Aurelia Butler

This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersOn one level, the Bank of England has had a remarkably good inflation crisis. A year ago, the UK’s central bank expected inflation still to be above 3 per cent in the final quarter of this year, interest rates still to be above 5 per cent and unemployment pushing ever closer to 5 per cent.The reality shows inflation hovering around the BoE’s 2 per cent target, interest rates falling faster to 4.75 per cent in November and the official measure of unemployment at 4.3 per cent. Financial markets do not buy the good news story, however. They are demanding an inflation risk premium for the UK, which they do not for the US, France or Germany. Derived from the nominal and real returns of UK government bonds, it is relatively straightforward to calculate break-even rates of inflation, representing financial market expectations of inflation over different time periods.These are shown in the chart below for the UK, US, France and Germany. In the short term, the market expectation of UK inflation over the three years two years from now (ie between late 2026 and late 2029) is close to 4 per cent, while very long-term market expectations hover around 3 per cent. This contrasts with market expectations of French and German inflation, which are extremely close to the European Central Bank’s 2 per cent inflation target. Those in the US are a little higher, but the market rates are based on US CPI inflation, while the Fed targets PCE inflation. With CPI averaging 0.36 percentage points higher than PCE since the start of 2010, US market inflation expectations are also in line with the Fed’s target. Some content could not load. Check your internet connection or browser settings.The UK’s exceptional status here has been a long-standing phenomenon and, in the past, there has been a straightforward explanation. The UK’s market inflation estimates are based on the retail prices index, which has averaged 1.1 percentage points above the CPI inflation measure targeted by the BoE. Remove that amount from the UK’s market expectations, especially for long-term indicators and the UK’s market expectations fall back to the BoE’s 2 per cent target. But that is no longer a valid adjustment to make because from February 2030, the calculation of the RPI will change to be identical to a third inflation measure, CPIH. This measure is largely the same as CPI, but includes housing costs of owner-occupiers using the concept of owners equivalent rent. It is methodologically close to the US CPI in that respect. After a long struggle to remove well known problems with the RPI and with all legal challenges exhausted, there is no doubt that the RPI will change to be CPIH from February 2030 and that “inflation protection” in UK index-linked government bonds will fall considerably. (I put inflation protection in inverted commas because the protection was previously too high to compensate for inflation). I will not go into the reasons why this is not remotely an expropriation or a disguised default, but you can read some of the gory details here.Although CPIH is currently elevated due to rental inflation being high, we would expect the inflation protection in UK index-linked bonds to fall by about 1 percentage point in the 2030s as you can see from the chart. Some content could not load. Check your internet connection or browser settings.There is therefore an important question about financial market expectations of UK inflation. In the year before and after the new methodology, inflation swaps market pricing shows that expected RPI inflation falls just over 0.4 percentage points. The change in inflation calculation methodology is being priced in, but not fully. As the chart below shows, well after the change in 2030, financial markets expect UK CPIH inflation to be a little over 3 per cent while the BoE’s inflation target is 2 per cent.The pink line represents the BoE’s own estimate of inflation expectations at all points in the future, derived from the same nominal and index-linked government bond markets. It is heavily smoothed so cannot accurately pick up the change in the RPI calculation methodology. Some content could not load. Check your internet connection or browser settings.There are only so many explanations for this market pricing that can exist. They are not mutually exclusive. Financial markets believe the RPI methodology change will not happen. I think this is incorrect given the public position of the UK Statistics AuthorityThe real yield on UK index-linked gilts is artificially depressed by high demand for these bonds from pension funds, thereby raising the implied expected inflation component. If this is the case, Sushil Wadhwani made a strong case for the government to issue more index-linked government bonds. If financial markets expect 3 per cent inflation and the BoE will deliver 2 per cent inflation, these will make government borrowing much cheaper than nominal bonds. The UK government’s policy is to do the opposite of this. It is potentially costlyFinancial markets do not find the BoE’s 2 per cent inflation target credible and believe the BoE will achieve a figure closer to 3 per cent for CPIH. As the table above shows, the past suggests this would not be an entirely unreasonable assumption. Even after the recent inflation, long-term average inflation for the US and