Aurelia Butler

The governor of the Bank of England said he was concerned about the risks of persistent inflationary pressure from a strong labour market, even though he expects economic activity to slow over the rest of the year.Speaking on the sidelines of the IMF and World Bank spring meetings in Washington on Thursday, Andrew Bailey said he feared that the economy might fall into recession if the central bank raised interest rates too far. Although the governor insisted that he was not sending precise signals about which way he would vote at a meeting of the Monetary Policy Committee in two weeks’ time, his comments suggest that he thinks interest rates need to rise further. “We are walking this very, very fine line,” the governor said, describing the twin pitfalls that threatened the UK economy. One was the potential failure of the BoE to “tackle inflation” and the other was “the risk that [the rising cost of living and higher interest rates] creates a recession and pushes too far down on inflation”. His comments about the possibility of recession suggested that he did not think interest rates needed to rise as fast as financial markets are anticipating. Traders are betting on the BoE raising rates aggressively from 0.75 per cent to 2.5 per cent by this time next year.Speaking to the Peterson Institute for International Economics, Bailey said that the high UK inflation rate, which hit 7 per cent in March, was caused both by US-style overheating and strong demand, and the European affliction of high energy prices that could ultimately curb spending and inflationary pressure. With these opposing threats, Bailey said he did not want to give too much forward guidance on the likely path of interest rates because economic conditions were changing so quickly. “If we live in a world where one core energy price can fall 20 per cent in one afternoon, as it did last week, you feel pretty humble about the amount of guidance you can give on where policy will go,” he said.

The governor made clear his concerns that the series of upward price shocks over the past year, alongside a tight labour market, would fuel persistent inflationary pressures. This combination, he suggested, required more attention than normal from the central bank.If there was “shock after shock” to prices, the central bank would have to worry more that companies would push through price rises to defend profit margins and employees would demand higher wages to compensate.Bailey said the tightness of the labour market would add to immediate inflationary pressures. “This combination of supply shocks and a tight labour market tends to give us more of a problem [of persistent inflation],” he said. “We think that the real income shock at the scale it is [currently], is going to cause a slowdown in growth . . . but the question is whether the labour market is going to slow down.”He added: “We have to ask ourselves the question, well: is that going to cause the labour market to be stronger for longer, notwithstanding a decline in growth?” More

Jay Powell sent his strongest signal so far that the Federal Reserve is prepared to raise interest rates by half a percentage point at its meeting next month as it steps up efforts to fight soaring inflation. “It is appropriate in my view to be moving a little more quickly,” the chair of the US central bank said at a panel hosted by the IMF. “We make these decisions at the meeting and we’ll make them meeting by meeting, but I would say that 50 basis points will be on the table for . . . May.”Powell’s comments underscore a shift in tone from several Fed officials, who have recently embraced the need for the central bank to take more forceful action to tame the highest inflation in 40 years. The view that the Fed should “front load” increases to it main policy rate so it quickly reaches a “neutral” level that does not stimulate growth was held only by the most hawkish officials, but it has become more widely accepted. Powell on Thursday indicated tacit support for that approach, suggesting multiple half-point rate increases could be implemented this year. “We’re really going to be raising rates and getting expeditiously to levels that are more neutral and then that are actually tightening policy if that turns out to be appropriate once we get there,” he said.Markets are pricing in three half-point rate rises for the next three policy meetings leading up to July, with the central bank moving to quarter-point increases after that point so that the federal funds rate reaches 2.77 per cent by the end of the year.Its current target range is 0.25 per cent to 0.50 per cent, a level reached in March after the Fed delivered its first rate increase since 2018.“It’s absolutely essential to restore price stability,” Powell said at the panel, which also included Christine Lagarde, president of the European Central Bank, and Kristalina Georgieva, managing director of the IMF. “Economies don’t work without price stability.”The Fed is also set to soon begin shrinking its $9tn balance sheet, aiming for a monthly reduction of as much as $95bn that is likely to officially kick off in June.Lagarde suggested the ECB would be less aggressive than the Fed in acting to quell inflation, especially in light of mounting risks to the bloc’s growth and the fact that price pressures in Europe broadly stem from supply-related constraints.

“It needs to be addressed in a sequential, flexible, gradual way, which is what we have begun doing,” she said, with the ECB deciding in June at what point in the third quarter it will stop purchasing government bonds.“That will then lead us to assess whether or not an interest [rate] hike is needed,” Lagarde said.She added: “For goodness sake, let’s wait until we have the data and then we move on to decide.”Powell on Thursday also pushed back on concerns that the effort to tighten monetary policy will result in a recession, pointing to the historically strong labour market, which he said was “unsustainably hot”. But he acknowledged it would be difficult to achieve a so-called soft landing. “I don’t think you’ll hear anyone at the Fed say that that’s going to be straightforward or easy,” he said. “It’s going to be very challenging.” More

