Economy

(Reuters) – The European Central Bank (ECB) meets on Thursday as policymakers, not quite ready to declare victory in the inflation battle, struggle to sway trader bets on swift rate cuts.Markets are banking on a first cut in April, but the ECB wants to see more evidence of price growth slowing before pushing the button.”There has been so much speculation about the timing of the first rate cut,” said Carsten Brzeski, global head of macro at ING. “To me the question is… whether the ECB wants to address that or not.”Here are five key questions for markets:1/ What will happen this week? The ECB is certain to keep rates steady, having stopped hikes in October, then clarified in December it would phase out its pandemic-era bond-buying scheme in the second half of 2024.Analysts expect ECB chief Christine Lagarde to continue signalling it is too early to discuss rate cuts – a message not fully resonating with traders who are still pricing in 135 basis points of cuts starting in April.Policymakers, not just hawks but even a dove such as Cyprus’s Constantinos Herodotou, have pushed back. Lagarde has warned pricing in too many cuts could hurt the inflation fight. Yet they also acknowledge the need for need for “humility” given uncertainties ahead.”Lagarde’s pushback will be more indirect,” said Deutsche Bank’s chief European economist Mark Wall. “She will point to the ECB’s forecasts for resilient growth and inflation as a way to create some doubt that the ECB will ease quite as quickly as priced.” 2/ Will the ECB pivot any time soon? Markets reckon so. Traders have merely delayed expectations for the timing of a first cut to April from March and expect one fewer cut than they did last month.Even hawks such as Germany’s Joachim Nagel do not rule out a summer move. A shift in tone seems a matter of time.The ECB releases new inflation and growth forecasts in March, which could set the stage for the start of a discussion on eventual easing. 3/ How far does inflation need to fall before rate cuts?Further. Euro zone inflation rose in December for the first time since April, reaching 2.9%. While core inflation fell further, it is still above 3%.The ECB will want headline and core inflation below 2.5% to be comfortable the 2% target is in reach before cutting rates, said Berenberg chief economist Holger Schmieding. Investors are more confident; swaps markets point to inflation just above 1.5% in a year.The ECB could be pressed on the impact of Red Sea tensions, which highlight how supply chain shocks are becoming more frequent. 4/ What about wages?The ECB has singled out wages as the biggest inflationary risk. Unemployment remains at a record low.Pay growth is down from 5.2% in October 2022, a wage tracker by recruitment platform Indeed and Ireland’s central bank shows, but ticked up to 3.8% in December. Economists reckon that’s driven by new wage deals, an effect seen continuing early this year.The ECB will likely assess first quarter deals to see if pay growth falls towards the 3% it sees consistent with 2% inflation before signalling a policy shift.Lagarde expects enough data by “late spring” and chief economist Philip Lane wants to see data due in April. This would rule out a rate cut before June, the most likely start date for easing, a Reuters poll shows.”The decline in headline inflation, the fact that inflation expectations are stable, all that points to the moderation in wages… but it’s not in the data yet,” said Dirk Schumacher, head of European macro research at Natixis. 5/ How worrying is the euro zone economy?For the ECB, inflation still trumps growth concerns. With the economy seen in a shallow recession, expected to have shrunk just 0.3% in the fourth quarter, whether rate cuts start in April or in the summer won’t make a real difference, economists said. “The ECB will take the view that a rate cut wouldn’t help,” said ING’s Brzeski. “This is why they can really focus on inflation.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Europe Express newsletter. Sign up here to get the newsletter sent straight to your inbox every weekday and Saturday morningGood morning. News to start: The leader of the far-right Alternative for Germany has told the FT that Brexit is “a model” and that she will hold a referendum on EU membership if elected.Today, I reveal what the EU’s biggest countries are proposing the bloc’s navies should do in the Red Sea, and Lithuania’s foreign minister tells my Brussels colleague how the EU should tighten its sanctions on Moscow. Plus: How can liberal democracies meet the challenge of mass migration? Join FT journalists Martin Wolf and Alec Russell and expert guests on January 24 at 13.00 GMT for a webinar exclusively for FT subscribers. Put your questions to our panel here and register for free here.All at seaFrance, Germany and Italy have urged as many of their fellow member states as possible to contribute to a plan to send EU naval assets to the Red Sea — but made clear the deployment should build on an existing mission in the region, and not try anything untested that could provoke a regional backlash.Context: Hamas’s October 7 attack against Israel has sparked spiralling violence across the Middle