Eurozone are only a touch over 2 per centFinancial market pricing is wrong. Hey, markets are not always efficientBoE credibilityClare Lombardelli, the BoE’s deputy governor for monetary policy, sought to address any issues about the central bank’s credibility, forecasting and policy with a speech yesterday at the annual BoE watchers’ conference. Although it was very much a work in progress, Lombardelli said the bank was working on its models, that the changes in forecasting practices would be large and that they were only just starting. She was notably hawkish, saying that in her view although the upside and downside risks were similarly sized, she thought outcomes would be worse if inflation remained too high for longer so gave that risk greater weight. Her colleague on the MPC, Swati Dhingra, shared much of the analysis but weighted risks differently. But all noises from the BoE suggest it is minded to withdraw restrictiveness gradually (which means at a roughly quarterly pace) until there is more evidence on the persistence of inflation one way or the other. That financial markets (unlike households) do not trust policymakers is not raised in most polite conversations. What I’ve been reading and watchingIan Harnett, chief investment strategist at Absolute Strategy Research, argues that central banks should seek to rectify inflation overshoots with a period of below target price risesFormer UK Monetary Policy Committee member DeAnne Julius thinks everything above here is too rosy and the UK is heading for stagflationUS finance and business breathes a sign of relief with the pick of Scott Bessent as Trump’s Treasury secretaryEurope needs to save less, says Martin Sandbu, and he comes up with a raft of policy ideas to achieve it, many of which are hated by the European economic establishmentA chart that mattersOver the past month and since Donald Trump became president-elect, expectations of US interest rate cuts have weakened significantly and the market-implied path of interest rates is now much higher than the start of the year. This reflects a combination of expectations of looser fiscal policy, a view that neutral rates are higher and that policy is not as restrictive as thought and a couple of slightly disappointing months of inflation data.UK expectations have followed the Fed, despite BoE forecasts suggesting inflation would be broadly on target with interest rates falling well into numbers beginning with a three. The UK Budget’s fiscal loosening and some inability of UK markets to divorce themselves from the Fed are thought to be to blame. In contrast, European market interest rate expectations have not budged over the past month. Some content could not load. Check your internet connection or browser settings.Recommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More

Retailers in the United Kingdom (TADAWUL:4280) are facing a challenging outlook as sentiment about their business situation over the next three months has sharply declined, according to the latest findings from the Confederation of British Industry (CBI). The CBI’s quarterly Distributive Trades Survey, released this November, indicates that retailer sentiment fell at the fastest rate in two years.In the year to November, retail sales volumes saw a moderate decline, with a weighted balance of -18%, a dip from -6% in October. Retailers have reported sales as “poor” for the time of year, a sentiment consistent with the previous month. There is an expectation that annual sales growth will further deteriorate in December, with sales volumes set to remain below seasonal norms, though the anticipated shortfall is less severe than in November.Retailers are also bracing for a decline in capital expenditure over the next twelve months compared to the past year, reflecting weakened consumer demand and falling confidence. Employment in the sector has fallen over the past year to November at the slowest rate since November 2023, and retailers predict that headcount will remain broadly the same in December.Notably, selling price inflation has eased in the year to November, with a balance of +24% compared to +30% in August, staying below the long-run average for the third consecutive quarter. However, an acceleration is expected in December, with retailers predicting a balance of +33%.The wider distribution sector, which includes retail, wholesale, and motor trades, also experienced a contraction in sales volumes at a moderate pace in the year to November, with firms anticipating sales to fall at the same rate in December.Ben Jones, Lead Economist at the CBI, highlighted the severity of the situation, stating that the level of gloom among retailers has not been seen since the peak of the inflation shock in November 2022. Jones emphasized the impact of upcoming fiscal changes, such as the rise in Employers’ National Insurance and increased business rates for higher-value properties, which are expected to hit retailers hard by adding significant operational costs. He urged the government to urgently collaborate with the business community to mitigate the cumulative cost burden that threatens to impair investment and hiring, while also leading to higher prices for consumers.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

