Economy

The head of Italy’s central bank has exposed a growing rift at the European Central Bank by criticising comments from fellow eurozone rate-setters about how much higher interest rates will need to rise to tame inflation.Ignazio Visco said in a speech in Rome on Wednesday that he did not “appreciate statements by my colleagues about future and prolonged interest rate hikes” as tensions grew over the pace of monetary policy tightening. The ECB has signalled it is likely to raise its deposit rate by half a percentage point to 3 per cent at its meeting next week. It also said no prior commitments would be made to any further moves.But some members of the ECB’s rate-setting governing council have reacted to higher-than-forecast inflation data in February and wider signs of economic resilience to say rates are set to rise much higher in the coming months. Robert Holzmann, Austria’s central bank governor, said this week he expected the ECB to raise rates by half a percentage point at each of its four meetings between now and July, which would take its deposit rate from 2.5 per cent to 4.5 per cent. That would be higher than the 4 per cent peak for the benchmark rate priced in by futures markets.Highlighting the war in Ukraine, Visco said the “serious geopolitical situation makes it difficult to forecast future macroeconomic trends”. Monetary policy needed to be “prudent and driven by the data . . . so as to bring inflation back to 2 per cent in the medium term without putting financial stability at risk and minimising the effects on the fragile economy”, he said.Italy’s central bank governor is one of the more dovish members of the ECB council, many of whom fear the more hawkish rate-setters will use the persistently high inflation data to press for a commitment to further rate rises. Fabio Panetta, the most dovish ECB board member, last month warned that pre-committing to future rate rises would be the policy equivalent of “driving like crazy at night with our headlights turned off”. Eurozone inflation has fallen for four consecutive months since hitting a record 10.6 per cent in October. But it fell less than expected to 8.5 per cent in February, while core price growth — excluding energy and food — hit an all-time high of 5.6 per cent.

Economists are divided on how fast inflation will fall and whether the eurozone will this year enter a technical recession, defined as two consecutive quarters of contracting output. Recent surveys of businesses and consumers point to resilient growth, but data showing weak retail spending and business investment indicate a downturn is likely.“The evidence on the health of the eurozone has been mixed so far,” said Franziska Palmas, economist at research group Capital Economics. “But we still think that depressed real incomes and rising interest rates will weigh heavily on consumption and investment, pushing the eurozone into recession.”The eurozone economy stagnated in the fourth quarter of last year, according to official figures published on Wednesday that were revised down from January’s flash estimate of 0.1 per cent growth after cuts to estimates in Germany and Ireland. A drop in household spending and lower business investment were offset by increases in government spending, the trade surplus and inventories, according to Eurostat, the EU’s statistics office.But Melanie Debono, economist at Pantheon Macroeconomics, said the quarterly data was still better than was expected in December, “so it does more for ECB hawks’ calls to continue on a steep tightening path than for the doves’ call for prudence”. More

