Economy

The Bank of England has increased interest rates by half a percentage point to a 15-year high of 4 per cent, but suggested that rates may have reached their peak.The BoE, which is now anticipating a milder recession this year than previously thought, said further rises would only be needed if there were new signs that inflation was going to stay too high for too long. It dropped its previous guidance that it would need to act “forcefully”. The Monetary Policy Committee voted seven to two in favour of the 10th consecutive rate increase. “If there were to be evidence of more persistent [inflationary] pressures, then further tightening in monetary policy would be required,” the MPC said. That wording suggests interest rates might peak at the new rate of 4 per cent, lower than the 4.5 per cent expected by financial markets. Sterling weakened on Thursday, trading 0.45 per cent lower against the euro at €1.12 and 0.36 per cent lower against the dollar at $1.23.The yield on the 10-year gilt slipped 0.13 percentage points to 3.17 per cent as the price of the debt rose. London’s FTSE 100 was up 0.5 per cent just after noon.Explaining why the BoE raised rates even when it forecast inflation to fall well below target, governor Andrew Bailey said “we need to be absolutely sure we really are turning the corner on inflation”.There was no attempt by the BoE to suggest that financial markets were misguided in expecting interest rate cuts later this year. But MPC members cautioned “that the risks to inflation are skewed significantly to the upside”, which underpinned the majority’s continued concern about price rises and justified the large interest rate rise on Thursday.The BoE’s new central inflation forecast shows it thinks price rises will ease quickly from December’s 10.5 per cent annual rate to a level under 4 per cent by the end of the year. Inflation is forecast to drop well below the BoE’s 2 per cent target in 2024. The two dissenting voices on the MPC — Swati Dhingra and Silvana Tenreyro, who voted to leave interest rates at 3.5 per cent — believed that the BoE had already done enough and Thursday’s rise to 4 per cent “would bring forward the point at which recent rate increases would need to be reversed”. The BoE’s new economic forecasts were less pessimistic than its previous set of predictions in November, with the upgrade attributed to lower wholesale gas prices and a new assumption that companies will be reluctant to lay off employees during a difficult time for the economy. The central bank is now predicting a mild recession, with output falling 1 per cent from the peak in 2022 to a trough in 2024, with five quarters of gently falling output. While the government will be encouraged by the forecast upgrade, the BoE made it clear it thought the UK economic performance would be weak for some time. The growth forecast was still marginally more pessimistic than that of the IMF this week, with gross domestic product expected to contract 0.7 per cent in the fourth quarter of the year compared with the same period in 2022. The equivalent IMF forecast was for the economy to shrink 0.5 per cent. After looking at the likely supply of workers, low business investment and trade weakness, BoE officials think the UK economy cannot expand even at a 1 per cent annual rate without generating inflationary pressures.

