Aurelia Butler

BRUSSELS (Reuters) -Facebook is set to gain EU antitrust approval for its acquisition of Kustomer after offering remedies that allow rival products to function with those of the U.S. customer service startup, people familiar with the matter said.A buying spree of startups by big companies has triggered concerns on both sides of the Atlantic, with regulators worried about so-called killer acquisitions aimed at shutting down potential rivals before they are big enough to be a threat.The world’s largest social network announced the deal in November 2020, which would give it another tool to attract more sellers to its platforms.Kustomer, which sells CRM software to businesses so they can communicate with consumers by phone, email, text messages, WhatsApp, Instagram and other channels, would help Facebook (NASDAQ:FB) scale up its instant messaging app WhatsApp, which has seen usage soar during the COVID-19 pandemic.Facebook has given remedies which focus on interoperability issues allowing different products and technology to function together, one of the people said. The European Commission, which has said the deal could hurt competition and boost Facebook’s power in online advertising, subsequently sought feedback from rivals and users, they said.The EU executive took up the case after the Austrian competition agency asked it to, even though the deal falls below the EU turnover threshold. The watchdog is using a rarely used power known as Article 22 that gives it some discretion.The EU competition enforcer, which is scheduled to decide on the deal by Jan. 28, declined to comment. Facebook said: “This deal will increase competition and bring more innovation to businesses and consumers in the dynamic and competitive CRM and business messaging spaces.”Last week, the German cartel office told Facebook to seek its approval for the deal, which has already received the green light in Britain and Australia. More

Hello from Brussels, and welcome to the penultimate Trade Secrets of 2021. The final one comes on Monday, when we’ll do a wrap-up of the year, and then we’ll be back in January with a change in format and even more licence to have strong opinions, if you can imagine. Today’s main piece is on the UK’s first full year of truly independent trade policy, which hasn’t necessarily turned out as many (including us) assumed. Charted waters has the stats on how the world’s semiconductor makers have, despite all the talk of shortages, actually increased production over the course of the pandemic. Diplomatic skill but ministerial eccentricityIt’s almost exactly a year since Trade Secrets predicted (and was subsequently vindicated, in our admittedly biased judgment) that the UK’s annual capitulation over trade talks with the EU was drawing nigh. In 2018 it was the recognition there was no middle way between single market membership and a bilateral trade deal; in 2019 it was accepting a customs border in the Irish Sea; in 2020 it gave way on “level playing field” issues about restraining trade-distorting behaviour.And this year? Well, the UK seems to be retreating from its position that no one on the island of Ireland may acknowledge the existence of the European Court of Justice lest they be banished to a penal colony, or something. And it’s given the French the fishing licences it said it wouldn’t. The fact that a senior UK official told journalists from EU media one thing and then Downing Street unconvincingly contradicted it shortly afterwards is about par for the course in the UK’s Brexit dealings: not just a retreat but a disorderly one.In other trade capitulation news, the UK is reaching its first real agreements for independent preferential deals by giving Australian and New Zealand negotiators pretty much all the agricultural market access they asked for. An Australian attack encountered more English resistance in the first Ashes Test last week, and that’s saying something.It’s also not been a great start for the UK’s pretensions to combine foreign policy and trade. As our brilliant Financial Times colleagues discovered, the Biden administration has held up a deal over the Trump-era steel and aluminium tariffs until Britain grows the hell up (our characterisation, not the administration’s) over Northern Ireland.So, is Global Britain a bit of a joke? Is the government just following the line of least resistance to give the impression of activity? Sort of, but not entirely.First of all, the UK’s Civil Service and diplomatic operations seem to be functioning pretty well — remembering that the Department for International Trade, which handles bilateral and regional trade deals and World Trade Organization issues, is distinct from the Cabinet Office which is in charge of post-Brexit relations with the EU. True, the ministerial pretensions overlaid on this are frequently silly. A claim that the UK “helped to broker” a fairly minor deal on service sector regulation at the WTO was news to most observers of the trade body. And a speech from the junior trade minister this week comparing Brexit to the American Declaration of Independence was simply embarrassing. But the general sense in Geneva, for example, is that the UK has engaged cogently at the WTO, if having little direct impact given its relatively small size.It remains to be seen how well the UK will conduct itself in its big project of applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, more commonly known as the CPTPP, membership of which will in any case have minimal economic benefit for the UK. But it shows some organisation and determination to get the bid together, an initiative that owes much to Crawford Falconer, the veteran New Zealand trade official now working as the UK’s chief negotiations adviser. In other “small but not invisible consolation