Economy

OTTAWA (Reuters) -Canada’s government on Thursday set out billions in new spending to support low income workers and clean energy technologies among other measures, dipping into a tax windfall to provide relief to those hit hardest by fast-rising prices.Analysts said the new spending was modest enough to avoid dramatically altering the inflationary outlook, though it fell short of the fiscal restraint needed at time when prices are rising faster than they have in decades. Promising the government would not to make the central bank’s job harder, Finance Minister Chrystia Freeland outlined C$11.3 billion ($8.2 billion) in new spending this year and next, adding to C$11.6 billion of measures laid out since the April 2022 budget. “We know how important it is right now … not to pour fuel on the flames of inflation,” Finance Minister Chrystia Freeland told reporters before presenting an update to the April figures. “We don’t want to put the Bank of Canada in a position where it has to raise rates higher and keep them there for longer.”The Bank of Canada is in the midst of one of its sharpest tightening campaigns ever, as it looks to slow prices rising at a pace not seen in four decades. Inflation has edged down over the last three months to 6.9% in September from 8.1% in June.Freeland said the update struck a balance between being “fiscally responsible” and providing compassion to those hardest hit by fast rising prices.The bulk of the new spending will go to direct supports for low-income workers, eliminating interest on federal student loans, tax credits for clean technologies, and to fund previously announced measures that have not yet been budgeted. Analysts said that while the dollar figures were relatively modest on their own, they build on perks the federal and provincial governments have already rolled out to help Canadians deal with rising prices.”In isolation, this update … does deliver restraint insofar as they haven’t unleashed massive new spending that’s going to unleash big inflationary pressures. But you can’t really look at it in isolation,” said Rebekah Young, an economist at Scotiabank.”Overall, it’s not really restraint, which is the message that the minister would like out there. They do continue to spend modest amounts and strong revenues have allowed that.”WEAKER GROWTHOthers questioned why the government was spending its revenue windfall rather than using it to pay down debt.That windfall “should have gone towards the deficit reduction in my view and it didn’t,” said Robert Asselin, senior vice president of policy at the Business Council of Canada. “I see a mismatch between the rhetoric and the actions here.”Conservative leader Pierre Poilievre said the new spending would simply add to the inflation problem: “The more the prime minister spends, the more Canadians pay.”The fiscal update showed “significantly weaker growth” next year that previous forecast, but the baseline numbers did not foresee a recession. The downside scenario, in which inflation is more entrenched, showed a contraction starting in early 2023.Prime Minister Justin Trudeau’s Liberal-led government also forecast a balanced budget in 2027/28, in what would be the first surplus on its books in seven years.It also cut its deficit forecast for this fiscal year by almost a third to C$36.4 billion from the C$52.8 billion deficit forecast in April. This as its bottom line was bolstered by C$40.1 billion in added revenues, mostly on higher tax revenues.The update also included a tax on corporate stock buybacks similar to a measure introduced by United States.The fiscal update document forecast Canada’s debt-to-GDP ratio would be 42.3% in 2022/23, versus 45.1% forecast in April, falling to 37.3% in 2027/28. More