LONDON (Reuters) -A global resurgence in industrial policies that aim to boost or protect domestic interests threatens international cooperation and could hurt poorer countries in particular, the European Bank for Reconstruction and Development said in an annual report.The annual transitions report, which this year examined data impacting trade for 140 countries, found a “remarkable global resurgence” in strategic interventions designed to shape countries’ economies. “Industrial policy is back with a vengeance,” Beata Javorcik, EBRD Chief Economist said in an interview. “It is back in rich countries as well as in emerging markets.”Such policies often include state-backed grants or loans or subsidies for local industry; 90% of those in advanced economies and EBRD regions discriminate against foreign interests in favour of domestic ones. The report found that such policies have increased rapidly since 2019 due to factors including boosting the green transition, following the lead of major economies such as China or the United States, and because citizens increasingly back a greater state role in the economy. The report found that while such policies can be effective, when they are not carefully managed they risk undermining the level playing field. “This means that industrial policy can become a force that will push the world towards fragmentation,” Javorcik said. The report, from the EBRD’s office of the chief economist, was the first compiled by it with the use of artificial intelligence, which researchers used to crunch data from the Global Trade Alert database. Javorcik said the economic upheaval in recent years – due to globalisation, automation, the green transition and now AI – had amplified support for greater state involvement – particularly among those born before 1975. The increasing use of such policies in lower-income countries that have limited administrative capabilities is particularly concerning, Javorcik said, as they tend to opt for the “most distortive”, such as import or export bans or export licensing, which bring risk of corruption. More

The ECB has cut interest rates three times already this year and investors expect further cuts at every policy meeting until at least next June as the bloc is once again skirting recession. Portuguese central bank chief Mario Centeno said the economy was stagnating and “risks are accumulating downwards” with tariffs threatened by incoming U.S. President Donald Trump a further downside risk.Centeno warned the ECB not to leave rate cuts too late because the risk of inflation undershooting the target was rising. ECB Vice President Luis de Guindos, meanwhile, said that growth was becoming the bank’s top concern and tariffs risked setting off a vicious cycle of trade wars.”Concerns about high inflation have shifted to economic growth,” he told Finnish newspaper Helsingin Sanomat. “When you impose tariffs, you need to be prepared for the other side to retaliate, which can start a vicious circle,” de Guindos said. “Eventually, this could turn into a trade war, which would be extremely detrimental to the world economy.”This could weaken growth, push up inflation and impact financial stability in a “lose-lose” situation for everyone, de Guindos said. Trump, who has said Europe will pay a big price for having run a trade surplus with the U.S. for years, this week pledged to impose large tariffs on his country’s top three trading partners, Canada, Mexico and China, as soon as he took office. Even if European growth suffered from higher U.S. tariffs, the inflation impact may not be so large, France’s central bank chief told a retail investor conference in Paris.”The inflation effect could be relatively limited in Europe, however long-term interest rates set by the market have a certain tendency to cross the Atlantic,” Francois Villeroy de Galhau said. “I don’t think it changes much for European short-term rates, but long-term rates could see a transition effect.”Finnish central bank Governor Olli Rehn, added his own warning about growth, predicting subdued activity and only a tepid recovery, which could prompt the ECB to lower its key rate to the so-called neutral level – which no longer restricts economic growth – by early spring. While the neutral rate is not an exact number, most economists see it somewhere between 2.0% and 2.5%, well below the ECB’s current 3.25% level.ECB rates are unlikely to stop at the neutral rate, however, with money markets betting the deposit rate will fall to 1.75% next year, a level that would stimulate growth. “If the U.S. imposes tariffs on other countries’ products, whether they be 10% or 20%, and everyone responds, all countries lose,” Rehn said. “In this situation the U.S. would lose the most because other countries could direct their exports elsewhere while U.S. companies would face the same tariffs everywhere.” More

