Economy

Sweden’s Riksbank unveiled its biggest interest rate rise in three decades on Tuesday, kicking off a week in which central banks round the world are expected to take similar action.The bank raised interest rates by 1 percentage point to 1.75 per cent as it sounded the alarm over sky-high inflation.The US Federal Reserve, Swiss National Bank, Bank of England and Norges Bank are all expected to follow suit in the coming two days with rate increases of 0.5 to 0.75 percentage points as central banks fight to bring inflation under control.Sweden’s central bank was one of the last to raise rates this year, opting to lift them from zero in April after years of lower inflation than its 2 per cent target. In August, the inflation rate stood at 9 per cent, the highest in Sweden since 1991.The 1 percentage point rise is the biggest since the country’s inflation-targeting regime was introduced in 1993, and is the joint highest this year by a major western central bank after the Bank of Canada made a similar increase in July.“Inflation is too high. It is undermining households’ purchasing power and making it more difficult for both companies and households to plan their finances. Monetary policy now needs to be tightened further to bring inflation back to the target,” the Riksbank said in a statement on Tuesday.The Swedish central bank indicated it would increase interest rates by a further 0.5 percentage points in November, and 0.25 points in February but then possibly stop.Torbjörn Isaksson, chief analyst at bank Nordea, called the increase “historic” and added: “The Riksbank is far behind the curve and is now trying to catch up. Monetary policy is indeed front-loaded. The bank will do what it takes to bring down inflation, even if it will lead to a recession.The Riksbank has struggled for more than a decade with its inflation target. It was one of the few western central banks to raise interest rates in 2010-11 after the global financial crisis, in what some economists dubbed “sadomonetarism”. It was forced to cut them soon afterwards.It then took its main policy below zero in 2015 and kept rates negative for five years as it worried about inflation remaining stubbornly below its target.Now, it is facing the same dilemma as nearly all central banks: how to curb surging inflation without harming the economy. Sweden’s households are some of the most indebted in the world and most have floating mortgage rates, leading some Riksbank officials to warn of pain for consumers in the months to come.“Rising prices and higher interest costs are being felt by households and companies, and many households will have significantly higher living costs,” the Riksbank said on Tuesday. “However, it would be even more painful for households and the Swedish economy in general if inflation remained at the current high levels. By raising the policy rate more now, the risk of high inflation in the longer term is reduced, and thereby the need for greater monetary policy tightening further ahead.”Economists expect the US Federal Reserve to raise rates by 75 basis points on Wednesday while the Swiss, British and Norwegian central banks are all forecast to raise by 50bp on Thursday. More

Ecuador announced on Monday night that it has reached a debt relief restructuring agreement with Chinese banks worth $1.4bn until 2025, as Beijing increasingly offers bailouts to countries at risk of financial crises.The government of centre-right president Guillermo Lasso said it had reached agreements with the China Development Bank and the Export-Import Bank of China (Eximbank) worth $1.4bn and $1.8bn, respectively. The deals will extend the loans’ maturity and reduce interest rates and amortisation.“As a result of these agreements, the maturities are extended to 2027 for China Development Bank and 2032 for Eximbank, allowing the cash flow relief to support government priorities,” said the Ecuador presidency.The South American nation’s government had been seeking since February to restructure its debt with China, which has been its most important financial partner for the past decade, beginning under leftist former president Rafael Correa, who was in office from 2007-2017.But the Chinese financing — totalling about $18bn in loans since Correa took office — has drawn scrutiny from economists in Ecuador over high interest rates and a growing dependence on the Asian power. China has disbursed tens of billions of dollars in emergency loans to countries in recent years in bailouts that have made Beijing into a competitor of the western-led IMF. Pakistan, Sri Lanka and Argentina are three of the largest recipients of China’s rescue lending, receiving $32.83bn since 2017, according to data compiled by AidData, a research lab at the College of William & Mary in the US. The funds freed up by the debt restructuring are expected to provide relief for Lasso, who is negotiating with indigenous protest leaders after demonstrators brought the country to a standstill in June over rising fuel and food prices. Their demands include increased spending on social programmes.A separate deal announced last week between state oil company Petroecuador and China will bring in $709mn, the company said, while Ecuador’s finance minister, Pablo Arosemena, has promised that the money raised from that deal will fund social spending.“The idea is that part of the oil is released and it is allowed to be sold at market price, which is an additional benefit for the Republic of Ecuador,” he said. “And with those resources, the president can further strengthen social investment.”Analysts in Ecuador cast the debt restructuring as a political victory for the Lasso government, which has been weakened by the protests as well as its minority status in congress.