Andrew Bailey: ‘We think [the] bank rate will have to go up by less than currently priced into financial markets’ © FT Montage/PAThe Bank of England painted two pictures of the outlook for the UK economy on Thursday. Both scenarios were bleak. Whatever happened, said the central bank, the British economy was slipping into a recession that would last at least all of next year. Unlike the Federal Reserve, which on Wednesday was still hoping for a “soft landing” for the US economy, the BoE’s talk was of falling gross domestic product and a “very challenging” outlook. Andrew Bailey, BoE governor, said this was inevitable because there were “important differences between what the UK and Europe were facing in terms of shocks and what the US is experiencing”. Europe, unlike the US, has been grappling with soaring gas prices following Russia’s invasion of Ukraine.The BoE’s grim predictions did not end with recession. Inflation would stay above 10 per cent for the next six months, and above 5 per cent for the whole of 2023. Unemployment, currently at a 50-year low of 3.5 per cent, would end next year above 4 per cent. If all of this pain was common to both of the BoE’s scenarios, the differences between them were key to the central bank’s messaging. In the first BoE scenario — normally considered its headline forecast — predictions were based on the assumption that financial market expectations for future interest rates would involve them peaking at 5.25 per cent next year. Were rates to top out at this level, the BoE Monetary Policy Committee thought it most likely the UK would have to endure eight quarters of economic contraction: the longest recession since the second world war. Unemployment would rise to 6.4 per cent. This economic pain would weigh on inflation, sending it to down to zero by late 2025.But with the BoE having an inflation target of 2 per cent, Bailey was clear this scenario suggested markets risked getting their bets wrong on future monetary policy. “We think [the] bank rate will have to go up by less than currently priced into financial markets,” said Bailey.The BoE’s alternative scenario — which is normally buried in the central bank’s forecasting documents — that interest rates stay constant at the current level of 3 per cent was given much more prominence in presentations by Bailey and his team. Under this prediction, output would still shrink, but by only half as much as in the first scenario, resulting in a mild recession by historical standards. Inflation would fall to 2.2 per cent in two years’ time, before slipping below the BoE’s target. Unemployment would rise, but only to 5.1 per cent. Many economists said the BoE’s alternative scenario was a clear signal by the central bank that it was close to being done with interest rate rises, now it had increased them from 0.1 per cent a year ago to 3 per cent, the highest level since 2008. Kallum Pickering, economist at Berenberg, said the recessionary overkill in the BoE’s first scenario meant the central bank “may need to do much, much less than the market expects in terms of further rate hikes to return inflation to its 2 per cent target”. When asked which of its two scenarios the BoE thought was most likely to happen, Bailey would not be drawn. He did not want to pin himself down to a specific view of future interest rates, saying: “Where the truth is between the two, we’re not giving guidance on that.” His main reason for refusing to be more specific is the possibility that inflation proves more entrenched than the BoE currently thinks. Bailey said that while no prediction would ever be exactly right, the main risk was that inflation would still be higher than the central forecasts in both BoE scenarios. One key danger for the BoE is that wage growth could easily stay higher than it would like, with companies feeling able to raise prices without losing too much business. Ruth Gregory, economist at Capital Economics, said the BoE’s many revisions upward for market expectations on future interest rates over the past year suggested inflation might prove “stickier” than it hoped.By the end of the day, markets had taken scant notice of the BoE’s dovish scenario. Before the BoE’s announcement at noon, markets were pricing in interest rates peaking at 4.75 per cent next year. By the end of the day, they were betting they would top out at 4.72 per cent next September.Market expectations for future monetary policy will move around, and Bailey was keen to highlight what would guide BoE decisions in the weeks ahead. Most important, he said, would be the evolution of economic data, particularly on wages and firms’ pricing strategies. If these soften, the BoE would feel less need to raise interest rates further. The path of wholesale energy prices would also be crucial, and the BoE will be hoping that these moderate further, having more than halved since late August. The other crucial factor will be chancellor Jeremy Hunt’s autumn statement on November 17. If the government proceeds with immediate public spending cuts and tax increases to fill a gaping hole in the public finances, it will depress the economy further and ease the pressure on the BoE to raise interest rates. Ben Broadbent, BoE deputy governor, suggested any fiscal action by the government would need to happen “in the relatively near term” to influence the central bank’s interest rate decisions. More