LONDON (Reuters) -Bank of England rate-setter Swati Dhingra said on Wednesday that it would be prudent not to raise interest rates further, as previous increases in borrowing costs are yet to feed through into an already weak economy.Despite recent signs that Britain’s economy may be holding up better than some economists had feared, Dhingra stuck to her view that the BoE risked harming the economy unnecessarily by raising rates too high.”In my view, a prudent strategy would hold policy steady amidst growing signs external price pressures are easing, and be prepared to respond to developments in price evolution,” Dhingra said a speech to the Resolution Foundation think tank.”This would avoid overtightening and return the economy sustainably to our 2% inflation target in the medium-term,” she added, in her first major speech since joining the BoE’s Monetary Policy Committee in August.Along with Silvana Tenreyro, Dhingra voted last month to leave interest rates on hold at 3.5%, while the other seven members of the Monetary Policy Committee voted through an increase to 4%.Financial markets now fully price in a further 0.25 percentage point increase on March 23 and see a greater than 50% chance that BoE rates will reach 5% later this year after Federal Reserve chief Jerome Powell signalled further interest rate hikes in the United States were likely.Dhingra on Wednesday stressed that the risk of too-high interest rates were a larger threat than the risk of embedded inflation pressure.”My conclusion is that, given little evidence of further cost-push inflation, further tightening is a bigger risk to output and the medium-term inflation target,” she said.Her views contrast with those of Catherine Mann, another external member of the MPC, who on Tuesday doubled down on her view that higher interest rates are likely needed to lessen the risk that double-digit inflation becomes ingrained.Dhingra – an associate professor at the London School of Economics who specialises in trade issues – said her analysis of supply chains suggested more of Britain’s inflation overshoot was due to global factors than domestic pressures than previously thought.INFLATION EXPECTATIONSThe BoE is currently divided over how great the risk is that inflation falls more slowly than forecast, for example if last year’s surge in energy prices leads to persistent upward shifts in wage growth and businesses’ price setting.Pay excluding bonuses in the final quarter of 2022 grew at its fastest rate since records began in 2001, excluding distortions during the COVID-19 pandemic.Businesses surveyed by the BoE last month expect inflation in a year’s time to be 5.9%, and 3.4% in three years in contrast to the BoE’s forecast last month that inflation would be below its 2% target by the second half of next year.Dhingra said she did not think either wage growth or inflation expectations offered good evidence of persistent domestically generated inflation pressures.Wage growth tended to lag broader economic developments, and more forward-looking wage data was slowing. Better data on productivity and businesses’ profit margins were needed to gauge its inflation impact.Inflation expectations were often driven by current inflation, rather than having predictive power, she said.”Those who put too much weight on those numbers, I think should have that in mind as well,” she said. More

LONDON (Reuters) – OakNorth is leaning towards the United States for a prospective stock market listing, as the British bank considers ways to grow in the world’s largest economy, including securing a local U.S. financial licence, chief executive Rishi Khosla told Reuters.The prospect of a U.S. listing for one of Britain’s biggest and most successful financial technology companies would come as a blow to London, after chipmaker Arm said it would float in New York despite government efforts to keep it at home.Sources with knowledge of the matter told Reuters that OakNorth, whose UK banking arm has been profitable since 2017, could be in a position to go public as soon as in the next 12 months.Khosla downplayed that timeline for an initial public offering (IPO), saying instead that the company will look to float “sometime in the future” but is in no rush to do so.Japanese conglomerate SoftBank Group, which holds an undisclosed stake in OakNorth and controls Arm, declined to comment.Khosla said the lack of a domestic investor base focused on high-growth technology made London unappealing as a listing venue for OakNorth.The comments mark a significant shift from previous interviews, in which Khosla had indicated a preference for London as a listing venue.OakNorth runs a business bank in Britain with more than 4 billion pounds ($4.73 billion) in assets, and supplies its technology to lenders elsewhere, including U.S. credit institutions such as PNC Financial Services Group (NYSE:PNC) and Modern Bank.It is looking to win further technology clients in the U.S. and is keeping an “open mind” about seeking a banking licence there, suggesting this could be achieved through an acquisition, Khosla said.OakNorth declined to comment on the type of licence it could seek. Foreign banks can operate in the U.S. through either state or federal banking charters, which they can apply for or obtain by acquiring a local credit institution.OakNorth, which is due to file its 2022 accounts in the next few weeks, has so far seen almost no credit defaults despite Britain’s slowing economy and sharply rising inflation. The lender reported a loan default rate of 0.07% against a sector average of 0.32% in 2021. Khosla said the figure would rise, “but not materially”, in the 2022 figures to be reported soon.That leaves it in a strong position to buy another bank in Britain, possibly snapping up one of its digital-only neobanks, Khosla said, without being more specific.”We feel good about our business, we are in a robust place… it would be easy for us to make a nine-figure acquisition in cash,” he said, adding the group could also use its own shares to help finance a deal.OakNorth was most recently valued at $2.8 billion in 2019 when SoftBank led a $440 million cash injection into the “fintech” group.Since then, technology valuations soared before plunging last year on the back of rising interest rates and slowing economic prospects. European banking stocks have rallied nearly 40% in the last year on the back of rising interest rates, whereas the Dow Jones US Banks Index has dropped 8% over the last 12 months.OakNorth declined to comment on its valuation but said it sees New York-listed Nubank as its closest peer.($1 = 0.8448 pounds) More