Before the financial crisis of 2007-8, the equivalent sustainable average annual growth rate was 2.5 per cent, and before the coronavirus pandemic it was around 1.5 per cent. The BoE attributed the long-term underlying weakness of the economy to Brexit, the pandemic and the energy crisis. The BoE’s downgrade implies it expects the output to be no higher at the start of 2026 than it was just before the pandemic at the end of 2019. More

ABUJA (Reuters) – Nigeria’s finance minister said on Thursday she disagreed with what she called a “surprise” downgrade of the country’s credit rating by Moody’s (NYSE:MCO), insisting the government was already addressing the agency’s concerns.Moody’s downgraded the West African oil producer last week to Caa1 from B3, saying the government’s fiscal and debt position was expected to keep deteriorating, an announcement that sent Nigeria’s dollar-bond and currency forwards tumbling.”Moody’s downgrade came as a surprise to us because we had presented all the work that we have been doing to stablise the economy,” the minister, Zainab Ahmed, told reporters in Abuja.”But these are external rating agencies that don’t have the full understanding of what is happening in our domestic environment.”She said she expected S&P’s rating, due on Friday, would be more positive.”S&P’s assessment is not the same as Moody’s. They have come out with a much better assessment,” she said.Nigeria has faced oil production shortages due to crude theft in recent years, though production has started to recover.It has also suffered chronic dollar shortages coupled with high debt service which has eaten into government revenues.Moody’s cited these factors as reasons for its downgrade. More

Investing.com — The Bank of England raised its key interest rate by another 50 basis points on Thursday, warning that its battle against inflation still isn’t over, but held out the possibility of an end to its policy tightening.The move, which was as expected by financial markets, takes the Bank rate to 4%, the highest it’s been since the 2008 financial crash.The Bank’s calculations showed that current market expectations of a peak in rates around 4.5% in mid-2023 would push inflation below its 2% target in the medium term. That suggests it doesn’t see the need to raise the Bank rate much more, if at all, although it was careful to add that uncertainties around this outlook are high and that “the risks to inflation are skewed significantly to the upside.” “We have done a lot on rates already, and the full effects are still to come through,” Governor Andrew Bailey said in opening remarks at his regular press conference. “One last 25bp hike in Bank Rate in the March meeting still can’t be ruled out. But if, as we expect, signs of slowing price rises and accumulating labor market slack continue to emerge in line with its expectations, then the Monetary Policy Committee looks set to keep Bank Rate at 4% in March, and throughout the rest of this year,” said Pantheon Macroeconomics analysts Samuel Tombs in a note to clients. U.K. markets reacted strongly to the Bank’s guidance, which was the clearest signal yet it is approaching the end of its tightening cycle.By 08:00 ET (13:00 GMT), the pound was down 0.6% at $1.2298, while the yield on the 10-year Gilt was down 14 basis points at 3.16%, its lowest in nearly two months. The U.K.-focused FTSE 250 stock index rose 2.5% to its highest since last August.By raising the cost of mortgage and consumer credit, the Bank threatens to sharpen an already clear economic downturn in the U.K. The International Monetary Fund expects the U.K. to be the only G7 economy that will shrink this year, and household spending had already showed signs of slowing at the end of last year.However, it has been forced to keep raising interest rates because inflation is also running higher than in the U.S. or the rest of Europe and, at 10.5% in December, hasn’t come down as quickly as it has elsewhere. “Headline CPI inflation has begun to edge back and is likely to fall sharply over the rest of the year as a result of past movements in energy and other goods prices,” the Bank said in a statement accompanying the decisions. “However, the labor market remains tight and domestic price and wage pressures have been stronger than expected, suggesting risks of greater persistence in underlying inflation.”That judgment comes a day after the most widespread strikes in Britain for over a decade, with civil servants, teachers and other public-sector employees all pressing for higher pay.As a result of the improved inflation outlook – benchmark Natural Gas Futures in particular, have fallen by 50% since the Bank’s last Inflation Report in November – the Bank dropped from its statement a promise to act “forcefully” to bring inflation down further if need be. As in December, the Monetary Policy Committee was not unanimous in its decision, with two members voting for no change in the Bank rate.  More

European stocks are rising today and US futures are also higher after the Federal Reserve shifted to a slower pace of interest rate rises. The quarter-point increase in the federal funds rate to a range of between 4.5 per cent and 4.75 per cent, the highest level since September 2007, marked a return to a more orthodox approach to rate rises.However, in a statement, the Fed maintained that “ongoing increases in the target range will be appropriate” in order to ensure it is restraining activity enough to bring price pressures under control.In his press conference after the decision, Fed chair Jay Powell said while there had been some “encouraging” signs that price pressure were easing it would be “very premature to declare victory.”Despite Powell’s comments, markets rallied sharply during and after the press conference on signs of a more dovish approach from the Fed chair. The benchmark S&P 500 and tech-heavy Nasdaq rose to their highest levels since August and September 2022, respectively.The two-year Treasury yield, which moves with interest rate expectations, fell to its lowest level in two weeks. The dollar was also lower. Money markets are now expecting the fed funds rate to peak at just below 5 per cent in the second quarter and the US central bank to begin cutting interest rates by the end of the year.Commentary: There is a wide gap between the markets’ rate expectations and the Fed’s policy guidance, says Robert Armstrong, which is a challenge to the Fed’s credibility. (Premium subscribers can sign up to Rob’s Unhedged newsletter for daily market updates)Five more stories in the news1. Facebook shares soar Mark Zuckerberg announced 2023 would be the “year of efficiency” after unveiling full-year results that beat expectations. The chief executive of Meta, which owns Facebook, Instagram and WhatsApp, said more jobs would be cut this year as part of a cost-cutting drive. Investors liked what they heard and sent the shares nearly 20 per cent higher in after-market trading.2. Gautam Adani defends ‘robust’ business The Indian billionaire broke his silence earlier today and defended his industrial empire which has seen $100bn wiped off its value since short seller Hindenburg Research accused the conglomerate of using offshore entities in tax havens to inflate the share prices of its listed companies. The comments come after Adani Group last night cancelled a $2.4bn share sale. 3. Banks set to recoup little from Archegos Banks that lost billions from the meltdown of Archegos Capital Management will get back as little as 5 cents on the dollar from its restructuring, with brokers such as Goldman Sachs funding the payouts using cash left in the family office’s trading accounts. Global banks, including Credit Suisse and Morgan Stanley, are expecting to recoup between 5 per cent and 20 per cent of their losses, according to people familiar with the matter.4. Washington optimistic about western security pact The White House has expressed optimism that the US, UK and Australia will clear the main obstacle to their landmark Aukus security deal. US national security adviser Jake Sullivan said yesterday there had been progress in easing some technology export rules, creating a “pathway” for allies to build nuclear-powered submarines for Australia.5. FBI search Biden’s Delaware holiday home After a three-and-a-half hour search agents said “no documents with classified markings were found” at the property in Rehoboth, Delaware. The search is the latest development in a legal and political morass that has cast a long shadow over the White House as Biden gets ready to announce his bid for re-election in 2024.The day ahead Monetary policy The Bank of England and European Central Bank are expected to maintain a more aggressive policy approach than the Fed to stamping out inflation in the British and eurozone economies. Both banks are today expected to raise their policy rates by half a percentage point. Our live blog will be following the decisions.Earnings Tech results are set to dominate a busy day for company results. Apple, Google-owner Alphabet and Amazon all report earnings for the final quarter of last year. Pharmaceutical companies Eli Lilly, Merck and Bristol Myers Squibb also report. From the consumer sector Hershey, Estée Lauder and Starbucks release earnings and Rupert Murdoch’s News Corp also reports. Economic data New jobless claims, a proxy for lay-offs, are expected to rise for the week ending January 28 after falling to a historically low level of 186,000 the week before. Separately, economists forecast that factory orders increased by 2.2 per cent in December after declining by 1.8 per cent in November.Pope in Africa Pope Francis continues his trip to the continent, calling for peace and an end to “economic colonialism” at his first stop, the Democratic Republic of Congo. He will next visit South Sudan.What else we’re readingHow the US fell out of love with flying The aviation chaos that grounded thousands of flights during the US holiday season was the final straw for many travellers frustrated with problems across the industry. Are these disruptions a short-term consequence of the pandemic, or the culmination of long-term under-investment and shortcomings in regulatory scrutiny?

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New York property tycoon to give offices ‘back to the bank’ Scott Rechler, chief executive of property developer RXR, has concluded that in the era of remote working and rising interest rates it has become unprofitable to keep some of the New York properties his company owns. His views reflect a growing consensus that the world’s largest office market is heading for a calamitous period.Does Ukraine need western fighter jets? As soon as Ukraine extracted pledges of modern battle tanks from western allies, its military and political leaders turned their attention towards fighter jets. Until now, leading Nato powers have balked at providing fighter jets but in some capitals, those assessments are shifting.On the ground: The battle for Bakhmut is nearing a tipping point, reports Christopher Miller in Kyiv.‘Capture, who’s looking after the children?’ An FT drama starring Jodie Whittaker (Dr Who), Paul Ready (Motherland) and Shaniqua Okwok (It’s a Sin), looks at online harm, regulation and responsibility. The search for their missing son leads a mother and father to a tech company, and a digital gatekeeper who seems to have all the answers. Instagram founders launch Twitter rival Kevin Systrom and Mike Krieger, who founded Instagram and then sold it to Facebook for $1bn in 2012, have launched a new “text-based” news app called Artifact. They have declined to accept outside investment and have spent “single-digit millions” to build the platform which they believe can avoid so-called “filter bubbles” that have plagued existing social media platforms. Take a break from the newsFT Globetrotter is going down under! Stay tuned for the upcoming launch of FT Globetrotter’s guide to Melbourne. Whether you are a Melburnian or go there often for business or pleasure, we want to hear from you. Share your top tip on where to go to eat and drink, exercise, find great coffee, watch sport or enjoy the nearby great outdoors.

The city of Melbourne More

UK power supplier Centrica has apologised for the “deeply disturbing” behaviour of a third-party contractor alleged to have broken into vulnerable customers’ homes to install pre-pay energy meters on its behalf, and suspended the controversial practice of forced instalments.Chief executive Chris O’Shea said the owner of British Gas had immediately suspended work with Arvato after an undercover reporter from The Times witnessed the contractor’s agents breaking into the home of a single father of three young children to fit a pre-payment meter. The investigation, which also unearthed other evidence of forced instalments in the homes of highly vulnerable customers, has shone a further spotlight on the controversial practice of fitting pre-pay meters under court warrants. Ofgem rules stipulate suppliers cannot forcibly fit a pre-pay meter for people in “very vulnerable situations”.Citizens Advice, the consumer charity, has called for an immediate ban on the forced installations of such meters by all energy companies until new customer protections are introduced. Most customers pay for their energy after it has been used, commonly by direct debit, but consumer groups have detected a rise in suppliers forcing households on to more expensive pre-payment meters if they fall into arrears. Ofgem is investigating the practice, while business secretary Grant Shapps warned suppliers last month that forced instalments should only be a “last resort”.Shapps has summoned Centrica for a meeting with energy minister Graham Stuart following the publication of The Times’ investigation. Ofgem said it was launching an urgent investigation into Centrica following the “extremely serious” allegations and would not hesitate to take “firm enforcement action” against the company.Centrica said it had suspended forced installation until “at least” the end of the winter.Speaking on Radio 4’s Today programme on Thursday, O’Shea called the practices unearthed by the investigation “completely unacceptable” and “deeply disturbing”, adding that “there’s nothing that can be said to excuse” the actions reported The Times.Centrica had commissioned an independent report so it could get to the “bottom of what went wrong”, O’Shea said. The third-party contractor had “let us down”, O’Shea said, but he conceded that he was ultimately accountable.Simon Francis, co-ordinator of the End Fuel Poverty Coalition, a group of charities, local authorities and trade unions, said the government also needed to investigate the role of the courts in issuing warrants to energy suppliers. Government figures show more than 536,000 warrants were issued between July 2021 and the end of December 2022.A separate investigation by the i newspaper in December alleged that warrants were sometimes being signed off rapidly in large batches and that magistrates often had little oversight of customers’ vulnerability. “What we’re really concerned with is the role of the courts in all of this and that’s [outside] Ofgem’s remit,” said Francis. “That’s why we feel there needs to be something more comprehensive.”Gillian Cooper, head of energy policy at Citizens Advice, said it was “truly shocking to see the extent of bad practices amongst some energy suppliers”.“Our frontline advisers know only too well the desperate situations so many struggling customers have found themselves in,” she added. “Time and time again we have called for a ban on forced pre-payment meter installations until new protections for customers are brought in.”The investigation comes ahead of Centrica’s full-year results this month when it is expected to report a near-eightfold rise in earnings. Its gas production, energy trading and nuclear power divisions have benefited from soaring commodity prices in the wake of Russia’s assault on Ukraine.Arvato Financial Solutions said it acted “compliantly at all times in accordance with the regulatory requirements in the areas in which we are operationally active. In doing so, we respect and adhere to the regulations of Ofgem as well as other regulatory bodies.” But it added: “If there has been any verbal or any other type of misconduct by individual employees, we deeply regret it.” More

(Reuters) – Federal Reserve Chair Jerome Powell had a clear message on Wednesday: as “gratifying” as it is that inflation has begun to slow, the central bank is nowhere near to reversing course or declaring victory.”It’s going to take some time” for disinflation to spread through the economy, Powell said in a news conference following the Fed’s latest quarter-point interest rate increase. He said he expects a couple more rate hikes still to go, and, “given our outlook, I just I don’t see us cutting rates this year.” Investors ignored him, keeping bets on just one more rate hike ahead and piling further into bets that rates will be lower by year’s end than they are now.It’s not obvious which view will prove right: neither the Fed nor markets have a great predictive record since the central bank’s current round of rate hikes began last March. Markets have repeatedly had to scrap bets for a quick pivot, pushing those expectations out farther as the central bank charged ahead with the most aggressive policy tightening in 40 years. For their part, Fed policymakers each quarter through last year kept ratcheting up their own estimates for how high they’d push interest rates as inflation proved stronger and stickier than anticipated. Not once did they signal rates would get cut this year. How the current disconnect resolves will largely come down to whether inflation drops faster than the central bank expects, or labor markets soften further than it hopes. “The actual outcome is data dependent, and we won’t have the data to confirm or deny…until we are deeper into the first half of the year,” said Tim Duy, chief U.S. economist at SGH Macro Advisors.And as long as there’s that uncertainty, it is in Powell’s interest to try to keep financial markets from betting too hard on rate cuts that would loosen financial conditions, possibly undermining the Fed’s hard-won progress against inflation.Even simply acknowledging the possibility of a rate cut later in the year could undo some of the Fed’s work, forcing more Fed tightening and making it even harder to avoid a recession. Thus Powell’s repeated assertions about not cutting rates, and indeed needing to take them at least above 5% as policymakers forecast in December. “It is our judgment that we’re not yet in a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate,” Powell said. But so far, said Kroll Institute’s Global Chief Economist Megan Greene, “the markets aren’t buying what the Fed is peddling.”The central bank’s benchmark overnight lending rate is now 4.50%-4.75%. Traders of interest-rate futures are pricing in one more 25 basis point increase in March before the Fed pauses to assess how its run-up in interest rates from near zero one year ago is slowing the economy. Rate cuts, they expect, will start in September – a view Powell said Wednesday is driven by the expectation of fast-receding inflation. Either cutting in September or waiting until next year, would be in the historical range. Since the 1990s, the interlude between rate hikes and rate cuts has varied from as long as 18 months in 1997-1998 to as short as five months in 1995. GRAPHIC: Fed rate cuts: not so fast? (https://www.reuters.com/graphics/USA-FED/RATECUTS/klpygdgzqpg/chart.png) Inflation data is trending in the right way over the past three months. By the Fed’s preferred measure, inflation is now running at a 5.0% annual rate, still more than twice the central bank’s 2% goal, but down from a high of 7% last summer.Wage pressures are also easing, which could allow the Fed to reduce rates later this year as it tries to engineer an elusive ‘soft landing,’ where inflation comes down without severe harm to economic growth and employment.DON’T WANT TO REV THE ECONOMYThe Fed is also wary of going too easy on inflation and cutting rates too soon. Powell and others point to the last big inflation war the Fed fought, in the last 1970s and early 1980s, as a cautionary tale.”Investors are inviting him to be Arthur Burns, and he doesn’t want to accept that invitation,” Dreyfus and Mellon Chief Economist Vincent Reinhart said of Powell. It was on Fed Chair Burns’ watch, in the 1970s, that the Fed repeatedly raised rates and then cut them to fight rising unemployment, only for prices to explode again and force more rate hikes. His successor Paul Volcker ended up jacking rates to almost 20% to finally quash the inflation that Burns had let get out of hand. The Fed, Powell said Wednesday, cannot risk doing too little. “We have no incentive and no desire to overtighten, but if we feel like we’ve gone too far … if inflation is coming down faster than we expect, then we have tools that would work on that,” he said.Then there’s the thorny issue of financial conditions, a proxy for how easy it is to access credit and which the Fed watches closely to see how tight borrowing costs are in reality.Financial conditions began to ease following the central bank’s policy meeting last November and while Powell largely brushed off such concerns on Wednesday, the Fed can ill afford for them to ease further”This loosening of financial conditions is undoubtedly not what the Fed was aiming for, and we expect a cacophony of Fed speeches in the coming weeks will aim to reorient the Fed’s message,” said Gregory Daco, chief economist at EY Parthenon. More

Here are some of their proposals:PLATINUM COINSome commentators have said the U.S. Treasury could mint high-value platinum coins and deposit them in the Federal Reserve in exchange for cash, which would give the government more money to spend.Critics say that could disrupt financial markets, as investors might be reluctant to buy U.S. bonds not backed by congressional action, or call into question the soundness of a political system that would resort to such unorthodox tactics. Others say it could spur inflation or undermine the independence of the Fed. Furthermore, the law that authorized platinum coins envisioned them as commemorative items, not currency.Government officials including Treasury Secretary Janet Yellen have repeatedly dismissed the idea as a gimmick.14TH AMENDMENTSection Four of 14th Amendment to the U.S. Constitution, adopted after the 1861-1865 Civil War, states that the “validity of the public debt of the United States … shall not be questioned.” Historians say that aimed to ensure the federal government would not repudiate its debts, as some ex-Confederate states had done. Some experts have suggested that Biden could invoke this amendment to raise the debt ceiling on his own if Congress does not act. That would almost certainly lead to prolonged legal wrangling, which could unsettle financial markets for the reasons outlined above. BYPASS REPUBLICAN LEADERSHIPDemocrats and rank-and-file Republican allies in the House of Representatives could bypass McCarthy and force a vote on a “clean” debt ceiling increase, free of spending cuts or other conditions. Because Republicans hold a narrow 222-212 majority in the House, only six of them would have to break with their party and side with Democrats in order to get the 218 votes needed to pass legislation.This group could try to hijack an existing vote on another bill and substitute it with their preferred solution. Alternatively, they could round up 218 signatures for a “discharge petition” to bypass legislative hurdles. That takes time. Supporters must wait at least 30 days after they introduce their bill before they file their petition, and then must wait seven more legislative days after that. If McCarthy or gatekeepers on the House Rules Committee still oppose the measure, supporters can still call it up for a vote — but only on the second or fourth Monday of the month when the chamber is in session. That leaves only three possible dates for action in the first half of this year: March 27, May 22 and June 12.Discharge petitions have only succeeded twice in this century, in 2002 and 2015. HIGH INTEREST BONDSSome have suggested that the Treasury Department could sell bonds at higher interest rates than those that are dictated by market conditions. Under this scenario, Treasury could earn $38 billion by selling $35 billion worth of bonds at 5%, rather than 3.5%, and use the proceeds to retire more of its debt, giving it more space to operate under the existing debt limit.Analysts say this would leave Treasury on the hook for higher interest payments and unsettle the market for Treasury bonds, which serve as a bedrock for the global financial system. GET RID OF ITCongress could vote to abolish the debt ceiling entirely, which would eliminate the need to vote on the issue periodically but also erode Congress’s authority on fiscal matters. Yellen has endorsed the idea, but Biden has dismissed it as “irresponsible” and prominent liberal lawmakers like Senator Bernie Sanders have ruled it out. Attempts to abolish the debt ceiling have gotten no traction in Congress in recent years.Sources: Moody’s (NYSE:MCO) Analytics; Congressional Research Service More

It has been a data-rich end of January. Last week we got fourth-quarter US and German growth numbers, with more countries reporting output statistics this week. On Tuesday, the IMF updated its economic forecasts, and the US reported quarterly employment cost data. Yesterday, the eurozone published the latest inflation rates. The overall narrative taken from the IMF update goes roughly like this: growth will be worse this year before getting better again in advanced economies (in emerging and poor countries growth hit its low point in 2022 and is slowly accelerating). But 2023 won’t be as bad as we had feared. In return, growth will improve less in 2024 than previously thought. Among rich countries, the US will pick up speed sooner than Europe, where a sharp slowdown is predicted this year (and an outright contraction in the UK). Inflation is coming down, though somewhat slowly. Some other new statistics would seem to support the same reading. The US recorded a solid 2.9 per cent annualised growth rate in the fourth quarter; Germany suffered a contraction of 0.2 per cent, or 0.8 on an annualised basis.But there are many things that worry me that the shared narrative ignores. The US GDP number is not such good news when you look under the bonnet. Big contributions to the fourth-quarter growth rate came from companies building up inventories fast (that is to say, not selling all their output) and shrinking imports. Those are not the characteristics of a booming domestic economy. And the IMF does not highlight anywhere near enough just how badly the past year has thrown advanced economies off course. The chart below, from the blog of its chief economist Pierre-Olivier Gourinchas, illustrates how the fund’s output forecast for 2024 changed from the eve of the pandemic to January 2022, and how the same forecast changed from January 2022 to today.

A year ago, advanced economies were — miraculously — set to achieve greater production by 2024 than if the pandemic had not occurred. This is what some of us insisted we should celebrate as a triumph of crisis policy. Only a year later, they are set to fall significantly behind the pre-pandemic trend, and that is after the fund’s upgrade since its October forecasts. What is behind this deterioration? There are two obvious candidates. One is Russian president Vladimir Putin’s weaponisation of energy (and other commodity) prices. The other is the decision by central banks to reduce their economies’ rate of output and jobs growth. In other words, is the roughly 3 per cent shortfall one of supply or demand? It is no doubt a bit of both — but an important indication of which prevails is surely a question of how inflation is developing — rising inflation if the growth slowdown is driven by supply and falling if by demand.My colleague Martin Wolf’s column on the IMF forecasts points out the fund’s judgment that “underlying (core) inflation has not yet peaked in most economies and remains well above pre-pandemic levels”. But for the most significant economies, this is just not true. In the US, price growth for non-food and energy personal consumption expenditures peaked last February. In the eurozone, the consumer price level excluding food and energy is falling, and is now at its lowest since September (the same is true for the overall price level). US labour cost growth fell for the third quarter running, coming in at a quarterly increase of 1 per cent (or 4 per cent annualised) at the end of 2022. That is approaching the range consistent with 2 per cent inflation, especially if the strong labour market has led to job reallocation that will, in time, boost productivity. All this suggests to me that if our economies weaken in the coming year, that is the work of our own central banks more than Putin’s machinations.In defiance of — or rather by passing over — such observations, the IMF holds on to the monetary dominance it pushed at its annual meetings last October. It says “the priority remains achieving sustained disinflation . . . Raising real policy rates and keeping them above their neutral levels until underlying inflation is clearly declining.” Wiser advice would be to stop tightening as soon as there is good reason to think inflation will abate by itself. As Free Lunch readers know, I have argued this for a long time (and I note some hawks are beginning to do so who, until very recently, chided central banks for not tightening more). For now, central banks seem to be following the fund’s advice, so I can only hope that it is right and I am wrong.There are tax credits and then there are tax creditsI got a lot of reader reaction to my column this week on why the EU should welcome a green subsidy race. Many of those readers also wanted to correct me on one point: my warning that tax credits “only help companies in a position to pay tax, which favours established players over newcomers”. One of the blessings of writing for the FT is to have highly informed and intelligent readers, who in the case at hand have read the Inflation Reduction Act better than me.So I am happy to stand corrected and relay that the IRA has an option for “direct payment”, which I understand as a refundable tax credit you can pocket even if you don’t owe any tax. This is mostly for non-profits and tax-exempt entities, but seems to be available to for-profit corporations for some of the green industrial activities that the act promotes. In addition, the IRA allows for a (one-off) sale or transfer of unused tax credits. And many readers have also pointed out to me that the US has a market for “tax equity”, in which financial investors in a position to pay tax join forces with companies keen to invest in the targeted green industrial projects. With the right corporate structures, the tax credit can then be applied to the investor’s tax liability rather than be “lost”.I would note that tax equity removes some of the simplicity and automaticity that is so appealing about tax credits, and the financial engineering obviously comes at some cost which means less than 100 per cent of the value of the credits can be realised in practice. And since the EU has nothing like the US’s federal taxes, such a practice can’t be as useful in Europe as in the US. My comment on tax credits referred as much to EU policy challenges as to US practice, but clearly, anything that works in the latter should be considered by the former. Making tax credits refundable, at least, seems essential — and plans in the works at the European Commission (which my eminent Brussels colleagues have sleuthed out) seem to go in that direction. There are taxes and then there are taxesI got a lot of reader emails about my newsletter on Norway’s exodus of billionaires, too. Not so much from the aggrieved billionaires themselves, but from people who thought I had missed out other important tax motivations for the migration of the very wealthy to Switzerland. On top of the tax changes I mentioned in the piece, Norway’s centre-left government has increased the tax rate on dividends (which hurts in particular the extremely few business owners who have no liquid money and must take cash out of their companies to service their newly higher net wealth tax). The maximum effective marginal dividend tax rate (including corporation tax on distributed profits) has gone up to 51.5 per cent for this year from 46.7 per cent in 2021. Note that this is still below the 55.8 maximum effective rate for salaried income (including employer payroll tax).And, “worst” of all, a loophole that could eliminate capital gains tax by spending five years abroad was removed late last year — a move that had been tabled in parliament months earlier. It worked like this: capital income is largely only taxed when realised by an individual in Norway, so you can postpone taxation as long as you keep investments inside a corporate wrapper. Move to a country that does not tax capital gains, largely the case for Switzerland, and you can enjoy your gains, with any deferred tax liability to Norway expiring after five years of Alpine residence. But not anymore. If this was the main motivation for the exodus of the super-rich, it should presumably now dry up. Free Lunch will try to keep half an eye on the world’s least important migration crisis and report back.Other readablesIn the New Statesman, Anoosh Chakelian writes about the loss of public spaces around Britain — “‘places to meet’ are the top thing people in 225 ‘left behind’ neighbourhoods . . . say they lack”.Sarah O’Connor notes that the young who graduated into the pandemic lockdowns have fared much better in the job market than we might have feared — at least, I would add, while governments were supporting a strong recovery.The European Commission is consulting on how to redesign its electricity market. Two Twitter threads by Georg Zachmann and Conall Heussaff, both from Bruegel, summarise (and criticise) the consultation document and link to relevant proposals and analyses.Numbers newsA new study of the UK benefits system, for the Deaton Review of Inequalities, shows that while it may have succeeded in bringing more people into work, it traps its beneficiaries in part-time low-wage work, effectively promoting poor “mini-jobs” with little prospect for career progression. More