East, including sustained missile and drone attacks by Yemen-based, Iran-backed Houthi rebels on Red Sea shipping. A US-led naval mission is bombing them in response, while many ships are taking lengthy detours around Africa to avoid the threat.Earlier this month, Brussels proposed sending an EU-flagged mission to the conflict zone, which got in-principle agreement last week. EU foreign ministers are expected to discuss more details today — as part of a wider Middle East debate that will include possible “consequences” for Israel if it continues to block Palestinian statehood. Ahead of that, the bloc’s three biggest members have laid out some guardrails for the nascent naval mission, named ASPIDES. Their key demand is that it “mak[es] use of the already existing structures and capabilities” of an existing naval mission — AGENOR — which the three countries participate in off the coast of Iran.That mission, the three countries state in a joint paper sent to their EU allies and seen by the FT, “managed to build a considerable degree of trust and confidence with regional Arab States, while never entering in a confrontational mode with Iran”.The three authors “call upon other Member States to consider favourably their participation, with naval assets or staff contributions”, but add that the mission could be launched under Article 44 of the EU’s treaties, which allows a small group of countries to be entrusted with a task on behalf of all the others.EU officials involved in the planning of the mission say that it would entail the use of lethal force. But some member states are more squeamish about direct engagement in what could feasibly develop into a full-blown regional war.“We are not fighting piracy here. We are fighting a much more complex thing, which is, non-state actor with hybrid fighting abilities,” said one official, referring to the Houthis. “It’s a difficult, difficult operation, but the political will is there. We really consider that this is necessary for our security.”Chart du jour: Atomic dominanceYou are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Russia dominates the world’s supplies of enriched uranium at a moment when demand for nuclear fuel is surging. Read our deep dive into the US-led plan to break Moscow’s dominance.Lost in transitLithuania is calling on the EU to ban a wider range of industrial exports from passing through Russia, over fears that many of the goods are being diverted to help Moscow’s war effort, writes Andy Bounds. Context: The EU has passed 12 packages of sanctions against Russia since its full-scale invasion of Ukraine almost two years ago. But there is evidence that Moscow can still get its hands on crucial technology. Ukraine published a report last week stating that it had found western components in many Russian weapons. “All Russian missiles have dozens of critical components manufactured abroad, many of them by companies from the free world,” President Volodymyr Zelenskyy said on Friday.Gabrielius Landsbergis, Lithuania’s foreign minister, will argue for a tighter regime at today’s meeting of EU foreign affairs ministers. “It’s a very clear request from Ukraine,” he told the FT. “The Baltic countries are the gateway to the east. That means if there’s a circumvention and if it’s going from Europe directly to Russia, it could go through us.”He said many goods that pass through Russia en route to third countries in fact never made it out again, allowing Russian factories access to vital parts. “The best thing would be that we make a decision that you cannot transit through Russia. You cannot go via Russia because we don’t believe that we’re able to control it,” Landsbergis said.As the European Commission works on its next package of sanctions, the fight to make existing measures work better continues.What to watch today EU foreign affairs ministers meet in Brussels.German Chancellor Olaf Scholz hosts French President Emmanuel Macron in Berlin.Now read theseRecommended 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 hereAre you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET and on Saturdays at noon CET. Do tell us what you think, we love to hear from you: [email protected]. Keep up with the latest European stories @FT Europe More

Stay informed with free updatesSimply sign up to the More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The new government in Warsaw has won a concession from the EU in its battle to limit Ukrainian food exports, with the bloc’s top trade official saying Brussels would control the influx of farm products if they risked depressing prices in Poland and other neighbouring countries. Poland and Hungary introduced unilateral import bans on Ukrainian produce in April 2023, following widespread protests from farmers about cheap exports from Ukraine resulting in grain gluts on their domestic market. The ban was in defiance of EU common trade law. Now the European Commission is set to offer additional safeguards to countries that border Ukraine when it extends its tariff-free, quota-free access from June.Valdis Dombrovskis, trade commissioner, told the Financial Times that the proposal should come this week and would likely include “country specific safeguards” allowing Brussels to block imports if a particular country’s market was flooded. Currently, the impact on the EU market as a whole is assessed, reducing the likelihood of action. “We will be looking at how we can provide additional assurances to Poland and other member states and one way of doing this is introducing country-specific safeguards,” he said.