Private payrolls in February increased by 242,000 vs. the estimate for 205,000 and above the 119,000 in January, ADP reported Wednesday.
Leisure and hospitality led job growth with 83,000 additions. Financial activities added 62,000 while manufacturing showed a 43,000 gain .
The ADP report comes two days before the government’s nonfarm payrolls count, which is expected to show a gain of 225,000.

A worker prepares a 155mm artillery shell at the Scranton Army Ammunition Plant in Scranton, Pennsylvania, U.S., February 16, 2023.
Brendan McDermid | Reuters

Companies added jobs at a brisk pace in February as the U.S. labor market kept humming, payroll services firm ADP reported Wednesday.
Private payrolls increased by 242,000 for the month, ahead of the Dow Jones estimate for 205,000 and well above the upwardly revised 119,000 jobs gain, from 106,000, in January.

Wage growth decelerated slightly, with those remaining in their jobs seeing a 7.2% annual increase, down 0.1 percentage point from a month ago. Job changers saw growth of 14.3%, compared to 14.9% in January.
The report comes with Federal Reserve officials watching jobs data closely for clues on where inflation is headed. Remarks Tuesday from Fed Chairman Jerome Powell, who called the jobs market “extremely tight,” triggered a sell-off on Wall Street amid expectations that the central bank could accelerate the pace of its interest rate increases.
“There is a tradeoff in the labor market right now,” said ADP chief economist Nela Richardson. “We’re seeing robust hiring, which is good for the economy and workers, but pay growth is still quite elevated. The modest slowdown in pay increases, on its own, is unlikely to drive down inflation rapidly in the near-term.”
By sector, leisure and hospitality led job growth with 83,000 additions. Financial activities added 62,000 while manufacturing showed a robust 43,000 gain as the industry benefited from a mild winter.
Other areas showing increases included education and health services (35,000), the “other services” category (34,000) and natural resources and mining (25,000). Professional and business services lost 36,000 jobs, while construction was down 16,000.

All of the job additions came from companies employing 50 or more workers. Small businesses saw a net loss of 61,000, most of which came at establishments employing fewer than 20 people.
The ADP report serves as a precursor to the more closely followed nonfarm payrolls report the Labor Department will release Friday.
Though ADP last year entered into a new partnership with Stanford University, the two counts still have differed by large margins in some cases. For instance, the Labor Department estimated payrolls rose 517,000 in January, more than four times what ADP reported.
Friday’s report is expected to show growth of 225,000 in February, with the unemployment rate holding steady at 3.4%, according to Dow Jones estimates.