Janet Yellen, US Treasury secretary, urged Europe to be “careful” about imposing a complete ban on Russian energy imports, warning of the potential harm such a move could inflict on the global economy. “Medium-term, Europe clearly needs to reduce its dependence on Russia with respect to energy, but we need to be careful when we think about a complete European ban on say, oil imports,” Yellen said during a press conference in Washington on Thursday. She said an immediate ban by the EU would “clearly raise global oil prices” and “would have a damaging impact on Europe and other parts of the world”. Yellen added that “counter-intuitively”, a total embargo may not have such a negative impact on Moscow’s finances, with Russia benefiting from higher prices. The focus of western allies should instead be on trying to reduce “proceeds from sales of oil and gas” for Russia. “If we could figure out a way to do that, without harming the entire globe through higher energy prices that would be ideal. And that’s a matter that we’re all trying to get through together,” she said. EU members are considering a ban on Russian oil imports as evidence mounts of atrocities committed by Moscow’s forces against Ukrainian civilians. A ban on gas imports is more politically and economically difficult but could be on the table at a later stage. The US has imposed a total ban on Russian energy imports, as well as curbs on new US investment in Russia’s energy sector. But it has far less at stake economically than Europe. US officials have consistently said they were not pushing Europe to follow their lead but instead wanted to help the continent wean itself off Russian energy over time, including by arranging more American deliveries of liquefied natural gas. Yellen spoke on the sidelines of the IMF and World Bank’s spring meetings, which were dominated by the war on Ukraine and its economic impact. Yellen and some of her western counterparts walked out of a G20 gathering on Wednesday in protest against Russia’s presence in the group. “It simply cannot be business as usual for Russia in terms of its participation in our global forums,” she said.

Yellen also rang alarms about the danger of rising prices for food and fertiliser, saying they could lead to “more people going hungry, further exacerbate inflation and harm government fiscal and external positions”. “We’re doing everything we can both bilaterally and through the international financial institutions to address food security risks,” she said, adding that more specific details of the response would be coming in the next few weeks. Yellen said the US was committed to providing Kyiv with an additional $500mn in economic aid on top of $500mn already pledged by US president Joe Biden last month. She also said Washington was considering funding some of Ukraine’s reconstruction with about $300bn-worth of Russian central bank assets, which the US and its allies froze at the start of the invasion. Such a move may require legislation, however. “We would carefully need to think through the consequences . . . before we’re taking [this step] I wouldn’t want to do so lightly,” Yellen said. “It’s something that I think our coalition and partners would need to feel comfortable with and be supportive of.” More

As the latest tech earnings season gets under way in the US, macro issues loom large.An industry that likes to focus on the micro — where the next disruptive change will come from, or which incumbent is about to get its lunch eaten — suddenly finds itself wrestling with an unusually large number of geopolitical and macroeconomic challenges.Inflation and the turn in the interest rate cycle have raised questions about both rising costs (particularly in the strained labour market of information technology) and weakening demand. Russia’s invasion of Ukraine has trimmed sales at the margin for many companies, but more importantly hit supplies of key materials and injected a new level of uncertainty into the global economy. China’s drastic response to Covid-19 outbreaks is only the latest issue to threaten global supply chains — and another reason to worry about a slowdown in the country’s economy.However, while this has brought a bumpy start to the year, IT demand has settled at an unusually robust level coming out of the pandemic. It all looks like a recipe for huge volatility, as companies try to withstand external shocks to their global supply chains and operations, with varying degrees of success. But it also suggests that some of the main engines of the IT industry are still firing on all cylinders.One concern is the strength of consumer demand. Exhibit A for the worriers came in the form of this week’s shocking new subscriber numbers at Netflix. Competition from new video streaming rivals has been looming for a while, but other forces have also taken hold this year. Netflix executives pointed to “spillover effects” from Russia’s invasion of Ukraine in central and eastern European countries, along with “macro strain” in a number of economies, including in Latin America.It’s unclear how much these factors contributed to the shortfall. But as higher energy prices eat into more consumers’ wallets, how many more will decide this year that it is time to limit their spending on streaming? And which other consumer services will start to show the strain?Another straw in the wind has been the sharp turn in the personal computer market since the start of 2022. Moribund before the pandemic, PC sales sprang back to life as workers logged in from home. The number of machines sold last year jumped by 15 per cent to 341mn, according to Canalys, the most in almost a decade. But figures from Gartner show sales fell around 7 per cent in the first quarter of 2022.

New hardware purchases are usually the first thing that gets put on hold when consumers and businesses start to feel uncertain. In other parts of the IT market, on the other hand, the picture looks very different.IBM, long a laggard in the shift to cloud computing, issued a surprisingly buoyant outlook on its earnings call this week following an overhaul that has included the spin-off of a large part of its services business. According to Arvind Krishna, IBM’s chief executive, IT demand is running at 4-5 percentage points above the rate of gross domestic product growth. Barring “something much more catastrophic”, he predicted it would continue at that rate, even through a mild recession.The optimistic view is that the shock of the pandemic has, if anything, led companies and governments to accelerate plans to digitise their operations. IT buyers started out this year with plans for bigger spending growth than they did at the start of 2020 before the pandemic, even though the economic outlook is now more uncertain, according to John-David Lovelock, chief forecaster at Gartner.The year 2020 turned out to be a bust. But it was followed by a near-10 per cent surge in IT spending last year, and Gartner is predicting that the $4.3tn global IT market will expand at a faster rate than in the years leading up to the pandemic, with growth of 4 per cent this year rising to 6.6 per cent in 2024.The effects of this growth will be very unevenly felt. Spending on new tech has always been channelled disproportionately into areas where companies see the biggest impact on their business. In recent years, that has meant things like cloud computing, analytics and security, which they hope will make them operationally more resilient and more responsive to both customers and new market opportunities.The forecasts, if correct, point to a solid backdrop for the industry as a whole, and a springboard for continued very high growth rates in the hottest corners of IT. Whether investors will accord these growth rates the same high multiples they did before the recent stock market correction is another [email protected] More