for leaving the EU” news, the UK has also been able to take a more constructive position on addressing digital and data issues in trade deals. For our money, though, the most striking thing the UK has done — and it’s not what we expected — is to override the UK agricultural lobby to get the Australia and New Zealand agreements done. The speed with which the UK gave way in negotiations was a defeat in a mercantilist sense. But it’s pretty impressive, in a slightly nihilistic way, that the same Conservative party that has espoused agricultural protectionism for centuries was prepared to shaft its own farmers to get there.Certainly Liz Truss, the then trade secretary (now promoted to foreign secretary), isn’t universally admired for her sophistication of ideological vision, and the abruptness of the decision doesn’t suggest a systematic and predictable model of (vile expression) “stakeholder management”. But whether you think it’s a good idea or not you have to admit that it’s a pretty bold move for a Tory secretary of state, especially one representing a heavily rural constituency, to eliminate farm tariffs for two of the world’s most efficient agricultural exporters.Will the government be able to withstand incurring similar political heat in Northern Ireland to defuse the situation with a comprehensive retreat there? We’re total amateurs at judging this, but ministers have shafted unionists twice, so it would be surprising if they were squeamish about doing so a third time, especially with the EU already offering some concessions to fix the problem. Their need to keep picking fights with the EU to distract attention among their English voters away from the shambles elsewhere might be more enduring.The bottom line is this. In trade policy, the UK has a competent Civil Service and somewhat eccentric but not ineffectual ministerial direction. Paradoxically, the thing that ought to give it more credibility now is to retreat from an untenable position on Northern Ireland and hence offer further evidence it’s not the prisoner of domestic constituencies. But that seems like the kind of coherent strategic thinking that has yet to emerge.Charted watersThe speeches and research of Hyun Song Shin, the Bank for International Settlements’ head of research, are always well worth a read. His latest is no exception. As Martin Sandbu touched on in this column, Shin makes a convincing case that manufacturers have risen to the challenge of high demand for their wares. It’s a theme that we’ve hit on on quite a few occasions in Trade Secrets this year. And we thought that regular readers would appreciate this compelling chart on what’s been going on in the market for semiconductor chips. As you can see, chipmakers have met much of the additional pressure and raised sales substantially. We’re not quite as convinced as Martin that capitalism and globalisation have had an amazing pandemic, but we do think the world’s makers of chips and many other products for which demand has rocketed deserve recognition. Claire JonesTrade linksAfter severe shortages, could the world soon see a semiconductor chip glut? Chipmakers are investing billions of dollars to expand production capacity, but Nikkei reports (Nikkei, $) that analysts say the industry’s cyclical nature means the global semiconductor shortage will inevitably give way to too many chips being produced. Meanwhile, Joe Miller heads to ‘Silicon Saxony’ to speak to people in Europe’s busiest chipmaking region. The Indian government has approved (Nikkei, $) $9.94bn-worth of incentives to spur local manufacturing of semiconductors and display panels, putting up a challenge to China, Thailand, Indonesia and Vietnam. Pandemic-related face mask production and government support have boosted the beleaguered French textile industry but not created many jobs.Citi has produced a bumper report on what it will take for supply chains to normalise. The Chinese intimidation of Lithuania underlines the opaque nature of Beijing’s coercive economic statecraft. Francesca Regalado and Alan Beattie More

Turkey’s president Recep Tayyip Erdogan pushed on with his risky economic “experiment” as the central bank cut interest rates for the fourth month in a row despite rising inflation.The bank lowered its benchmark lending rate by 1 percentage point to 14 per cent even as official data showed that annual inflation was running at 21 per cent in November.The country’s deeply negative real interest rates have put huge pressure on the Turkish lira, which is down more than 40 per cent against the dollar since the central bank began cutting rates in September.The lira hit a record low following Thursday’s decision, plunging as much as 5.2 per cent to 15.595 against the US dollar, according to Refinitiv data. Erdogan, who rejects the established economic orthodoxy that high interest rates curb inflation, has argued that slashing the cost of borrowing will lead to a surge in exports, investment and employment that will ultimately stabilise the currency and bring down inflation.Economists say the president’s plan is likely to result in runaway price rises, further eroding the living standards of a population that is already suffering from rising poverty.“If it were not for the pain and suffering inflicted on 84 million people, this would be a fascinating economics experiment,” said Refet Gurkaynak, a professor of economics at Ankara’s Bilkent University.