“We see that this regional impact of trade or exports of Ukrainian agricultural products is very unevenly distributed. It’s primarily felt by immediate neighbouring countries whereas [it] doesn’t create much disruption for the EU market as a whole.”The tighter safeguards would be a boost for Polish prime minister Donald Tusk, who is trying to protect domestic economic interests while meeting his pledge to put Poland back at the heart of EU policymaking. This follows years of feuding between the previous administration of the Law and Justice (PiS) party and Brussels, mostly over Poland’s eroding rule of law. The Polish agriculture ministry did not respond immediately to a request for comment about the EU’s plan. After taking office last month, Tusk disappointed Brussels by maintaining the PiS-introduced grain ban, as well as vowing to defend the interests of Polish truckers who had blockaded some border crossings with Ukraine to protest against cheaper competition from Ukrainian hauliers. The drivers agreed last week to suspend their blockade, which will also facilitate a visit by Tusk to Kyiv. Dombrovskis said the extension would cover the year to June 2025. The proposal must be approved by the European parliament and a majority of member states.He also said he would open talks on mutual trade liberalisation, pressing Ukraine to reduce some of its own trade barriers to boost EU exports as it starts negotiations to join the bloc.The unilateral concession was granted to Kyiv in June 2022 in the wake of Russia’s full-scale invasion, which reduced Ukraine’s ability to send food through the Black Sea to its traditional markets in Africa and Asia.EU officials confirmed they are also considering export quotas on sensitive products such as poultry meat, sugar and eggs from Ukraine. Poultry and egg imports have doubled since the war began. A person familiar with the situation cautioned that no decision has been taken.Farmers and truckers have also mounted sporadic protests in Romania this month, demanding mostly domestic economic measures but also voicing concerns about Ukrainian competition and the lack of adequate regulation of Ukrainian imports and services.Romania’s main farmers’ organisation on Sunday asked the country’s leaders to push for a national safeguard clause and tighter restrictions on imports when the measures are renewed. Additional reporting by Marton Dunai in Budapest More

Central bankers and Biden administration officials are concerned that the reluctance of companies to lower price rises to pre-pandemic levels risks undermining efforts to cool inflation. While the shocks triggered by the shutdown of the global economy because of the coronavirus are long gone, economic officials worry businesses have become accustomed to passing on large and frequent price rises to their customers. Thomas Barkin, the president of the Richmond Fed who will vote on the US central bank’s policy deliberations this year, is looking closely at whether retailers regain their ability to force manufacturers of household staples to offer discounts, which they can pass on to US shoppers.“For 30 years before Covid, inflation had gotten so grounded that companies had gotten conditioned into thinking that they didn’t have any pricing power,” Barkin told the Financial Times in an interview that took place on Tuesday. “You had globalisation, favourable demographics. No one wanted to go into Home Depot and table a price increase.” But now the producers had the upper hand, he said. “Big box retailers are pushing back on manufacturers to try to encourage them to begin to do more discounting. But their bargaining power is less than pre-Covid because we still have a lot of back and forth with suppliers on freight costs, on labour costs, on deglobalisation,” Barkin said.“It’s going to take a while for them to negotiate price increases out of the system.” Procter & Gamble, the biggest US consumer goods manufacturer, said on its earnings call in October that “labour inflation continues throughout the supply chain and in our costs”. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Research from the Richmond Fed and Duke University showed almost 60 per cent of companies planned to raise prices this year by more than they did before 2020. “There’s a softening in the intensity and they only plan to raise prices once, not multiple times,” Barkin said. “But it’s still there.”Barkin is watching whether consumers respond to those price increases by cutting back on purchases. If they continue to spend, he will be more reluctant to start cutting rates from their current 23-year high of between 5.25 per cent and 5.5 per cent. The latest edition of the Fed’s Beige Book survey said shoppers were becoming more sensitive to changes in prices. That trend, the publication said, “had forced retailers to narrow their profit margins and to push back in turn on their suppliers’ efforts to raise prices”. Grocery sector specialists cite the rise of German discount chains Aldi and Lidl as a sign of consumers’ focus on value. Still, Barkin’s fears speak to a broader concern among global central bankers that the world has shifted to what the Bank for International Settlements has labelled a high-inflation regime, in which price rises become so pervasive that they beget more of the same. Data show that products such as fizzy drinks, where competition and the market power of big retailers had kept prices more or less on hold, have now become susceptible to inflation. “You had a generation trained by two decades of falling goods prices, where globalisation just kept increasing,” said Vincent Reinhart, a former Federal Reserve economist who is now at Dreyfus and Mellon. “With the pandemic, you’ve lost that innocence. And once it’s lost, then I don’t think you can easily go back.”Jon Hauptman, founder of consultancy Price Dimensions, has noticed a shift away from a model where big producers offered credit to retailers in return for discounts. “Historically, consumer goods companies offered trade funding to retailers in return for discounts. But that’s no longer happening to the same extent,” Hauptman said, adding that the companies were also only willing to offer discounts to specific types of shoppers. “We’re seeing more and more that the money they are spending is targeted in a laser-focused way.” As the presidential race heats up, persistent price pressures are an increasing concern for Biden’s economics team, especially for groceries, the prices of which have risen sharply over his four-year term. The January edition of the FT Michigan Ross poll showed that, when it came to inflation, 72 per cent of respondents cited higher food prices as having a big impact on their finances, with 51 per cent of those polled also concerned about the rise in cost of everyday necessities. The prices of some staples, such as milk and eggs, have fallen from 2022 highs. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Retailers are also managing to regain some of their power by expanding the range of own-brand products they offer. “They’re coming out with new tiers of private brands,” Hauptman said, predicting that this would push manufacturers to provide more trade funding for discounts than they were today. Walmart, the US’s mega-retailer, has said in recent earnings calls that it is seeing inflation returning to more normal levels. Discount chain Dollar Tree, which made headlines when it raised its prices from $1 to $1.25 in 2021, has reintroduced a $1 range on a limited number of products. A big question is whether change will come soon enough ahead of the November to rectify the public perception that the president is not doing a good job on the US economy. The January edition of the FT Michigan Ross poll showed that more than half of voters believe they have become worse off under Biden. More than 40 per cent of respondents see Democratic policies as one of the three main reasons why prices are still rising — the second biggest factor after large corporations, which 57 per cent of respondents believe are taking advantage of high inflation. The US Treasury has repeatedly emphasised that wages are now rising at a faster pace than prices for the average American. But Barkin’s counterpart at the Atlanta Fed, Raphael Bostic, told the Financial Times in an interview earlier this month that he believed the soaring cost of items such as food was still weighing on the nation’s mood. “Everybody noticed that when you went to the grocery store, the same amount of money wasn’t getting the same amount of stuff,” Bostic said.“Now that inflation has slowed, the escalation of the crisis is not as extreme. But prices are still higher than in many instances and they were at the beginning of the pandemic and that is still weighing on folks.” Barkin agreed that the higher cost of goods that are frequently bought was lingering in shoppers’ memories. “If there’s a dramatic rise in prices over a short period of time, people remember that.” More

Populism is a potent form of democratic politics. Unfortunately, it is also a destructive one, weakening institutions, damaging debate, and worsening policy. It can threaten liberal democracy itself. The Brexit saga is an object lesson in the dangers: it has damaged what was long thought to be among the world’s most stable democracies.The recent book, What Went Wrong With Brexit: And What We Can Do About It, by my colleague, Peter Foster, lays out the story superbly. It shows how a classic populist alliance of fanatics and opportunists mixed simplistic analysis with heated rhetoric and outright lies to weaken the UK’s most important economic relationship and threaten its domestic stability. Happily, there exists an opportunity to learn from this experience and start putting things right. Brexit was in fact certain to go wrong, because it was based on false premises. Countries cannot be fully sovereign in trade, since it involves at least one counterpart. Thus, the rules of the single market were created because the alternative was