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COLOMBO (Reuters) -The Export-Import Bank of China has told Sri Lanka it will try to finalise in the months ahead how it treats debt owed by the crisis-hit nation, according to a letter seen by Reuters which also reiterated a moratorium for debt due in 2022 and 2023.The International Monetary Fund said on Tuesday that Sri Lanka had secured financing assurances from China, India and all its major bilateral creditors, setting the stage for final approval of the IMF’s $2.9 billion, four-year bailout for the island nation on March 20.Sri Lanka is facing its worst economic crisis in more than seven decades and a shortage of dollars has disrupted imports of essentials, though the situation has improved this year from last year when protesters ousted its president.China has extended its “firm support to Sri Lanka through a debt treatment”, EXIM Bank wrote in the letter to the Sri Lankan government on March 6.The bank’s Vice President, Zhang Wencai, said in the letter that the island nation would not have to immediately repay the principal and interest due on its loans for the two years, “so as to help relieve your short-term debt repayment pressure”.”Meanwhile, we would like to expedite the negotiation process with your side regarding medium- and long-term debt treatment in this window period, with a view to finalising the specifics of a debt treatment in the coming months. We will make our best efforts to contribute to the debt sustainability of Sri Lanka.”The letter mirrors what EXIM Bank sent to Sri Lanka in January, except for the target of finalising debt-treatment specifics in the coming months.By end-2020, Sri Lanka owed EXIM $2.83 billion, or nearly 9% of external central government debt, according to IMF data.The letter added that China would call on “commercial creditors to provide debt treatment in an equally comparable manner, and encourage multilateral creditors to do their utmost to make contributions to help you better respond to the crisis and emerge from it”.A Chinese foreign ministry spokesperson confirmed the contents of the letter.”It fully reflects our sincerity and efforts to support Sri Lanka in achieving debt sustainability, and we hope that relevant parties will respond positively to Sri Lanka’s loan application as soon as possible,” Mao Ning told a regular news conference.LONG TALKS WITH CHINASri Lanka’s international bonds slipped on Wednesday with most issues down around 1 cent on the dollar, though that only partially offset stellar gains in the previous session, Tradeweb data showed. Winning the support of China, the world’s and Sri Lanka’s biggest sovereign creditor, was crucial for the IMF deal to go ahead.Sri Lankan President Ranil Wickremesinghe told parliament on Tuesday that the government received the China letter on Monday night and soon after, he and the central bank governor sent a letter of intent to the IMF.A source at Wickremesinghe’s office said the president had been expecting the letter from EXIM Bank from Thursday.”Sri Lanka has been talking, discussing and negotiating with China EXIM Bank for weeks, mostly virtually, because that was what we were tasked with doing,” said the source, declining to be identified as he was not authorised to talk to the media.He said the support from the international community, especially Japan and the United States talking to the Chinese government, helped Sri Lanka. Sri Lanka’s case was also boosted by a G20 meeting in India last month, said the source.Sri Lanka cabinet spokesperson and transport minister, Bandula Gunawardena, told a weekly news briefing that the possible final IMF approval was a “great achievement”.”Sri Lanka has worked hard and spent months to fulfill requirements for the IMF programme, at certain times the president engaged at personal level to get support,” he said.”Without the IMF programme, Sri Lanka cannot turn around its economy.” More

OTTAWA (Reuters) – The Bank of Canada is expected to keep rates on hold on Wednesday, becoming the first of the world’s major central banks to suspend their tightening campaign, after economic growth stalled in the fourth quarter of last year.When the bank last met to set policy in January, it lifted rates by 25 basis point, as expected, to 4.50%, and said it would seek to leave rates unchanged for a while to let previous rate hikes sink in. Over the past year, the bank raised rates by a total of 425 basis points to tame inflation, which peaked at 8.1% and slowed to 5.9% in January, still almost three times the 2% target.”We expect the Bank of Canada to be the first G10 central bank to hold rates,” said Jay Zhao-Murray, a forex analyst at Monex Canada.The majority of the 32 economists surveyed by Reuters last week said the Bank of Canada (BoC) would likely keep rates on hold through the end of this year, and all of them forecast the bank to stay on hold on Wednesday.Money markets expect the policy rate to be left on hold on Wednesday but are pricing in another tightening by September.While some data have been particularly strong since the bank’s last policy meeting, including a blockbuster January jobs report, gross domestic product stalled in the fourth quarter – far weaker than the 1.3% annualized growth forecast by the BoC.”Look for the Bank of Canada to point to slowing GDP growth and inflation when justifying its decision to maintain the level of rates,” said Royce Mendes and Tiago Figueiredo, Desjardins economists, in a note. “The central bank is unlikely to do much to endorse the view that further rate hikes will be necessary,” they said.Macklem has left the door open to raising rates further, but he has also said that if inflation comes down as the bank has forecast, then higher borrowing costs will not be needed. Macklem said in January inflation would slow to about 3% by mid-year, and then reach 2% in 2024. He also said he expects near-zero growth for the first three quarters of 2023.Senior Deputy Governor Carolyn Rogers (NYSE:ROG) will deliver a speech, titled “Economic Progress Report” and take questions from the media on Thursday in Winnipeg. There will be no speech or news conference on Wednesday after the rate decision.Minutes from this week’s meeting are due to be published on March 22. More