The European Central Bank has criticised Spain’s proposed windfall tax on its banks, warning it could damage the capital position of lenders, disrupt monetary policy and prove difficult to enforce.Spain’s government should carry out an impact assessment on the bank tax and clarify several areas that are unclear, the ECB said in a non-binding legal opinion that raised similar objections to those it has issued about comparable moves in other EU countries.Pedro Sánchez’s Socialist-led coalition government wants to use the temporary measure to raise a total of €3bn from lenders that would be spent on cushioning the impact of the surge in energy prices triggered by Russia’s invasion of Ukraine.Several other EU countries have also announced extra taxes on lenders this year to cover the cost of Europe’s energy crisis. Hungary plans to impose an extra levy of 10 per cent on banks’ domestic revenues this year and 8 per cent next year, while the Czech Republic plans a 60 per cent tax on any “excess profits” by banks, defined as more than a fifth above the average over the past four years. But the ECB warned Spain’s planned 4.8 per cent tax, charged on banks’ income from interest and commissions for two years, could be levied on an institution even if it was lossmaking, as it does not take into account provisions for bad loans or operational expenses.“If the ability of credit institutions to attain adequate capital positions is damaged, this could endanger a smooth bank-based transmission of monetary policy measures to the wider economy,” the ECB said in an opinion signed by its president Christine Lagarde, and dated November 2. The central bank recommended Madrid carry out “a thorough analysis of potential negative consequences for the banking sector” to detail its impact on profitability, financial stability, competition and resilience of banks as well as on the supply of credit.Spain’s government — whose tax will hit roughly 10 lenders, including the country’s two largest banks, Santander and BBVA — has argued rising interest rates are yielding “extraordinary” profits for the sector.The parliament is likely introduce the tax, due to cover revenues made in 2023 and 2024, despite the ECB’s concern. One Spanish government official stressed the ECB’s opinion was non-binding while noting the central bank did not come out firmly against the proposal.The official said the issues where the ECB called for clarification or more analysis had been taken into account by the government as it developed the windfall tax proposal, which was announced in July.Santander, BBVA and CaixaBank, Spain’s biggest lenders, all declined to comment, as did the main trade association for the country’s banks.Commercial lenders have said the fact the government wants to stop them passing the cost of the tax on to clients is incompatible with EU rules and potentially destabilising.The ECB said this aspect of the proposal “might generate uncertainty, as well as related operational and reputational risks for those institutions”. It added: “The ECB generally expects credit institutions, in accordance with international best practices, to consider and reflect in loan pricing all relevant costs, including tax considerations, when relevant.”It also raised doubts about whether this could even be enforced, saying: “Considering all the different circumstances that may cause an increase in prices in the current context of interest rate rises, inflation or deteriorating risk premia, it appears to be difficult to differentiate whether the temporary levy would actually be passed on to clients or not.”Calling for Madrid to clarify a “discrepancy” in the draft law on exactly what part of a bank’s income the tax would be levied on, the ECB raised concern over whether its reference to Banco de Espana’s duty to comply would “amount to the conferral of any new task” on the national central bank. The ECB’s non-binding opinions have been ignored by the Spanish government before. This year Madrid pressed ahead with imposing a €1,000 ceiling on cash payments that can be made involving businesses, a measure to curb black market activity, despite the ECB saying in March it was “disproportionate”. More

Banks and building societies will cut the costs of UK fixed-rate mortgages after financial markets pared back their expectations of future rises in the Bank of England’s main interest rate, brokers and lenders have predicted. Mortgage brokers said the current high costs of fixed rates were set when markets had expected aggressive future rises in the base rate to counter soaring inflation, but those expectations had already subsided before the BoE signalled a more dovish outlook for interest rates in the wake of its latest base rate rise on Thursday. Simon Gammon, managing partner at mortgage broker Knight Frank Finance, said: “We are expecting fixed rates to continue to fall back slightly — they are still overpriced because lenders don’t have an appetite for a lot of fixed-term lending right now, but with a period of stability, you can expect that to change.” David Hollingworth, director at L&C Mortgages, said: “Lenders could see their way to dropping fixed rates back a little bit. There’s more scope for them to do that.”The MPC on Thursday raised base rates sharply by 0.75 percentage points to 3 per cent, but BoE governor Andrew Bailey suggested markets had overcooked their predictions of future rises, which influence the pricing of home loans, and said lenders needed to reflect this in their mortgage pricing. “[The Bank rate] will have to go up by less than currently priced into financial markets,” Bailey said in comments after the announcement. “That is important because, for instance, it means that the rates on new fixed-term mortgages should not need to rise as they have done.” Lenders said fixed-rate mortgage costs would come down, but warned it would take time. One senior banking executive said: “I think the most likely thing is that we see longer-term interest rates moderate. In time it will hopefully bring mortgage interest rates down a bit — but it will take a while for it to filter through and for expectations to shift.”