NEW DELHI (Reuters) – Betting big on the clean energy goals of Indian Prime Minister Narendra Modi, billionaire Gautam Adani found backers in France’s TotalEnergies (EPA:TTEF) and the Qatar Investment Authority as he set out to build the world’s biggest renewable energy project.The crown jewel of his company, Adani Green, is an energy park in western Gujarat state planned to be five times the size of Paris on completion, and producing 50 gigawatts by 2030, or roughly a tenth of India’s clean energy goals.Now the plan faces a hurdle in the form of a U.S. indictment of Adani, his nephew and executive director Sagar Adani and managing director Vneet S. Jaain, accusing them of paying bribes of $265 million to secure Indian power supply contracts, and misleading U.S. investors during fund raises there.Since the news, stock of Adani Green has nosedived 36%, losing $9.6 billion in market value. Adani Group has denied the accusations in the U.S. indictment as baseless, and vowed to seek all legal recourse.But fund-raising could get complicated. “To the extent of raising additional capital for newer projects, any sort of regulatory issues become problematic,” said Deepika Mundra, a senior analyst at M&G Investments based in Britain.”Particularly if you want to tap international markets.”Adani Green is one of many public and private companies key to helping India achieve its goals, she added. “It is quite important that all these (Adani Green) projects go through.” The Adani Green boom is reflected in a surge of 10,000% in its shares between 2018 and 2022 as power demand in India swells, spurring it to develop the energy park in Khavda in Gujarat.”For us, this renewable energy park is a symbol of our commitment to sustainability and a symbol of national pride,” Adani wrote in his annual report in June.When complete, its output would be “enough to power nations like Belgium, Chile, and Switzerland”, he added. Adani has committed investment of $100 billion in the renewables sector, seen as core to the ports-to-airports conglomerate that is worth more than $135 billion. Now the tide is turning for Adani Green, described by U.S. prosecutors as being at the heart of “The Corrupt Solar Project”. After the U.S. indictment, TotalEnergies, which holds a stake of nearly 19.8% in Adani Green, was among the first to react, saying it would not invest more in the group for now.It had not been made aware of the bribery case, even though Sagar Adani was served a grand jury subpeona last year by the U.S. Federal Bureau of Investigation, it added.The Qatar Investment Authority, with a stake of 2.7%, declined comment.But standing firm for now is GQG Investors, which holds a stake of 4.2%. In an internal client note seen by Reuters, it said, “We believe the fundamentals of the companies we are invested in remain sound.” Adani Green added power capacity of 37% each year to reach 11.2 GW by September this year, from a mere 2 GW in the 2018-19 financial year.Its next big target is 50 GW goal by 2030, or a capacity addition of 31% each year, it told investors in a presentation in November.’RENEWABLE ENERGY MARVEL’ Adani Green’s revenues of $574 million during the period from April to September this year were up 20% on the year, boosting its cash profit 27% to $313 million over that time.With large solar, wind and hybrid power developments in Gujarat and the desert state of Rajasthan, it is developing smaller pumped-storage hydro power projects in five Indian states.The facilities in Rajasthan and Gujarat were to have supplied the power contracted for in the Adani deals that U.S. prosecutors allege to have been granted after payment of bribes. One of them is the partly developed marquee project in Khavda, just 18 miles (30 km) from the international border with Pakistan. It is described by Adani as “a renewable energy marvel in the making”.Adani is targeting a massive jump in operational capacity at the location to 30 GW by 2029, up from 2.25 GW now. Energy from the park can power 16.1 million homes each year, Adani says.Reuters was among media which toured the project site in April, when thousands of labourers worked on construction and scores of solar panels were being installed. Engineers that day talked up the potential of the project, which would sprawl across 540 sq km (210 sq miles) when complete, saying it would be visible from space.”The kind of support being provided by the central government, and I must say, the state governments also, is extraordinary,” Managing Director Vneet S. Jaain said at the time.Jaain, one of three Adani executives, besides Gautam and Sagar Adani, indicted for offering bribes to Indian state officials to secure deals, has not responded to a request for comment from Reuters. More

(Reuters) – Several British police forces have largely withdrawn from Elon Musk’s X social media platform as concerns over its role in promoting violence and extreme content persist, a Reuters survey of forces’ social media output showed.X, formerly Twitter, was used to spread misinformation that sparked riots across Britain this summer, and has reinstated British-based accounts that had been banned for extremist content.Musk’s comment in August that civil war in Britain was “inevitable” drew rebukes from Downing Street and police leaders. Critics argue that Musk’s approach fosters hate speech, though Musk has said he is defending free speech and has described Britain as a “police state”.Reuters reported in October that North Wales Police had ceased posting on X. Others are moving in that direction, according to Tuesday’s survey.Reuters visually monitored posts on X from 44 territorial police and British Transport Police over the three months to Nov. 13 and focused on ones that had noticeably fewer posts, comparing their output to a year previously. Reuters then contacted those eight forces. West Midlands Police, one of Britain’s biggest police forces which serves the second city of Birmingham, reduced its X posts by around 95% in annual terms in that period. Lancashire Police in the north of England, cut its usage of X by around three-quarters compared with a year ago.”We understand that, as the digital landscape changes, so too does our audiences’ channels of choice,” the force said.And Derbyshire Police, which serves around a million people in central England, made its last original post on Aug. 12 and has responded only to queries since. It said it was reviewing its social media presence.X-COMMUNICATION Other forces said X remained useful for updates on things like road closures, but platforms like Facebook (NASDAQ:META) and Instagram were better for reaching communities. X did not respond to a request for comment.X has been a primary communication tool for the British government, public services, institutions and millions of people for over a decade. It had just over 10 million British app users in October, compared with 4.5 million for Threads and 433,000 for Blue Sky, according to data from digital intelligence platform Similarweb (NYSE:SMWB).But usage is dropping, with X’s British app users down 19% on a year ago, Similarweb data showed.The government still posts to X but does not use it for paid communications. It does, however, advertise on Meta’s Instagram and Facebook, a government source said last month.Several well-known organisations, including the Guardian and non-profit Center for Countering Digital Hate, have quit X due to concerns over its content.Cary Cooper, professor of organisational psychology and health at Alliance Manchester Business School, said many institutions were wary of Musk’s power over the platform, as well as his “very substantial views”. Asked why more police forces had not quit, Cooper told Reuters: “Institutions, just like individuals, get addicted. They invested in it over a period of time.” North Wales Police is the only force to officially quit X completely. “As X was no longer an effective communication medium, this change hasn’t affected our abilities to reach our communities,” it said. More

WASHINGTON (Reuters) – Federal Reserve officials say they are likely to keep reducing interest rates for now, and investors still expect them to do so at the U.S. central bank’s Dec. 17-18 meeting.But how far they will go beyond that remains a wide-open question, with the minutes of the Fed’s meeting earlier this month expected to show the start of a debate that will shape the financial landscape faced by the incoming Trump administration.The minutes of that session are due to be released at 2 p.m. EST (1900 GMT) on Tuesday and will provide a detailed account of the Nov. 6-7 session where officials grappled with data showing stronger-than-expected economic growth and higher-than-expected inflation. While job growth slipped in October, the sense among policymakers was that the U.S. economy was continuing to beat expectations.”It’s actually remarkable how well the U.S. economy has been performing, with strong growth, a strong labor market, inflation coming down,” Fed Chair Jerome Powell said in a Nov. 7 press conference after the central bank announced it was cutting its benchmark policy rate by a quarter of a percentage point to the 4.50%-4.75% range.”We’re on a path to a more neutral stance … We’re just going to have to see where the data lead us … I’m not ruling (December) out or in,” Powell said of the Fed’s plans to make monetary policy less restrictive and eventually be neither stimulating nor restraining economic activity.Public commentary since the meeting, which often reflects the positions staked out during the two days of deliberations, has shown a broad divide among Fed officials who feel monetary policy may already be close to the neutral level and, as a result, near a possible stopping point for rate cuts, and those expecting a likely more extended cutting cycle. Powell just a week after the meeting said the economy was “not sending any signals that we need to be in a hurry to lower rates,” and that the central bank could decide on further reductions in borrowing costs “carefully.”His comments contributed to what has been a steady slip in market expectations for a rate cut next month, with a quarter-percentage-point reduction given just a 53% probability as of Monday afternoon.TRUMP EFFECTWhile officials like Fed Governor Lisa Cook have focused on what she sees as a steady easing of inflation still to come alongside possible improvements in productivity, others say they still see inflation risk as paramount.”We have seen considerable progress in lowering inflation since early 2023, but progress seems to have stalled in recent months,” Fed Governor Michelle Bowman said last week at an event in Florida, adding that the central bank “may be closer to a neutral policy stance than we currently think.”If so, it may imply fewer Fed rate cuts overall, a possibility that has grown more distinct in the minds of many investors and economists since Republican former President Donald Trump won the Nov. 5 presidential election on a platform to cut taxes, restrict immigration, and raise import tariffs. The fallout from those policies, including possibly heightened inflation and wage pressures, could also lead to more caution about cutting rates too far and too fast. Investors now see the Fed’s benchmark rate falling only to around 3.9% next year, and no further, stopping a full percentage point higher than policymakers foresaw in their last set of projections in September. More