Here is a thought experiment. If Taiwan did not exist, would the US and China still be at loggerheads? My hunch is yes. Antagonism between top dogs and rising powers is part of the human story. The follow-up is whether such tensions would persist if China were a democracy rather than a one-party state. That is harder to say but it is not obvious that an elected Chinese government would feel any less resentful of the US-led global order. It is also hard to imagine the circumstances in which America would willingly share the limelight.All of which suggests that loose talk of a US-China conflict is no longer far-fetched. Countries do not easily change their spots: China is the middle kingdom wanting redress for the age of western humiliation; America is the dangerous nation seeking monsters to destroy. Both are playing to type. The question is whether global stability can survive either of them insisting that they must succeed. The likeliest alternative to today’s US-China stand-off is not a kumbaya meeting-of-minds, but war.This week, Xi Jinping went further than before in naming America as the force behind the “containment”, “encirclement” and “suppression” of China. Though his rhetoric was provocative, it was not technically wrong. President Joe Biden is still officially committed to trying to co-operate with China. But Biden was as easily blown off course last month as a weather balloon. Washington’s panic over what is after all 19th-century technology prompted Antony Blinken, the US secretary of state, to cancel a Beijing trip that was to pave the way for a Biden-Xi summit.Washington groupthink drove Biden’s overreaction. The consensus is now so hawkish that it is liable to see any outreach to China as weakness. As the historian Max Boot points out, bipartisanship is not always a good thing. Some of America’s worst blunders — the 1964 Gulf of Tonkin resolution that led to the Vietnam war, or the 2002 Iraq war resolution — were bipartisan. So is the new House committee on China, which its chair, Mike Gallagher, says will “contrast the Chinese Communist party’s techno-totalitarian state with the Free World”. It is probably safe to say he will not be on the hunt for contradictory evidence.A big difference between today’s cold war and the original one is that China is not exporting revolution. From Cuba to Angola and Korea to Ethiopia, the Soviet Union underwrote leftwing insurgencies worldwide. The original idea of containment, laid out in George Kennan’s 1947 Foreign Affairs essay, The Sources of Soviet Conduct, was more modest than the undeclared containment that is now US policy. Kennan’s advice was twofold: to stop the expansion of the Soviet empire; and to shore up western democracy. He counselled against the use of force. With patience and skill the USSR would fold, which is what eventually happened.Today’s approach is containment-plus. When Xi talks of “suppression”, he means America’s ban on advanced semiconductor exports to China. Since high-end chips are used for both civil and military purposes, the US has grounds for denying China the means to upgrade its military. But the collateral effect is to limit China’s economic development. There is no easy way round this. One possible side-effect will be to accelerate Xi’s drive for “made in China” technology. The Chinese president has also explicitly declared Beijing’s goal of dominating artificial intelligence by 2030, which is another way of saying that China wants to set the rules. The one positive feature of today’s cold war compared with the last one — China and America’s economic interdependence — is thus something Biden wants to undo. Decoupling is taking on an air of inevitability.When Xi refers to “encirclement”, he is thinking about America’s deepening ties to China’s neighbours. Again, Xi mostly has himself to blame. Japan’s shift to a more normal military stance, which includes a doubling of its defence spending, probably worries China the most. But America’s growing closeness to the Philippines and India, and the Aukus nuclear submarine deal with Australia and the UK, are also part of the picture. Add in increased US arms transfers to Taiwan and the ingredients for Chinese paranoia are ripe. How does this end?This is where a study of Kennan would pay dividends. There is no endgame to today’s cold war. Unlike the USSR, which was an empire in disguise, China inhabits historic boundaries and is never likely to dissolve. The US needs a strategy to cope with a China that will always be there.If you took a snap poll in Washington and asked: one, are the US and China in a cold war; and two, how does the US win it, the answer to the first would be an easy “yes”; the second would elicit a long pause. Betting on China’s submission is not a strategy.Here is another way to look at it. The US still holds more of the cards. It has plenty of allies, a global system that it designed, better technology and younger demographics. China’s growth is slowing and its society is ageing faster. The case for US resolve and patience is stronger today than it was when Kennan was around. Self-confident powers should not be afraid to [email protected] More