multiple different regulatory regimes and so costlier (and smaller) trade. An institution also had to decide whether countries were abiding by the rules they had agreed. That has been the indispensable role of the European Court of Justice.Creating the single market, then, was an act of regulatory simplification. Leaving it would increase regulation for any business trying to sell in both the UK and the EU. Such business would necessarily be discouraged. So, indeed, it has proved. As Foster shows, smaller businesses suffer most under these burdens.In the short term, existing businesses enjoyed sunk costs — their capital, knowledge and relationships. The costs of creating such assets anew is far higher than those of using what they already had. So, suppose a business is considering entering the EU market today. Other things being equal, would it make sense to locate in the UK rather than in any of its 27 members? Of course not. Over time, then, the separation will grow.This is also true for personal relationships, education, work experience, or work as a creative person, consultant or lawyer. In sum, this supposed liberation has greatly curtailed the freedom of many millions of people on both sides.Whose freedom has it increased? That of British politicians. They can act more freely than they could when bound by EU rules. What have they done with this freedom? They have lied about (or, worse, failed to understand) what they agreed over the Northern Ireland Protocol. They have threatened to break international law. They even proposed eliminating thousands of pieces of legislation inherited from EU membership, regardless of the consequences. These people have, in sum, destroyed the country’s reputation for good sense, moderation and decency. All this is a natural result of the classic populist blend of paranoia, ignorance, xenophobia, intolerance of opposition and hostility to constraining institutions. Yet all is not lost. For some good things have emerged, at least for now. The governing party rid itself of two terrible prime ministers, Boris Johnson and Liz Truss, peacefully. Their successor, Rishi Sunak, is not a fantasist. Neither is the leader of the opposition, Keir Starmer. This is cheering.Many surely now know that the challenges confronting the country — inadequate infrastructure, sluggish innovation, low investment, poor corporate performance, huge regional inequalities and high income inequality — had nothing to do with the UK’s EU membership. Moreover, the opportunities for transformative global trade deals have proved a “will-o’-the-wisp”. In Foster’s phrase, Brexit is “a colossal distraction”. It is performative politics, full of sound and fury signifying nothing sensible. Other EU members have at least learned that.I have argued that attempting to rejoin the EU now would be a mistake. But it is possible to seek improvements in the UK’s relationship with it, notably over movement of people and workers and over regulatory standards, especially in food and manufactures. There is no good case for divergence from the latter. For that matter, would UK-specific regulation of artificial intelligence or a carbon-border adjustment mechanism make any sense? More boldly, the case for rejoining the customs union and so eliminating the difficulties now created by rules of origin is strong.The UK must try to mend its fences with the EU. Its government must also act to improve its economic performance. If the next government fails to improve the economic trajectory, this populism could return in worse form. Nothing less than that is now at [email protected] Martin Wolf with myFT and on XVideo: The Brexit effect: how leaving the EU hit the UK More

Inflation remains a concern, particularly with rising food costs, and is shaping central bank policies in the region. Initially, central banks plan to maintain steady policy rates, with potential reductions later in the year. Currency stability is also anticipated, with the Philippine peso expected to hold at 55.2 against the dollar and the Malaysian ringgit projected at 4.55 against the dollar by year-end.Disinflation trends across Asia are expected to align with central bank targets, which could lead to policy rate cuts in countries like China. This scenario is anticipated to be favorable for bond markets in the region. Reflecting this outlook, HSBC’s investment strategy favors bonds, with a recommended overweight position in US Treasuries and global investment-grade bonds.Furthermore, HSBC anticipates that anticipated rate cuts by the Federal Reserve starting in June 2024 will enhance global investment sentiment, which should have positive effects on both equity and bond markets. The recovery of the global electronics sector, along with the resumption of international tourism, are additional factors that are expected to support Malaysia’s economic expansion.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

The one-year loan prime rate (LPR) was kept at 3.45%, and the five-year LPR was unchanged at 4.20%.In a Reuters poll of 27 market watchers conducted last week, all but one participant predicted both LPRs would stay unchanged. Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. More