“It shows that economists actually have a very good understanding of the fundamentals of monetary policy. We knew this would be the result — and it is.”Charlie Robertson, chief economist at the investment bank Renaissance Capital, said Erdogan’s approach had no precedent. “I can’t think of another leader who has pushed this weird policy mix before,” he said. “A medieval policy on usury doesn’t work in a floating currency world.”Erdogan, whose ruling party has suffered an erosion of support in the polls amid the economic turbulence, is expected to announce a huge increase in the minimum wage on Thursday in an effort to offset the impact of the sliding currency on the public. Pro-government media reported that the increase was expected to be about 35 to 40 per cent.The president, who earlier this month appointed a new finance minister after the resignation of his former economy chief, announced a further shake-up in the economic team early on Thursday.He removed Sakir Ercan Gul and Mehmet Hamdi Yildirim, two deputy finance ministers, according to a decree published in the official gazette.He replaced them with Yunus Elitas, a bureaucrat, and Mahmut Gurcan. Gurcan is a former ruling party official who, like the family of Nureddin Nebati, the new finance minister, also has a textiles business. More

Business activity in the eurozone slowed after restrictions to tackle surging coronavirus infections hit the services sector, while there were signs of an easing in the supply bottlenecks holding back manufacturers, according to a closely watched survey.The IHS Markit flash eurozone composite purchasing managers’ index, a monthly poll that takes the pulse of business activity, fell slightly more in December than most economists expected to a nine-month low of 53.4, down from 55.4 the previous month.A number of countries have announced new coronavirus containment measures recently, including Germany, Italy, Austria and the Netherlands. The restrictions are already reducing the flow of customers in the services sector, particularly at restaurants and shops. While the PMI score for the region’s services sector remained above 50, indicating a majority of businesses still reporting higher activity levels than a month ago, the slowdown was sharper than for manufacturing. Euro area manufacturers reported an improvement in the global supply chain problems that have caused order backlogs in factories, congestion at ports and shortages of materials, helping them to report the biggest rise in production since September.“This chimes with our assessment that supply bottlenecks may have peaked, with the important caveat that the Omicron variant brings some downside risks in this area,” said Ricardo Amaro, senior economist at Oxford Economics.Input costs and selling prices rose less steeply than in the previous month, but IHS Markit said they still increased at the second-fastest rates in the history of its survey. Higher shipping costs, energy prices and staff costs again added to inflationary pressures, it said.“The eurozone economy is being dealt yet another blow from Covid-19, with rising infection levels dampening growth in the service sector in particular,” said Chris Williamson, chief business economist at IHS Markit.But he added there was “encouragement” from the easing of supply strains in the manufacturing sector, for which the survey’s measure of output rose to a three-month high.German businesses reported a stalling of activity and their first drop in new orders for goods and services since June 2020, as the country’s PMI score dropped to an 18-month low of 50.The slowdown was mainly caused by the German services sector, for which the PMI score fell below 50 for the first time in eight months, indicating a fall in activity from a month ago, which outweighed a recent rebound in production at the country’s manufacturers.Deutsche Bank economists forecast this week that Germany would enter a technical recession this winter as coronavirus restrictions, high inflation and supply bottlenecks hit Europe’s largest economy over the next two quarters.The picture is brighter in France, where businesses reported only a slight slowdown in growth. IHS Markit said “a relatively resilient service sector helped to offset a decline in manufacturing output for the second time in the past three months”.Most economists still expect the overall eurozone economy to continue growing in the fourth quarter, albeit at a markedly slower pace, while the rapid spread of the Omicron coronavirus variant has raised doubts about the outlook for the first quarter of next year. “Strong recoveries are being dampened by the latest wave of the virus, but the medium-term economic outlook remains relatively benign,” said Carsten Brzeski, head of macro research at ING. He added that indications of easing price pressures were “a first cautious sign that much of the current high inflation is likely to be temporary”. More

The Bank for International Settlements does not get enough credit. It is known — among those who know about it at all — by the soporific label “the central bankers’ bank”. Some, no doubt, even mix it up with the more derogatory category of “gnomes of Zurich” — unfairly so, since it is based in Basel, does not do any banking and is quite an amazing fount of wisdom about the global economy and financial system.In the past, for example, the BIS has helped to understand the problem of zombie companies and shown how financial growth can harm economic growth. And in my FT column this week, I pointed out how BIS researchers have highlighted that despite our talk of shortages, global supply chains have delivered greater volumes than would have been predicted before the pandemic — including of such crucial inputs as semiconductors that are causing so much anxiety among policymakers.This month the BIS has been on another roll, with a special feature of its Quarterly Review devoted to non-bank financial intermediation (NBFI). That, too, has the sound of something to make your eyes glaze over, but you should care because it is where the next financial crisis is most likely to emerge from.NBFI is what it says on the tin: financial