Brussels has urged EU countries to start phasing out massive energy subsidies as it prepares to reimpose budget rules three years after the coronavirus pandemic broke out.The European Commission on Wednesday set out its plan for the return of the Stability and Growth Pact (SGP), which was suspended at the start of the pandemic in 2020 as EU governments spent huge sums supporting their economies and providing healthcare.Rising energy prices as Russia cut gas supplies after its invasion of Ukraine last year prompted member states to provide support to people and businesses struggling to pay their bills.But the commission said the measures should now be unwound as the cost of energy drops and deficits need to be reduced. Governments spent 1.2 per cent of EU gross domestic product in 2022 on energy subsidies and plan to spend 0.9 per cent in 2023, its figures showed. “As energy prices head lower, we should move to phasing out most of the support measures, starting with the least targeted,” said Valdis Dombrovskis, executive vice-president at the commission. “The time for broad-based fiscal support has passed. It is time to shift gear and look to the future. From a fiscal standpoint, we need to change focus.” Dombrovskis said if support had been given to only the poorest 40 per cent of citizens last year, the cost would have been cut by three-quarters.The subsidies in most countries disproportionately benefited the wealthy, who consume more, a senior commission official said. “The measures were not very well targeted and did little to reduce consumption.”The commission confirmed that the general escape clause, which suspended enforcement of the SGP, would be “deactivated” at the end of this year. Under the pact countries are meant to limit budget deficits to 3 per cent of GDP and bring debt ratios to 60 per cent of GDP or below. That means that from 2024 Brussels is likely once again to open so-called excessive deficit procedures against member states where the gap between public revenue and spending is overshooting the target, said Paolo Gentiloni, economics commissioner. “Given the still high economic uncertainty, we have decided not to open any excessive deficit procedures until spring 2024,” he added. Wednesday’s guidance is meant to help member states prepare their 2024 budgets. Gentiloni said fiscal rebalancing “should not be achieved by cutting investment but by limiting the growth of current spending”, given the need to fund green energy projects. “We do not need austerity,” he added.Governments should provide plans of how they will comply with fiscal tightening by April. These stability and convergence programmes “should set ambitious fiscal targets that respect the 3 per cent GDP deficit reference value and ensure a path for credible, continuous debt reduction, or for keeping it at prudent levels in the medium term”, Dombrovskis said.The commission has forecast the euro area budget deficit will widen from 3.5 per cent of GDP in 2022 to 3.7 per cent this year. The number of member states breaching the 3 per cent figure is expected to increase from 10 to 12 between 2022 and 2023, including Italy and Spain. Public debt in the euro area is expected to fall to 92 per cent of GDP in 2023.The commission set out its guidance for public finances in 2024 amid a planned overhaul of the bloc’s budget rules that will probably involve the introduction of fresh legislation.EU finance ministers are expected to debate the ideas at a meeting in Brussels next week. While there is no consensus, the senior official insisted there was growing convergence on several issues. While the 3 per cent deficit and 60 per cent debt targets should remain, fiscal plans would probably be assessed over several years rather than an annual basis. More