Another executive at a major UK lender suggested fixed mortgage rates of 1 or 2 per cent, which they were last year, were a thing of the past. “We expect in a few weeks and months to see fixed rates start to drop but almost certainly consumers will be getting rates higher than those they locked in at previously,” the person saidLenders’ funding costs for their fixed-term mortgages are influenced by swap rates, which rocketed on September 23, when the “mini” Budget of Liz Truss’s government spooked markets and pushed up government borrowing rates. Two-year swap rates have subsequently fallen below their 4.5 per cent rate on the eve of the “mini” Budget, as markets have welcomed the decision of new prime minister Rishi Sunak and chancellor Jeremy Hunt to reverse most of its measures. But while swap rates and interest rate expectations have calmed, mortgage lenders have so far made only small reductions in their headline rates. “People who are now in the process of getting new fixed-rate mortgages or rolling over should obviously get those terms,” Bailey said. In July, the BoE said that 40 per cent of fixed-rate mortgages would expire in 2022 or 2023.Two-year fixed mortgages peaked at an average 6.65 per cent on October 20, according to finance site Moneyfacts, compared with 4.74 per cent before the September fiscal announcement. The average rate for a two-year fixed deal had crept down to 6.46 per cent on Thursday.Average five-year fixed rates stood at 4.75 per cent on the eve of the “mini” Budget. They rose to 6.51 per cent on October 20 and fell back to 6.3 per cent by Thursday. While those on a fixed-rate mortgage are protected from fluctuations in the base rate for the term of their fix, those on variable rates including tracker, discounted variable or standard variable rates, face a more direct effect from Thursday’s rate rise, which was the biggest in 30 years. Lenders’ standard variable rates, which tend to reflect changes in the BoE base rate, have risen to 6.49 per cent from a typical 3.59 per cent in December 2021, when the BoE embarked on a series of rate rises, according to L&C Mortgages. If lenders eventually pass on Thursday’s rise to their standard variable-rate borrowers, it would mean an extra £5,076 in extra annual mortgage payments for someone with a £250,000 mortgage compared with early December last year, the broker calculated. More

US investors: think you have it bad? Imagine trying to trade British or Canadian or Australian markets right now. It’s a fairly common argument that the Federal Reserve is exporting inflation with its rate increases. Higher rates mean a stronger dollar, and other major economies aren’t in a great spot to have significantly weaker currencies amid a food- and energy-price shock. (The shock is especially severe outside the US, for various reasons.)That leaves other global central banks with a dilemma. Do they also need to hike rates until something breaks to control inflation that’s partly exported? TS Lombard’s Dario Perkins lays out the challenges in a Thursday note: If the Fed continues to raise interest rates into 2023, central banks in other jurisdictions will face an increasingly difficult dilemma. They can either abandon their efforts to match US monetary policy, which would risk a more persistent inflation problem, or continue to raise interest rates until something in their domestic economies/financial sectors eventually “breaks”. Some economies are poorly placed to handle these monetary tensions, especially those with large current account deficits, a heavy reliance on external funding, large/overleveraged financial sectors and domestic property bubbles. Central banks in these jurisdictions — which include Canada, Australia, the UK, New Zealand, the Nordics and a portion of the euro area — seem to be entering a “lose-lose” situation, with currencies likely to remain under pressure irrespective of their domestic policy choices. At this point, only a genuine Fed pivot can save them.A “genuine Fed pivot”, eh? Bit of a problem there, as Fed Chair Jay Powell said during Wednesday’s presser there’s “some ways to go”, and that rates may end up at a higher level than officials had previously forecast. The last round of dots had rates rising as high as 4.9 per cent next year. The futures market has ratcheted up projections further, with the futures-implied rate up to 5.2 per cent by June 2023, the highest so far this cycle:

© Bloomberg

To be sure, it’s possible the dollar has overrun a bit. Financial markets are forward-looking, after all, so a slowdown in the Fed’s rate-hike pace could still help countries that import food and energy. But just because the worst is over doesn’t mean global economies won’t still face stress. Perkins writes that “Canada, Australia, the UK, New Zealand, the Nordics and a portion of the euro area” could face especially severe pressure because of “current account deficits, a heavy reliance on external funding, large/overleveraged financial sectors and domestic property bubbles.” He continues: Beyond the relative safety of US-denominated assets — since further dollar strength seems inevitable in the absence of a Fed pivot — there are few parts of the world that are likely to provide “safe-haven status”. Investors should probably favour the currencies of economies with strong trade positions, modest financial imbalances, and central banks that can defend their exchange rates without driving those economies into a recessionary death spiral.Outside the US, some safer destinations for cash include Switzerland and Japan. And even in the US, it will be . . . interesting to see how the economy fares with a 5-per-cent-plus fed funds rate. The view from the central bank appears to be that businesses have termed out their debt and consumers have been holding on to cash, so rates can grind higher with minimal pain. Still, investment-grade bonds have posted a nearly 20-per-cent loss this year, investors are indeed withdrawing cash from open-ended funds, and analysts are starting to ask questions about how managers are marking their portfolios to market. The QQQs are down more than 30 per cent this year. And if Wednesday’s presser was any indication, things could get uglier. More

Another week, another wave of Elon Musk headlines. One of the most interesting of these to emerge recently, however, does not involve Twitter, the social media platform that Musk now owns. Instead, it relates to the revelations that executives at Tesla, the electric vehicle manufacturer that Musk leads, considered taking a stake last year in Glencore, the commodities trader. The deal was never concluded. But the fact these discussions even occurred underscores a crucial point: Musk is increasingly nervous about supply chain risks around battery metals.Tesla relies on minerals such as cobalt and lithium to make cars, and China controls around 80 per cent of global processing of these. Consequently Musk wants to diversify his supply, in case of a future China export ban. To put it in engineering terms, Tesla is confronting a “single point of failure” problem. And it is not alone. When future corporate historians look back at 2022, they may frame it as the year when executives became obsessed with Spof. Consider this, if you like, the natural corollary of another four-letter acronym that crept into the C-suite over the past decade: Vuca, short for “volatility, uncertainty, complexity and ambiguity”, a phrase coined by the US military to describe an increasingly unstable, terrifying world. To be fair, worrying about points of failure is not entirely new. Engineers have always fretted about Spofs in industrial machines. So have military leaders who handle logistics. And financial regulators confronted the issue during the 2008 financial crisis, not just inside separate banks, but across the entire banking ecosystem.For an example, look at AIG Financial Products. Before 2008 numerous banks used derivatives to hedge their credit portfolios with AIGFP, which seemed like a sensible risk mitigation strategy when viewed from the perspective of an individual bank. But when the 2008 crisis erupted, it became clear that so many companies had hedged with AIGFP, in exactly the same way, that it had created new concentrations of risk — or a form of Spof. The key issue, as Andrew Haldane, then head of financial stability at the Bank of England, noted, is that when networks lack diversity they become vulnerable to a single shock. This was a bruising experience for financial regulators. But what is striking, in retrospect, is that the non-financial world seems to have learnt so little from it.Until Vladimir Putin’s invasion of Ukraine in February, for example, there was only limited public debate among German industrial giants about the folly of their collective reliance on Russian gas. A decade ago, there was equally little discussion among American tech companies about their dependence on Taiwan for the supply of advanced computer chips. It was a stunning collective blind spot.Similarly, prior to the Covid-19 pandemic, few western corporate leaders ever talked about the degree to which their healthcare systems depended on Chinese manufacturing for key medical supplies. The fact that the world’s shipping systems were so heavily reliant on the Suez Canal remaining open was also widely overlooked — until a ship got stuck in this choke point in 2021. Or, to cite yet another example, there has been remarkably little policy debate in recent years about the degree to which countries from Greece to Ethiopia rely on a tiny, concentrated collection of underwater cables for their internet connections. This is unnerving, as the mysterious recent attack on the Baltic underwater Nord Stream pipelines shows.A belated rethink is now under way in corporate boardrooms, since it has become clear that the trifecta of protectionism, war and climate change can threaten supply chains. The word “diversification” is suddenly all the rage among risk managers, both on a micro level (with Tesla seeking new sources of lithium, for instance) and a macro level (including Washington’s moves to incentivise more varied supplies of chips). Another word, “redundancies”, is also in vogue, as companies try to build spare capacity to support diversification. And a third concept that is being embraced is fragmentation, as championed by the writer Nassim Nicholas Taleb in his book Antifragile.As Taleb notes, the problem with operating systems that are tightly interconnected, in the name of streamlined efficiency, is that these create contagion in a crisis. Electricity grids are a case in point. Thus one way to build resilience is to create systems that can fragment into separate parts if disaster hits. It would be nice to think that these shifting preoccupations will create a more resilient world. It would be even nicer to hope this will occur before the geopolitical shocks worsen (particularly given that figures like Ray Dalio, the hedge fund luminary, are now loudly warning that we are sliding towards world war).But this shift has one obvious big downside: executives’ desire to embrace redundancy, fragmentation and diversification will invariably create new costs. In other words, anyone who thinks the current wave of global inflation can just be blamed on central banks needs to think hard about Vuca and Spof. And then plug them into their valuation models — and not just for electric cars. [email protected] More

Unit labor costs increased 3.5% for the July-to-September period, below the 4% Dow Jones estimate.
The September trade deficit widened to $73.3 billion, $1 billion more than expected and up from August’s $65.7 billion.
Weekly unemployment insurance claims totaled 217,000 for the week ended Oct. 29, down 1,000 from the previous period.

The cost of labor rose less than expected, but low productivity helped keep the pressure on inflation in the third quarter, according to Labor Department data released Thursday.
Unit labor costs, a measure of productivity against compensation, increased 3.5% for the July-to-September period, below the 4% Dow Jones estimate and down from 8.9% in the second quarter.

However, productivity rose at just a 0.3% annualized rate, below the 0.4% estimate — a reflection of upward price pressures that have kept inflation running around 40-year highs.
In an effort to bring down soaring prices, the Federal Reserve on Wednesday enacted its sixth interest rate increase of the year, bringing its benchmark short-term borrowing rate to a target range of 3.75%-4%. Fed Chair Jerome Powell said he doesn’t think wage pressures have been a major contributor to inflation, though he added that the current pace is not consistent with the Fed’s 2% inflation goal.
“In such a high inflation environment, productivity growth could play a critical role in alleviating cost pressures and shielding companies against a rising wage bill,” said Lydia Boussour, senior economist at EY Parthenon. “But today’s report indicate businesses still can’t count on productivity gains to mitigate the effects of high inflation on their bottom line.”
In other economic news, the September trade deficit widened to $73.3 billion. That’s $1 billion more than expected and up from August’s $65.7 billion.
An unexpected increase in exports helped fuel a 2.6% gain in gross domestic product for the third quarter. September’s numbers, though, indicate that average exports fell $300 million, though they are up 20.2% year to date.