transactions and relationships carried out through (“intermediated by”) financial actors that are not banks. This is a part of the financial system that is changing extremely fast, and much faster than regulation, which is, in any case, less comprehensive than for banks. Here are three recently emerged types of NBFI that the BIS highlights: so-called decentralised finance in crypto assets, open-ended mutual funds investing in bonds and new patterns in dollar borrowing in emerging Asian economies. There are also articles on private capital markets and environmental, social and governance finance.The BIS’s press release and the foreword by its general manager Agustín Carstens give a good overview, but do dive in to learn about any of these specific areas, mishaps in which could very well affect your wallet some day soon. In fact, they already may have. Take dollar funding in emerging Asia. The issue here is that as countries have developed and grown a domestic financial industry, many local investors hold assets in US dollars and have liabilities in domestic currency. When the cost of insuring against that mismatch jumps, which happened in the financial ructions triggered by the pandemic in March 2020, their need to get hold of dollars can suddenly increase, to the point of overwhelming funding sources for normal times. This is the sort of thing that can add to a global squeeze on dollar funding, which can lead to the unexpected dysfunctions in the US Treasuries market that happened when too many investors tried to offload US government bonds simultaneously which, in turn, forced the Federal Reserve into a massive intervention to support the market. And that is something that affects all finance everywhere.What about the other two examples? Open-ended bond funds are easiest to understand: they can amplify market swings by being forced to dump bonds in fire sales when too many investors try to redeem their fund shares at the same time.Decentralised crypto finance is newer and weirder to most people. It consists of automated algorithms that make possible programmable or “smart” contracts on crypto blockchains — meaning that holders of crypto assets can enter various forms of lending, investing and other transactions that are “self-executed” by the algorithms when specified conditions occur. The goal is the logical end point of the crypto dream of a financial system without any centralising intermediaries at all — but, as the BIS points out, this is a “decentralisation illusion”. Not all eventualities can be programmed in and, even if they can, a lack of co-ordination can lead to instability and runs. In these cases, some centralised action will be called for, which will favour those at the heart of the natural concentration to which blockchain technology after all leads. Do read up on the details. I will simply note the common thread. It is that NBFI is prone to the same core problem that banks have: a perception of liquidity that is only achievable so long as not too many people try to avail themselves to shift their positions in the same direction all at once. This is made worse and harder to appreciate by the many ways of racking up leverage — investing with resources that are not your own — that fancy new products provide. It is no accident that Carstens’ foreword is titled “Non-bank financial sector: systemic regulation needed”. If NBFI carries the same risks to the economy as banks, it should be regulated as banks.The logic is correct. But it leaves the BIS and other regulators in a dilemma. It means the current situation — where banks are heavily regulated and NBFI, well, not so much — is unsustainable. But you could take one of two diametrically opposite routes from that acknowledgment. Both banks and non-banks provide essential, systemic, liquidity and payment services. You can either replace the bank/non-bank distinction with a distinction between systemic and non-systemic activities, and say liquidity and payment functions must be as safe outside of banks as inside banks. But that may be impossible, or only possible by quite brutally forcing some activities (say Treasury repo activities, used for liquidity management) to only take place within a heavily regulated institution, or equally brutally, supplant some activities altogether (say crowd out crypto by introducing programmable central bank digital currencies).Or you can give up separating the financial world into systemic and non-systemic universes and accept that systemic risks can arise everywhere. The logical consequence of that is to acknowledge that, in a crisis, central banks may have to come to the rescue of any exotic financial product that may have taken on a systemic function: the ultimate central bank put. But then you are driven in the direction of Lord Mervyn King’s idea of the central bank as a “pawnbroker for all seasons”, committing in advance to lend (and not just to banks) against any asset, but at a pre-agreed price.Financial policymakers will find the end point of either of these two directions extremely unpalatable. The question is whether there is any good alternative.Other readablesIn the aforementioned column, I argue that the global economy’s supply response to seesawing demand in the pandemic has been smoother than many give it credit for — and a fascinating article in Nikkei Asia suggests we may soon be facing a global glut of semiconductors.An excellent note from the Resolution Foundation sets out how to think clearly about the Omicron coronavirus wave. This variant is much more contagious, so it will have to be much less virulent than Delta if we are going to avoid much larger death numbers, threats to the health system and the need for deeper and longer lockdowns. In the face of that uncertainty, we may be better off with tighter restrictions immediately.The LSE’s Centre for Economic Performance dissects UK labour shortages.Numbers newsThe IMF has just updated its global debt database — and found that global debt now amounts to $226tn. I moderated an online discussion with the IMF’s Vitor Gaspar, World Bank chief economist Carmen Reinhart and law professor and debt expert Anna Gelpern, where the mood was rather bleak about the prospects for orderly debt management for poorer countries. More

