to sustainability. More

In his general election campaign of 2019, Boris Johnson promised the country that he would “get Brexit done”. He has failed. Once again he is planning a law to allow him to repudiate parts of the UK’s Brexit deal on Northern Ireland, on which he campaigned. This would destroy the UK’s reputation for keeping its word, invite a parallel EU repudiation of its free trade deal with the UK, enrage the Biden administration and divide the west.At the time of the referendum campaign in 2016, the then Irish foreign minister remarked to me that the EU is a “peace project”. It was true of France and Germany. It was also true of Ireland and the UK. The fact that the Republic and the UK were members of the EU had made borders almost irrelevant. This had facilitated the peace process and might even be what made it possible.“You break it, you own it”, as the late Colin Powell told George W Bush before the invasion of Iraq. This possibility did not seem to cross the minds of Brexiters. Brexit would disrupt the EU ties between the two countries, which had facilitated the Good Friday Agreement. The Leave campaign ignored this issue. Remainers mostly did, too. But they had the excuse that they were not proposing to wreck the relationship.To their credit, Tony Blair and John Major, joint progenitors of the Good Friday Agreement, warned of the consequences of Brexit in a visit to Londonderry in June 2016. Blair argued that the only alternative to controls on the land border “would have to be checks between Northern Ireland and the rest of the UK, which would be plainly unacceptable as well”. Major warned it would be “a historic mistake” to do anything that risked destabilising the Good Friday Agreement. They were both correct. Alas, they were ignored.After the referendum, the Brexiters insisted that their narrow victory mandated them to choose the hardest possible Brexit, whatever its cost. They rejected the single market. They also repudiated Theresa May’s withdrawal agreement, which would have kept the UK in the customs union. Only last week, May reminded the House that “I put a deal before the House that met the requirements of the Good Friday Agreement and enabled us not to have a border down the Irish Sea or between Northern Ireland and the Republic of Ireland. Sadly, the Democratic Unionist party and others across the House chose to reject that.” Among those “others” was the ambitious Johnson.Once in power, Johnson made his deal to “get Brexit done”, the one he now wishes to change unilaterally. Then he said that “Northern Ireland has a great deal. You keep free movement and access to the single market but you also have unfettered access to GB.” But he was determined to take access to that very single market from the rest of the UK. He also insisted his “great deal” would not mean border controls in the Irish Sea, though it obviously would. What he should also have known is that the greater the divergence between the UK and EU — over phytosanitary regulations, for example — the more onerous those border checks would have to be. Is he unable to admit these self-evident realities even to himself?In a recent speech justifying unilateral repudiation, Lord Frost, Johnson’s negotiator, argued that “The detail of the protocol’s provisions was essentially imposed under duress because we had no ‘walk away’ option.” As a matter of fact, we did. But it would have been too costly to exercise. In these negotiations the EU was (and is) in a stronger position, because it matters far more to the UK than them. This is power, which matters in international relations. Who knew? Not Frost, it seems.Having disrupted Northern Ireland, the leader of the Brexiters blames the predicament on EU recalcitrance. Yet the difficulty lies not with the deal’s substance: the Northern Ireland economy is outperforming the UK’s, which is, predictably, performing poorly post-Brexit. Nor is it with majority opinion in Northern Ireland: 56 per cent of its voters rejected Brexit in the 2016 referendum. The May 2022 elections to the Northern Ireland Assembly have also delivered 53 members in favour of the protocol and only 37 against. The problem is with the unionists. But the unionist parties together only received 40 per cent of the vote in May. Unionist parties had favoured Brexit in 2016. But what, one wonders, did these people expect to follow? Why did they welcome so risky a choice? Ironically, our government, which treated the votes of 16.1mn Remainers with contempt when it chose almost the hardest and most damaging possible version of Brexit, wishes to give fewer than 350,000 unionist voters in Northern Ireland and a vastly smaller number of potential trouble makers the power to break the withdrawal agreement with the EU, even though this would damage the prospects of the rest of the country. “It is time”, Frost says, “to put our own interests first”. Indeed, we should. The interest of the British people lies in the best and most stable possible relations with the EU, our biggest trading partner and closest neighbour. It is not to risk a deeper decline in UK trade in response to threats of violence from a tiny minority of British people.The UK government must engage cooperatively in efforts to make trade with Northern Ireland smoother. But the EU should also engage, recognising that Brexit has been helping it to make far faster progress than it would have done if the UK had remained a member. Gratitude for removal of this obstacle should encourage it to be conciliatory. But the decision is ultimately for the UK. Europeans are eternal neighbours, share values and have common foes. The UK has to keep its promises. This depressing version of Groundhog Day must now [email protected] Martin Wolf with myFT and on Twitter More