Labor market data released Thursday showed that the jobs picture hasn’t changed much.
Weekly unemployment insurance claims totaled 217,000 for the week ended Oct. 29, lower by 1,000 from the previous period and slightly below the 220,000 estimate. Continuing claims, which run a week behind the headline number, increased 47,000 to 1.485 million, the Labor Department reported.
At the same time, outplacement firm Challenger, Gray & Christmas reported that announced layoffs for October jumped 13% to the highest monthly rate since February 2021.
The jobs data come the day before the Labor Department releases its nonfarm payrolls report for October, which is expected to show a gain of 205,000.

WATCH LIVEWATCH IN THE APP More

Christine Lagarde has indicated a recession in the eurozone would not be enough to stop the European Central Bank raising rates further, underlining policymakers’ determination to quash inflation despite the risks to growth. Lagarde said in Latvia on Thursday that a “mild recession” in the eurozone would not be enough to “tame inflation” on its own. A recession was not yet her baseline scenario for the 19-country single currency bloc, but if it happened it would not be sufficient for the ECB to “just let it roll out” to bring inflation down to its 2 per cent target.The hawkish comments by the ECB president follow remarks after the central bank’s policy vote last week, which investors initially interpreted as a signal that policymakers could soon stop raising rates due to growing recession fears.They come hours after the US Federal Reserve dashed market expectations that it would soon pivot towards a less aggressive monetary policy stance. Both central banks raised rates by 75 basis points at their previous policy meetings. While the ECB and the Fed are expected to slow the pace of rate rises, both central banks have signalled they may lift rates higher than investors anticipated. The ECB has increased its deposit rate from minus 0.5 per cent to 1.5 per cent in the past four months and is expected to announce another rise to at least 2 per cent in December to tackle inflation, which hit a new eurozone record high of 10.7 per cent in October.The debate between ECB rate-setters is intensifying ahead of December’s meeting. Some are pushing for it to maintain the pace of rate rises to ensure inflation does not spiral out of control, while others warn it risks overshooting the amount of monetary tightening needed.Fabio Panetta, an ECB executive board member, warned in a speech on Thursday: “When calibrating our stance, we need to pay close attention to ensuring that we do not amplify the risk of a protracted recession or trigger market dislocation.” He said residential property markets and non-bank financial institutions were among those areas “vulnerable to adverse loops, with falling prices and rising rates feeding into higher debt refinancing costs, especially as falling real incomes make those costs less affordable”.The euro fell 0.8 per cent to $0.974 against the dollar on Thursday while German 10-year bond yields rose 11bp to 2.25 per cent. A weaker euro increases inflation in the eurozone by pushing up the price of imports. Lagarde said the ECB would be “influenced by the consequences” of the Fed’s action, but it did not need to “progress at the same pace or under the same diagnosis of our economies”.The ECB is seen as unlikely to raise rates as high as the Fed, which is now expected to raise them as high as 5 per cent next year.Eurozone inflation has been higher than in the US for several months, however. Piet Haines Christiansen, chief strategist at Danske Bank, said higher energy prices in the eurozone meant the ECB was likely to “have a much harder time tackling this than the Fed”.

Lagarde said the US economy had much stronger demand and an “extremely tight labour market” compared with the eurozone, where there is one unemployed person for every 0.3 job vacancies, unlike the US that has double the number of vacancies than jobless people.Eurozone unemployment continued to fall in September, dropping below 11mn people for the first time and taking the region’s jobless rate to a new low of 6.6 per cent, according to data published by the European Commission’s statistics arm on Thursday.The euro area economy has been more resilient than expected — growing 0.2 per cent between the second and third quarters — despite an energy crisis triggered by a sharp drop in Russian gas supplies following Moscow’s invasion of Ukraine.Norway’s central bank, however, said there were signs of an economic slowdown and a potential easing of inflationary pressure due to falling energy and freight prices as it eased the pace of its interest rate increases to 0.25 percentage points on Thursday — becoming the latest to do so after Australia and Canada.Additional reporting by Richard Milne in Oslo More