Good morning and welcome to Europe Express.It’s EU summit day and one of the important issues on the leaders’ agenda is fear that Russia could invade Ukraine. Leaders are not expected to discuss specific measures they might take in case of renewed aggression, but we look at some of the options under consideration.While this will be the first EU summit for the new German chancellor, his Dutch counterpart Mark Rutte has been a member of the European Council since 2010. Now, he is starting his fourth term in office, and we will profile Rutte’s latest political incarnation — as leader of the most progressive coalition government yet.Meanwhile, in Frankfurt, the European Central Bank holds its governing council meeting. Top of many minds is the topic of accelerating inflation, and we will look at where the ECB thinks it will go next.Marathon summitEU leaders are back in Brussels today for a last get together before winter break, write Sam Fleming, Henry Foy and Valentina Pop. The organisers have insisted on keeping the European Council to one day, starting at 10am, given that several leaders were already in town for the Eastern Partnership summit yesterday.Given the breadth and depth of topics to be discussed, officials expect the meeting to run late into the night. One of the most highly charged will be the discussion on Russia and the troops it has massed on the border with Ukraine. Diplomats expect leaders to put aside their mobile phones to have a candid conversation over lunch about how to respond to Vladimir Putin’s provocations.The European Commission has been in discussion with member states and allies including the US as it considers how to deter Russia from escalating the situation. Brussels has prepared an options paper containing a broad range of potential sanctions that could be deployed. However, diplomats do not expect detailed discussions today on specific measures given the prevailing uncertainty over exactly what Putin will do next. Capitals are also divided over how much economic pain they are willing to bear in order to punish Putin’s behaviour.Potential sanctions that have been explored by Brussels range from the most extreme, such as disconnecting Russian banks from the Swift global network, to targeted sanctions against private-sector Russian banks, according to people familiar with the subject.Other options include restrictions on exports of certain technologies to Russia as well as more familiar steps such as the imposition of individual sanctions against more oligarchs. (The options are along the lines of what Washington has also been considering.) The commission declined to comment. Kyiv worries that the Europeans are missing the point of a deterrent. President Volodymyr Zelensky, who met EU leaders yesterday, said the bloc needed to make abundantly clear to Putin what the consequences of an attack would be, rather than just punish him for it afterwards.“For us, it is important for them to be applied before, rather than after a conflict . . . which would basically make them meaningless,” he told reporters yesterday evening. “We have had a war for eight years. We understand that only if the sanctions are applied prior to an armed conflict they can be a prevention mechanism.” Ukraine is just one of a host of topics that leaders will chew over in Brussels. Here are some of the other ones: Covid restrictions: Leaders are expected to discuss the surge in Covid-19 infections and the latest measures adopted against the Omicron variant. In the lead-up to the summit, Italy irked member states and the commission by giving no advance notice on new measures requiring even vaccinated travellers to take Covid tests before entering the country.Energy and carbon markets: Leaders will again discuss rising energy prices and the commission’s latest proposals — which include a ban on long-term gas contracts — as well as suspicions of market manipulation, which also concern the bloc’s emissions trading system. Inflation: A eurozone dinner with European Central Bank chief Christine Lagarde could see leaders linger on the topic of rising inflation (more below). The banking union, capital markets union and reform of the bloc’s fiscal rules are also on the agenda — and there is nothing approaching a consensus on any of them. Rutte, reincarnated Mark Rutte arrives at this morning’s EU leaders’ summit boasting a new domestic coalition that will equip the Dutch leader with something he has rarely enjoyed: an avowedly pro-EU, progressive majority, writes Mehreen Khan in Brussels.Known as “Rutte IV”, the government is made up of the same four parties that comprised the last coalition. But the latest incarnation marks a decisive break with years of penny-pinching, an obsession with a small state, and even opens the door towards greater EU federalism. Here’s the FT’s take on the 50-page coalition agreement that commits the Netherlands to tens of billions in spending on climate, housing and defence policy, expanding the country’s borrowing and budget deficit. It is a radical departure from previous iterations of frugal Rutte-led governments and cements the 54-year-old’s reputation as a political shape-shifter extraordinaire. The former Unilever executive entered office in 2010 as a hyper-individualist, pro-market climate change sceptic. Rutte IV is likely to be defined