“It’s a positive deal. There is an important political demand for a more active state role and more active state spending,” said Sebastián Hurtado, the founder of Prófitas, a Quito-based political risk consultancy. “The reduction in payments that is being achieved is important from the perspective of public finances.”Ecuador is pursuing a free trade agreement with China, which it hopes to reach by the China-Latin America and the Caribbean business summit in December.Hurtado, the analyst, said the restructuring deal could be a precursor to an agreement. “It is not easy, but in any case it is the sign of a good relationship with China.” More

Liz Truss has admitted that a UK-US trade deal, long seen as one of the biggest prizes of Brexit, is not on the horizon, as she arrived in New York on her first overseas trip as prime minister.Brexit supporters insisted that the 2016 Leave vote would open the way for a free trade agreement with the US, which would dwarf trade deals with countries such as Australia or New Zealand.But President Joe Biden has made it clear that such a deal was not a priority and on the flight from London to New York, Truss admitted it was not on the agenda.“There aren’t currently any negotiations taking place with the US and I don’t have an expectation that those are going to start in the short to medium term,” Truss told reporters en route to the UN General Assembly.Her frank assessment ahead of a meeting with Biden in New York leaves a hole in the government’s post-Brexit trade strategy, a core part of Truss’s ambition to boost the UK’s growth rate.Boris Johnson’s government replaced a deep trade deal with the EU, Britain’s biggest trading partner, with a more basic trade agreement that threw up numerous barriers.The argument ran that Britain would compensate for lost trade with Europe by striking trade deals around the world, such as the one agreed last yearwith Australia.Truss said her focus was to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, along with trade deals with India and the six countries of the Gulf Cooperation Council.“Those are my trade priorities,” Truss said. Asked when she thought a trade deal with the US might be feasible, she declined to comment.A leaked UK government document in 2018 assumed a US trade deal might boost Britain’s gross domestic product by 0.2 per cent in the long term, compared with official forecasts suggesting that Brexit would cut GDP by 4 per cent in the long term.The analysis said deals with countries including India, Australia and nations in the Gulf and south-east Asia might add a further total of 0.1-0.4 per cent to GDP over the long term.Truss’s downbeat comments on a putative US deal partly reflect the fact that Biden and the US Congress are in no hurry to conclude a trade deal with Britain, as well as the wider politics around her visit to New York.

When Truss meets Biden on Wednesday, post-Brexit trading arrangements in Northern Ireland are expected to come up.Biden wants Truss to settle a row with the EU on the issue and some Democrats have warned the UK that there can be no trade deal unless the matter is resolved.Truss’s allies said the prime minister wanted to “decouple” the issues, making it clear that her tough stance on the Northern Ireland protocol would not be affected by threats of trade reprisals, especially as no deal was on the table.In May, Nancy Pelosi, Speaker of the US House of Representatives, warned that unilateral UK legislation to scrap the protocol, which is being pushed through parliament, could endanger Britain’s prospects for a free trade deal.“Our relationship with the US goes far beyond talk of trade deals,” said one ally. Talks with Biden at the UN on Wednesday will also focus on policy towards the war in Ukraine and broader security co-operation.Truss said: “The number one issue is global security and making sure that we are able to collectively deal with Russian aggression and ensure that Ukraine prevails.” The prime minister added that it was important that Europe and G7 countries worked together “to make sure we are not strategically dependent on authoritarian regimes”. More

The era of negative interest rates in Europe is set to end this week when Switzerland’s central bankers leave Japan as the sole proponent of one of the most controversial economic experiments of recent times. Surging inflation has led monetary policymakers to raise rates above zero and ditch a policy that — by paying borrowers and penalising savers — turned the principles of finance on their head. The Swiss National Bank, which for years used the policy to counter the threat of falling prices, is expected to raise its benchmark policy rate by as much as a percentage point from its current level of minus 0.25 per cent on Thursday after inflation climbed to a 30-year high in August. Watched with fascination by economists and consumers when it was introduced by Sweden’s Riksbank in 2009, the policy ultimately fell short of hopes that it would quickly vanquish the threat of deflation and revive growth. “It has not proven to be the holy grail that we were looking for,” said Katharina Utermöhl, senior European economist at German insurer Allianz.While central bankers have stuck to claims that the topsy-turvy policy boosted loan growth, it is best known for producing some bizarre results in practice. For years, investors paid to lend money to governments such as Germany’s, while housebuyers earned interest from banks on their mortgages in some countries such as Denmark.It also provoked fierce attacks in the eurozone after the European Central Bank implemented the policy in 2014, with savers voicing their frustration at banks charging them to hold deposits. Critics of aggressive monetary easing claim it inflated asset bubbles and widened inequality. Monika Václavková, a student from the Czech Republic, harangued a group of European central bank bosses at last month’s Alpbach conference in Austria for cutting rates to “artificially low” levels. Václavková said the policy pushed up share and property prices and asked: “How do you think a person like me will be able to finance my first home in the next decade of my life?”The Swiss decision will follow similar moves by Sweden, Denmark and the ECB, which ended its negative rates policy after eight years in July. The ECB’s last rate cut to minus 0.5 per cent in 2019 proved so controversial in savings-obsessed Germany that its top-selling tabloid newspaper portrayed the central bank’s then chief Mario Draghi as a vampire sucking savers’ accounts dry.“With the benefit of hindsight, it turned out to be a mistake, not only in theory but also in the internal politics of the ECB,” said Lorenzo Bini Smaghi, chair of French bank Société Générale, who left the ECB board before it cut rates below zero in 2014. The move caused bitter debates between officials, who argued over whether its side-effects outweighed the benefits. “The only significant effect of negative rates was to keep the euro lower, which in a deflationary world had limited impact in any case.”Markus Brunnermeier, an economics professor at Princeton University, noted that while the policy was not “a massive success” for the ECB, it worked in the sense that it managed to convince everyone that below-zero rates were another weapon in central bankers’ armoury. “It shows you can go negative,” he said. Sweden’s Riksbank became the first to ditch the policy two years ago. This month, the Danish central bank followed suit to shore up the krone and avoid importing more inflation via higher import prices. Switzerland’s expected rate rise is also aimed at boosting the franc — in contrast to its attempts to weaken the currency when inflation was low.Responding to the moves, a flurry of European banks have rushed to announce they will no longer charge customers for holding their deposits. The total amount of global debt with interest rates below zero — meaning creditors pay to lend money — has shrunk nearly 90 per cent from its peak of $18.4tn in late 2020. The one outlier is the Bank of Japan, which is unlikely to abandon sub-zero rates and a cap on bond yields at zero in the near future, despite higher prices and a fall in the yen. That is mainly because Japan’s headline inflation has remained low at 3 per cent, and there has been no pass-through from a rise in commodity prices to higher wages.Japan’s central bank, however, stands at a crossroads with its governor Haruhiko Kuroda’s 10-year tenure ending in April next year. His successor could shift the BoJ’s stance on rates, but a recession in the US could also force it to maintain its monetary policy. “The big question for next year is whether the BoJ will be able to shift towards normalisation even under a new governor,” said Masamichi Adachi, chief economist at UBS in Tokyo.The ECB has branded the experiment a success, estimating it caused an average 0.7 per cent of extra bank lending per year than there would otherwise have been, based on surveys of lenders. The ECB also said the policy produced an extra 0.4-0.5 percentage points of economic growth and found little evidence that big sums of money shifted into cash, lying dormant in bank vaults and safes — a key criticism levelled at the policy. However, German banks rushed to return a record €11bn of cash, mostly in €500 and €200 notes, to the ECB after its deposit rate rose to zero in July, suggesting the policy had caused some hoarding of hard currency. While German lenders complained that the policy ate into their profits and was hard to pass on to clients, Ralph Wefer at German price comparison site Verivox said 455 of the 1,300 banks it analysed had been charging retail depositors as well as business customers.Brunnermeier pointed to the “psychological difficulty” the policy created for his fellow Germans: “When you are growing up in Germany, you are taught it is a virtue to save money and then suddenly you are punished for doing so and it seems to make no sense.” More

Federal Reserve officials are under pressure to prove they are serious about stamping out elevated inflation by backing up their hawkish rhetoric with a new set of interest rate projections set to be published this week.Following its two-day policy meeting, the Federal Open Market Committee is on Wednesday expected to raise interest rates by at least 0.75 percentage points for the third time in a row as it tries to hit the brakes on the overheating US economy. The decision, which would lift the federal funds rate to a new target range of 3 per cent to 3.25 per cent at a minimum, will be accompanied by a fresh “dot plot” that compiles officials’ forecasts for interest rates until the end of 2025. “The message has to be that they don’t see an end of the tunnel in terms of rate hikes,” said Ethan Harris, head of global economics research at Bank of America. “It’s less about how big the rate moves are going to be than it is about how durable they are.”The new set of projections, the first since June, will also include officials’ estimates for inflation, unemployment and growth.Harris said the Fed’s June projections were “not plausible”. Those forecasts signalled the US central bank was confident of achieving a “soft landing” whereby inflation is brought under control without causing significant economic damage. The dot plot is expected to project more aggressive monetary policy running throughout this year and potentially into 2023, according to economist forecasts. Barbara Reinhard, head of asset allocation at Voya Investment Management, said: “The dot plot is going to have to show that once they raise rates to their terminal level, they are going to leave them there.”The terminal level refers to the point at which rates will peak in the Fed’s campaign to tighten monetary policy, which is the most aggressive since 1981. The median forecast for the policy rate is expected to rise to about 4 per cent in 2022 and peak even higher in 2023. In June, officials predicted the fed funds rate would reach 3.4 per cent by the end of the year and 3.8 per cent in 2023, before declining in 2024.Economists expect the near-term inflation forecast to rise marginally and for officials to more directly acknowledge that growth and employment will take a bigger hit than they predicted at the start of the summer. Back then, they estimated the unemployment rate would creep up to 4.1 per cent by 2024. It hovers at 3.7 per cent at present and, according to a recent Financial Times survey of top economists, is expected to top 4 per cent next year.The chief concern is that supply constraints will keep stoking inflation, meaning the Fed needs to do more to contain it.“Housing and labour supply are constraints that won’t be temporary, and they create a lot more distance that the Fed needs to travel,” said Betsy Duke, a former governor at the central bank. Bringing inflation back down to 4 per cent could occur “fairly easily”, she added, but it could be “much more difficult” to get it below 3 per cent.Many economists warn the Fed’s credibility is at stake, especially as some question its resolve to squeeze the economy sufficiently to root out inflation.Fed chair Jay Powell sought to snuff out those concerns last month when he delivered his most hawkish message to date at the annual symposium of central bankers in Jackson Hole, Wyoming.

Some economists argue the most effective way to reinforce the Fed’s determination to bring down price pressures is for the central bank to implement a full percentage point rate rise this week, especially in light of August’s alarming inflation data.However, traders in fed funds futures contracts have priced in the odds of that outcome at just 20 per cent, according to CME Group. Most economists instead expect the string of large rate rises to be extended past September. The implementation of a fourth consecutive 0.75 percentage point increase at the November meeting is on the cards. Raghuram Rajan, the former governor of the Reserve Bank of India, said the Fed would face a big test if inflation stayed high while obvious “signs of malaise” started to emerge in the broader economy. “It becomes a much more problematic situation when the economy is very weak, but you still see reasons to actually do more,” he said. “That’s when you find the true character of the central bank emerging.” More

Another rise in UK interest rates was already on the cards before Queen Elizabeth’s death delayed the Bank of England’s decision. If anything, the pause has made the case for rapid monetary tightening even clearer — the only question is how far policymakers will go at their meeting on Thursday.The big change since the BoE Monetary Policy Committee last met in early August has been new prime minister Liz Truss’s plan to cap energy bills for households and companies, at an estimated cost of £150bn. This will lead inflation to fall faster in the next few months, but the plan amounts to a huge fiscal stimulus that will probably keep it higher in the medium term, unless the MPC acts to offset it.“We do have work to do,” BoE chief economist Huw Pill told MPs after Truss’s energy measures were announced, adding that the MPC’s focus would be on how they affected inflation “at longer horizons”.Financial traders are betting the MPC will act even more aggressively in response to high inflation this week than it did in August, when interest rates were raised by 0.5 percentage points to 1.75 per cent — the sharpest increase in 27 years. Now, market pricing implies a bigger, 0.75 percentage point rise, with rates peaking at 4.5 per cent next year.The MPC’s members, however, are likely to split on the scale of monetary tightening. With the UK economy hovering on the brink of recession, at least one member, Silvana Tenreyro, has taken a more dovish line, and could vote for a 0.25 percentage point rise, while others are likely to favour a second successive 0.5 percentage point increase. Analysts said it was unclear what the majority of MPC members will decide.One argument for the BoE to go big is that it risks looking irresolute compared with its peers. The European Central Bank raised interest rates by 0.75 percentage points this month for the first time since the euro’s launch. Meanwhile, the US Federal Reserve looks likely to deliver a third consecutive 0.75 percentage point increase on the eve of the MPC’s decision. If the BoE is seen as a laggard, it could worsen the sell-off in sterling — which hit a 37-year low against the dollar on Friday — adding to inflationary pressures.

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“The MPC is boxed into a corner right now and must raise bank rate quickly to prevent sterling from depreciating further, and to signal to households that it is serious about tackling inflation,” said Samuel Tombs, at the consultancy Pantheon Macroeconomics, who nonetheless argued the outlook for inflation was improving and that policymakers did not need to “strangle the economy” with a sustained series of big rate increases.Other analysts believe that inflationary pressures are still building in the UK economy, with data released over the past week showing that stagnant output and falling retail sales have not stopped service prices rising, or nominal wage growth accelerating in a buoyant labour market.“If persistent surprises in the wage and price data since August, hawkish developed market central banks, a weaker currency, a gilt market sell-off and . . . fiscal easing don’t push the MPC to up its tightening pace to 75 basis points . . . it’s hard to see what would,” said Allan Monks, economist at JPMorgan.Policymakers will also be worried by dwindling public confidence in the BoE’s response to surging inflation. Although UK consumer price inflation dipped a little to 9.9 per cent in August on the back of lower petrol prices, it remains the highest in the G7. The MPC “needs to be bolder to restore its credibility”, said Julian Jessop, fellow at the Institute of Economic Affairs, a think-tank, arguing that a 0.75 percentage point increase “would send a stronger signal that the bank is serious about getting inflation back down over the medium term”.Others, however, think policymakers will be more cautious and content themselves with a 0.5 percentage point rise for now. Although the new direction of government fiscal policy is clear, the MPC will be meeting before chancellor Kwasi Kwarteng outlines on Friday details of Truss’s proposed tax cuts and the Treasury’s costings of the energy support package, and policymakers will only be able to incorporate these into their forecasts in November.

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Fabrice Montagné, economist at Barclays, said a sudden turn for the worse in business sentiment showed that the economic slowdown was broadening, and that this “should make the arguments of the most dovish [MPC] members more palatable”. A further question is whether the MPC will still press ahead with plans to start reducing the stock of assets it amassed under quantitative easing programmes, as it had signalled in August — given the possibility of the government launching big bond sales as it relaxes its fiscal stance.

Whatever the MPC decides on Thursday, many analysts think it will need to keep raising interest rates for longer than looked likely in August, as a result of developments in energy markets and the government’s fiscal stimulus.“Even if the bank doesn’t hike as far as markets expect, we do think the arrival of government stimulus means the BoE won’t be racing towards rate cuts next year, unlike some of its developed market counterparts,” said James Smith, economist at ING. “Liz Truss’s policy will probably make the bank more likely to hike rates faster and further,” said Paul Dales, at the consultancy Capital Economics, which now expects interest rates to rise to 4 per cent. More

Anahita Thoms has spent years cautioning clients about the dangers of not doing due diligence on suppliers. Her efforts are finally paying off.“We’ve seen double the amount of interest in this topic in the past two years than we did the previous five,” says the lawyer who runs Baker McKenzie’s international trade practice in Germany. “It’s not just about the legal risk, but the commercial and reputational risk.”After years of neglect, companies and their investors are now having to ask more awkward questions about their suppliers — addressing what Nikolai Badenhoop, a fellow at the European University Institute, describes in a recent paper as “a blind spot of the green finance debate”.The answers, however, are often difficult to come by.To properly address supply-chain risk, companies need information about the carbon footprints, biodiversity impacts, and working conditions of suppliers which, for a big multinational, can number in the “tens of thousands” according to Thoms. They will often be based in parts of the world where information may be scant, and labour and environmental laws far removed from European standards.Marie Navarre, head of sustainable research at Allianz Global Investors, thinks events such as the Covid pandemic and Russia’s invasion of Ukraine revealed how woefully unprepared the corporate world was for a big supply chain shock — but may, in turn, help address some of the information gaps.Shortfalls in the just-in-time model, where supply chains have to be as efficient as possible in terms of delivery times and cost — often regardless of the political, social and environmental risks — are now clear for all to see.“These two events have properly tested the supply chains of many companies and sectors for the first time, prompting significant expansion of the depth and breadth of internal and external supply chain audits,” Navarre says. “The measurability of supply chains has developed significantly in the last two years and [that] will continue.”

Along with law firms, the Big Four accounting firms, tech firms, and rating agencies offer advice to those wanting to invest in companies with greener supply chains. Navarre’s team uses data from analytics firms such as MSCI, Sustainalytics, Moody’s-Vigeo, ISS ESG, S&P Global Trucost and RepRisk to accompany its own research. “We use multiple providers since each tends to have specific areas of strength,” Navarre said. “The data is diverse and [offers] different coverage.”The onus on European firms to invest more time and resources into supply chain due diligence will rise as the continent’s lawmakers — who have increasingly led the way on setting rules to bring about a greener economy — look to raise standards.In Germany, a new supply chain law comes into force at the start of next year. Companies with at least 3,000 workers must put in place systems to check whether or not their suppliers are abusing human rights, at the risk of fines of up to €8mn or 2 per cent of annual global turnover.“The authorities will want to know if you’ve acted on red flags,” says Thoms. “If one of your suppliers is in Bangladesh, for instance, and you are a clothing manufacturer, you are expected to ask more questions than if you’ve been working for the past years with a reputable business in Japan.”Brussels is also working on a corporate sustainability due diligence directive. This would require any EU business with more than 500 employees and a global turnover of €150mn to come up with a strategy to manage environmental and human rights standards across their supply chains, and ensure their business model is compatible with the limiting of global warming to 1.5C, in line with the Paris Agreement.While the US has legislation requiring companies based there to ensure their suppliers do not use forced labour, the measures taken by European lawmakers are pioneering in their scope.Once the EU’s proposal is finalised — something that is expected to occur in 2023 — and becomes an EU act, the next step is for each member state not only to pass the legislation nationally, but also to task an official body with monitoring compliance.Badenhoop believes the EU directive will help place supply chains “front and centre” of the green finance debate — and could have an impact far beyond Europe.The prevalence of mobile phones may also make data easier to come by, meaning “information about supply chains can be gathered quickly and to an arguably higher standard,” says Tom Adams, co-founder of data firm 60 Decibels.However, Thoms says the capacity to compile and analyse data is still not good enough. “When it comes to due diligence, we need better digital tools to manage it.” More

The decision was made at a meeting of Prime Minister Fumio Kishida’s cabinet. ($1 = 143.1800 yen) More