by mass social spending on childcare and housing, a higher minimum wage and radical emissions-cutting ambitions. The motto for the new coalition is “take care of each other and look to the future”. The agreement bears clear hallmarks of the pro-EU liberal democrat D66, which made big gains in the March elections and is the second-biggest party behind Rutte’s VVD. The spending plans will mean the Netherlands is on course to overshoot the EU’s 60 per cent debt to gross domestic product ceiling for the first time since the aftermath of the eurozone crisis.After spending the post-Brexit years as the EU’s frugal chieftains, the government has made some surprising interventions on EU matters. They support giving the European parliament stronger powers to sack individual commissioners. It was only a few years ago that Rutte dismissed the parliament as a talking shop. The shift will please Brussels and southern EU capitals that have gone head to head with the Netherlands over eurozone reform, the EU budget and recovery fund spending. But a big test of the government’s pro-EU credentials will be in its personnel changes. There are 20 ministerial positions up for grabs, with the finance ministry being fought over by the conservative Christian Democrats and D66. Should it change hands from hawkish incumbent Wopke Hoekstra to progressive former diplomat Sigrid Kaag, the sea change in Dutch politics may well live up to its billing. Inflation predictionsWhen Christine Lagarde presents the outcome of the European Central Bank’s meeting today, one number will be of particular interest to investors and economists: its first inflation forecast for 2024, writes Martin Arnold in Frankfurt. Economists expect the ECB to forecast 2024 inflation of 1.8 per cent. Cynics may say that number is too convenient. If it was much higher, the “hawks” would argue it was on track to achieve its 2 per cent target and the central bank should stop buying bonds and raise interest rates soon. If it was much lower, the “doves” would argue it needs to buy even more bonds to push inflation up to its target, which would be difficult to explain after eurozone inflation rose to 4.9 per cent in November — a record since the euro’s launch 23 years ago.But most economists agree with Lagarde’s prediction that inflation will follow a “hump” shaped trajectory — falling back below the ECB target in the next few years — justifying it maintaining bond purchases and negative interest rates for at least another year or two.“Policymakers should continue to be relaxed about inflation and not take the eye off the recovery ball,” said Christian Odendahl, chief economist at the Centre for European Reform. “The real risks from high energy prices are weakness in consumption and a potentially weaker economy in 2022 and 2023, not inflation.” Nevertheless, rising prices are causing political concern — notably from Germany’s new chancellor Olaf Scholz, who said recently his government would “have to do something” if inflation in the country does not drop from its recent 30-year high of 6 per cent. Consumers are expecting higher prices, according to a recent Bundesbank survey of German households, which found the proportion expecting inflation to “increase significantly” over the next 12 months had more than doubled in the past year to 40 per cent.Other central banks — including the US Federal Reserve and Bank of England — are preparing to withdraw their stimulus policies. But Lagarde says Europe is different because its economic recovery is still fragile and wages have shown few signs of shooting upwards.Lagarde can expect EU leaders, who know voters are feeling the pinch from rising prices, to ask more questions about inflation over dinner when she joins them at the summit tonight.What to watch todayEU leaders meet in Brussels for their last summit of the yearThe European Central Bank holds its governing council in FrankfurtNotable, Quotable

Berlin-Moscow irritant: A German court has convicted a Russian man to life in prison for murdering an exiled Chechen rebel leader in a Berlin park in 2019 on the orders of the Kremlin. Annalena Baerbock, Germany’s new foreign minister, called the murder a “serious breach of German law and Germany’s sovereignty”.Brazilian beef, out: Several European and UK supermarkets, including Delhaize and Sainsbury, are removing certain Brazilian beef products from their shelves after an investigation tracked deforestation-linked products to the retailers. Recommended newsletters for you More

Good morning. Fed day turned out to be quite dull, going mostly as expected. But we still think many observers are mischaracterising Federal Reserve policy and misunderstand what the Open Market Committee is saying. It’s not that the Fed is being subtle; it’s that some people are ignoring the literal meaning of its statements, which show that the “Powell pivot” is a tactical tweak by Fed that remains very dovish indeed. Email us: [email protected] and [email protected].‘Transitory’ in all but nameThe most surprising thing in the Fed’s sedate December meeting was the news — delivered in the notorious “dot plot” — that monetary policy committee members project three interest rate increases next year, rather than the two consensus called for. Even this spooked no one. The stock market was pleased, in fact, rising by a merry per cent or two. The policy-sensitive yield on the two-year Treasury note did not move at all. Five and 10-year yields rose an indifferent couple of basis points. The US central bank’s communications strategy seems to be working perfectly. Some observers see the committee’s higher rate expectations, as well as the as-expected faster taper of asset purchases, as signs the Fed has been forced into a dramatic shift in approach. Here’s BlackRock’s Rick Rieder:“We would suggest, however, as we have for many months now, that this is what it looks like when the Fed is running behind the curve and needs to catch up to rapidly changing events on the ground.”One sellside strategist thought the accelerated tapering showed the Fed capitulating on its “transitory” narrative:“Inflation has clearly passed the point where it could be considered transitory, and the Fed acknowledged that by accelerating the pace of tapering of asset purchases.”Another strategist echoed the idea:“The notion that elevated inflation levels would be transitory has finally been thrown out the window by the Fed.”It is true that the dot plot, charting central bankers’ expectations for future rate rises, unambiguously shows the Fed eyeing higher rates sooner. Here is the plot from back in September:

And here is the new plot:

But this is tactics, not strategy. As telegraphed, the Fed is acknowledging short rates will need to rise somewhat to hedge against persistent inflation. That is evident in the 2022 and 2023 dots. But the median forecast for rates in 2024 nudged up only a bit, from 1.75 per cent to just over 2 per cent. The longer run dots have stayed the same. In the background is the very clear fact that the committee thinks, with a high level of unanimity, that a short raising cycle, topping out at 2.5 per cent, will ensure that inflation is transitory. The committee’s median projection is that personal consumption expenditure inflation in 2022 will be 2.6 per cent, and it is unanimous in thinking that in 2023 it will be barely above 2 per cent.

That is, above target inflation will last about a year. Everybody, say it together now: transitory! The Fed retired the word, but it still thinks the same way.As we have argued before, the bond market wholeheartedly agrees with the Fed’s attitude. Five-year inflation break-evens, after trending down this month, float near 2.7 per cent. And the rate futures market is actually more dovish than the Fed: it thinks the rate raising cycle will top out below 2 per cent. The flat yield curve does not, as some people have argued, predict a too-late, over-tightening Fed mistake. It predicts that the US central bank can stop inflation with a feather. As our friend and rival John Authers at Bloomberg pointed out on Wednesday, both consumers and a majority of money managers agree with the bond market that inflation will not last long. The only market signal that might be expressing the contrary view is long-shot technology stocks, which have been selling off hard (though they rose on Wednesday). One explanation for this is that they are very rate-sensitive and are anticipating rising long-term rates. Another explanation, though, is that they were trading at stupid prices, and stupidity has been subsiding. Even if the Fed does get to a 2-plus per cent policy rate, that will constitute a very mild tightening of policy, Morgan Stanley’s Jim Caron points out:“Fed signals a policy move to neutral by 2024 not tightening . . . 2024 fed funds rate median of 2.125 per cent vs core PCE inflation at 2.125 per cent. Thus [a] real policy rate of 0 per cent by 2024.”That Fed chair Jay Powell’s attitude has not changed with his rhetoric was made clear in his press conference after the FOMC meeting on Wednesday, where he expressed serious concerns about the labour market and the participation rate in particular. This is not a man who sees the US economy settling at a strong level after the pandemic. The Fed’s projection for real gross domestic product in 2024 and beyond is an uninspiring 2 per cent. Even that may be above trend, given weak productivity growth and demographic headwinds. After inflation subsides, the new “new normal” will probably look a lot like the old “new normal,” which worried everyone in the years leading up to the pandemic. The Fed, the bond market, consumers and money managers may all be wrong that inflation is unlikely to persist (we at Unhedged are not smart enough to predict inflation). But don’t be confused by a change in terminology by the Fed. Everyone, from Powell on down, is betting on transitory. If the bet is lost, it’s going to be ugly. (Wu and Armstrong)One good readThis post from Bank of England staffer Thomas Belsham raises one of the hard questions facing bitcoin: what happens when the maximum number of coins have been mined, meaning that bitcoin miners — who do the work required to keep the common ledger secure and up to date — can no longer get paid in new coins. The question is not new, but it is very clearly explained here. More

The spike in inflation is causing all kinds of problems for our personal finances, from the cost of living crisis to frozen tax thresholds and worries over how our investments will perform. But one area where it can perversely make us feel richer? House prices. Soaring demand for property during the pandemic means that annual house price inflation is 10.2 per cent, double the rate of consumer prices and the highest it has been since 2006. The latest Halifax data show the stamp duty holiday has powered the average UK house price above £270,000 for the first time. All of this makes homeowners feel considerably richer — on paper at least. But it has the opposite effect on first-time buyers, who are finding it increasingly hard to get the numbers to stack up as property prices continue to outstrip wage growth.The Bank of England is under pressure to tweak affordability limits on mortgages. Next year, it will consult on scrapping tests requiring borrowers to withstand a sudden rise in interest rates. Relaxing these limits could help tens of thousands of people get on to the property ladder, or secure a bigger loan, and has prompted some lenders to consider offering mortgage terms of up to 50 years in the near future.

There’s one very obvious problem. All of these measures practically guarantee that property prices will soar even higher. Politicians have long been keen to help the next generation buy into the property owning dream, but now government initiatives to help first-time buyers are running into some nasty inflation-related problems of their own. I am referring to the Lifetime Isa, which was introduced in April 2017 to help the under-40s save for their first home, or invest for their retirement.With a generous 25 per cent bonus, those able to save the maximum £4,000 a year get a free £1,000 top-up. Your funds can be kept in cash, or invested — and any interest or investment growth is tax free. As a result, the Lifetime Isa (or Lisa for short) has been phenomenally popular. In the past tax year, the numbers subscribing more than doubled to 545,000 people.One of them is FT Money reader Julia, who saved the maximum every year and has notched up a balance of £25,000 in her Lisa, boosted by £5,000 worth of government bonuses. After looking at around 40 different flats in London this year, she put in an offer for one costing £450,000 — only to be gazumped by another buyer offering £5,000 more. She was unable to bid any higher, as the Lifetime Isa rules stipulate that £450,000 is the maximum price of a property you can buy.This cap hasn’t changed since the Lisa was introduced in 2017. Since then, the average UK house price has soared by 22 per cent. If the Lisa limit had increased accordingly, it would now be £549,000. Yet it remains nearly £100,000 lower, blocking Julia and many other first-time buyers in London and the Southeast from using their savings to buy a property. If that wasn’t bad enough, the sting in the tail is the penalty charge for withdrawing the cash before the age of 60 if you’re not using it to fund a property purchase. This is charged at 25 per cent — which would cost Julia £6,250. This not only claws back the £5,000 worth of government bonuses she received, but £1,250 of her own savings on top. A substantial cash trap, this has always been a controversial feature of the Lifetime Isa.As someone who has saved carefully for years, Julia is aghast that her quest to achieve the security of home ownership has been jeopardised by the inflexible rules of a scheme designed to help her. I contacted the Treasury this week and asked if there were plans to review the £450,000 Lisa limit. A spokesperson said Lisa savers had received an estimated £3.7bn worth of support since the scheme launched, adding: “The property price cap ensures that this significant investment of taxpayer funding is managed carefully and precisely targeted while still supporting the majority of first-time buyers across the UK.”This is not the first time I have directly asked HMT this question.

When FT Money covered the launch of the Lifetime Isa nearly five years ago, I submitted a host of reader queries. The very first was: “Will the £450,000 limit rise in line with house price inflation?”As saving for a property deposit is something that takes most buyers eight to 10 years, this was not an unreasonable worry. Back then, the official response was: “As with all policies, the government will keep the parameters of the policy under review.”So why hasn’t it? The UK’s rampant house price inflation has been caused in part by subsequent government policies such as the stamp duty holiday. I could foresee future accusations of mis-selling from savers like Julia who stand to be worse off than when they started. This summer, a freedom of information request to HM Revenue & Customs revealed that £48m in penalties had been levied against Lisa holders for early withdrawals over the past three tax years. During the pandemic, recognising that savers needed emergency access to their cash, the government temporarily reduced the penalty from 25 to 20 per cent, which simply wiped out the bonus element. If the Treasury is opposed to releasing “trapped” buyers by adjusting the property price limit to take account of inflation, could it instead allow first-time buyers to withdraw their funds without penalty seeing as the product is no longer suitable? Since the Lifetime Isa’s inception, there have been disparities between its maximum property price limit and the government’s Help to Buy scheme. Help to Buy equity loans, which offer buyers of new-build property cheap government loans to bridge the affordability gap, have regional price caps. These range from £186,100 in the north-east to £437,600 in the south-east and £600,000 in London — substantially higher than the Lisa limit, and more in line with average property prices in the capital which have now surpassed £516,000. London is defined as all of the 32 boroughs, helping housebuilders to shift properties costing up to £600,000 in areas as far-flung as Croydon and Havering by lending buyers up to £240,000 of taxpayers’ money. How can the government justify effectively subsidising property developers, who have paid out billions in special dividends and executive pay awards, while robbing readers like Julia of thousands of pounds of their savings? That’s something that raises my blood pressure. Claer Barrett is the FT’s consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb More