Economy

FRANKFURT (Reuters) – The European Central Bank will raise interest rates again on Thursday to fight runaway inflation and, with a big move and a record one under consideration, the only question is by how much.Concerned that sky-high inflation is getting increasingly entrenched, policymakers are scrambling to keep a lid on the bloc’s most damaging bout of price growth in nearly half a century as it eats up household savings and weighs on business output.Ultimately, the choice will be between a 50 and a 75 basis point increase in the zero percent deposit rate. The latter would be the biggest ever hike of the ECB’s benchmark rate, but regardless of the outcome the bank’s direction of travel will be clear. More hikes are factored in for coming months as price pressures already expected to usher in a winter recession consistently exceed even the most pessimistic forecasts.Buoyed by hawkish comments from conservative policymakers, markets have now nearly priced in a 75 basis point hike. A slim majority of economists polled by Reuters are also predicting the larger increase.”We think it is a very close call, with good arguments on each side, but ultimately think those advocating for a larger hike will prevail as September offers the best opportunity to send a clear signal of determination,” Morgan Stanley (NYSE:MS) economist Jens Eisenschmidt said.”Be it 50 or 75 basis points, … we see the ECB hiking cycle ending at 2% in March.”The decision also encapsulates a policy dilemma.Updates to ECB forecasts are certain to show sharply higher inflation and significantly weaker economic growth.Sky-high energy prices will sap purchasing power and almost certainly plunge the bloc into a recession that could be exacerbated by an aggressive ECB, especially with borrowing costs rising for governments as they try to help those most affected.A big hike after a decade of ultra-low rates also goes against the ECB’s guidance for gradualism and several policymakers, including board member Fabio Panetta and Greek central bank chief Yannis Stournaras, have made the case for a smaller move. Central banks are also powerless against inflation driven by supply-side disruptions, and rate hikes now will affect the economy years down the road, when inflation is abating on its own.CREDIBILITY However, timid action now could push up long-term inflation expectations from already high levels, weakening the ECB’s inflation-fighting credibility and challenging the very framework of its mandate.Headline euro zone inflation is over 9% while its underlying rate is 4.3%, more than twice the ECB’s target, indicating that more and more of the energy-driven price pressures are seeping into the broader economy.A smaller move would also weaken the euro as the U.S. Federal Reserve is clearly raising rates faster, which would in turn further fuel inflation as energy is denominated in dollars. That is why nearly a half dozen policymakers have publicly backed putting a 75 basis point option on the table, giving the debate a hawkish momentum. The coming recession also makes the case for frontloading rate hikes as moving aggressively once the downturn takes hold will be difficult to communicate. Some policymakers may even welcome a shallow recession that, with the bloc’s labour market is increasingly tight, could provide relief to firms now struggling to find workers.”We expect rate hikes of 75, 50 and 25 basis points in the forthcoming meetings this year, taking the deposit rate into neutral territory as the economy slows, and another three 25 basis point hikes next year,” Societe Generale (OTC:SCGLY) economist Anatoli Annenkov said.On top of the rate announcement, the ECB will likely debate changing how it pays interest on excess reserves parked by commercial banks, which are now set to enjoy a risk-free windfall on trillions of euros worth of cash circulating in the financial system.The ECB may also discuss whether to start reducing its balance sheet as part of its policy normalisation process.However, no decision is expected in either of these areas.The ECB announces its policy decision and presents the new economic projections at 1215 GMT, followed by President Christine Lagarde’s news conference at 1245 GMT. More

LONDON (Reuters) – Britain’s new Prime Minister Liz Truss on Wednesday readied the final details of a plan to tackle soaring energy bills, which looks likely to cool inflation but add more than 100 billion pounds ($115 billion) to the country’s borrowing.On her first full day as Britain’s leader after replacing Boris Johnson, Truss told parliament she would support businesses and households who are bracing for a recession that is forecast to start later this year.Sterling fell to its lowest level against the U.S. dollar since 1985, in part due to worries among investors about the scale of debt that Britain will have to sell to fund the energy support plan, and the tax cuts that Truss has also promised.A source familiar with the situation told Reuters that Truss was considering freezing energy bills in a plan that could cost towards 100 billion pounds, a major turnaround from her rejection of “handouts” during the early stages of the Conservative Party leadership campaign. Deutsche Bank (ETR:DBKGn) said the energy price support and the promised tax cuts could cost 179 billion pounds, or about half Britain’s historic pandemic spending push which dealt a blow to the country’s public finances.Truss ruled out demands by the opposition Labour Party that she fund some of the spending by raising taxes on energy firms.”I am against a windfall tax. I believe it is the wrong thing to be putting companies off investing in the United Kingdom,” Truss told lawmakers.She is due to give details of the energy support plan in parliament on Thursday.MORE BORROWING Her finance minister Kwasi Kwarteng, also on his first full day in the job, said borrowing would be higher in the short term to provide support for households and businesses and fund the tax cuts.”We need to be decisive and do things differently. That means relentlessly focusing on how we unlock business investment and grow the size of the British economy, rather than how we redistribute what’s left,” he told business leaders.The pound sank its lowest level against the dollar since 1985 at $1.1407 and was down almost 1% against the euro too.While the fall in sterling could add to the inflation pressures in the economy, the expected price freeze plan was likely to help ease the cost-of-living squeeze on consumers which had been shaping up to be the most severe in decades.BoE Chief Economist Huw Pill said the plan could slow inflation – which surpassed 10% in July – although it was too soon to say what the implications for the central bank’s run of interest rate increases would be.The BoE forecast in August that inflation would exceed 13%, and some economists have said it recently could top 20% if gas prices – pushed up by Russia’s invasion of Ukraine – stay high.Pill also said the BoE would not allow the surge in government spending to fuel demand in the economy to the point where it pushed up inflation.Nonetheless, investors scaled back their bets on a 75-basis-point rate hike at the BoE’s next scheduled monetary policy announcement on Sept. 15 to 60% from almost 80% earlier on Wednesday. Two-year British government bond yields also dropped.Kwarteng met BoE Governor Andrew Bailey and told him that “independence is really a cornerstone of how we see managing the economy,” comments that seemed aimed at reassuring investors that the new government would not pressure the central bank.Early in the Conservative Party leadership campaign, Truss said the government should set a “clear direction of travel” for monetary policy although she subsequently struck a less interventionist tone.Kwarteng said he and Bailey would meet regularly, initially twice a week, to coordinate economic support.($1 = 0.8721 pounds) More

WASHINGTON (Reuters) – Federal Reserve officials on Wednesday said they still aren’t convinced the worst of the U.S. inflation scare has passed, in comments that teed up a continuation of the central bank’s aggressive interest rate increases.”We are in this for as long as it takes to get inflation down,” Fed Vice Chair Lael Brainard said in an address to a banking conference, echoing past comments by officials from other central banks to do “whatever it takes” to protect their economies.The chief risk now, Brainard and others said on Wednesday, remains the worst outbreak of inflation since the 1980s.The cure: A steep rise in interest rates meant to slow the economy, clamp down on spending, and bring the demand for goods and services more in line with the economy’s ability to produce or import them. The Fed has raised interest rates at its last four policy meetings by a total of 2.25 percentage points, and is expected to lift its policy rate by another 50 or 75 basis points at its Sept. 20-21 session.Policymakers on Wednesday shied from tipping their hand on that decision. Investors currently expect the larger rate hike to prevail at this point, though monthly inflation data due next Tuesday may influence that outlook.Fed Chair Jerome Powell may also shape expectations about what is to come when he speaks on Thursday, in what are likely to be his final public comments before this month’s policy meeting. Those who spoke on Wednesday noted that even as the economy slows overall, the job market remains by some measures historically tight, and data have provided little sense of relief yet from rising prices. In its most recent “Beige Book” compendium of anecdotal reports about the economy, the Fed noted widespread signs that economic activity was weakening, and “some degree of moderation” of price increases in certain parts of the country.But overall “most contacts expected price pressures to persist at least through the end of the year,” the Fed said in its report.’NEED TO DO MORE’While Brainard, who spoke to the annual conference of The Clearing House and Bank Policy Institute, noted that the risks to growth and jobs may at some point weigh more heavily on the Fed’s deliberations, she said the lesson from past bouts of inflation was clear: Don’t pull back on rate increases too soon.A slowdown in the inflation data for July was “welcome” Brainard said, but “it will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down” to the Fed’s 2% target.Annual inflation, using the Fed’s preferred measure, is currently above 6%.In her first policy remarks since taking over as president of the Boston Fed, Susan Collins said “we’ve not yet seen significant declines in prices, and that’s what we’re going to be looking for.””We need to do more,” Collins said in a podcast interview with staff from the regional bank. In separate comments, Cleveland Fed President Loretta Mester said she was concerned higher inflation may already be in train as the full effect of things like rising prices for services and rents is felt. “I’m not even convinced that inflation’s peaked yet,” Mester said in a webcast with Market News International. Services inflation “tends to be much more persistent and rents are still very elevated … It takes a while for rents to show up in underlying inflation. There’s still more that’s going to show up.” More

The U.S. central bank released its latest summary of feedback from business contacts nationwide as it mulls whether to proceed with a third straight 75-basis-point interest rate hike at its Sept. 20-21 policy meeting or go with a still larger-than-usual 50-basis-point rise in its bid to quash high inflation.”Overall labor market conditions remained tight, although nearly all Districts highlighted some improvement in labor availability,” the Fed said in its survey, known as the “Beige Book,” which was conducted across its 12 districts through Aug. 29. “Price levels remained highly elevated, but nine Districts reported some degree of moderation in their rate of increase.”Fed Vice Chair Lael Brainard earlier on Wednesday said the central bank would maintain tight monetary policy “for as long as it takes” to get inflation down but did not address the upcoming policy meeting.Fed Chair Jerome Powell is scheduled to speak at 9:10 a.m. EDT (1310 GMT) on Thursday. A much-anticipated monthly measure of inflation is due on Sept. 13.The Fed has raised interest rates by 225 basis points since March as it lifts its benchmark overnight interest rate to a level consistent with dampening demand across the economy enough to alleviate price pressures and bring inflation back down to its 2% goal.Those moves are filtering through to expectations for the year ahead. “The outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months,” the Fed’s report said.RECESSION FEARSInflation has been running at 40-year highs and more than three times the Fed’s target. While there are some positive signs that supply chain issues are improving and tight labor market conditions loosening, policymakers remain fearful higher inflation expectations could become entrenched among businesses and consumers.They have also flagged rising risks that the aggressive series of rate hikes needed to bring inflation down may cause a recession.In the Fed’s Chicago district, those jitters were apparent, with “many” contacts expressing concerns about the potential for a recession, while one staffing firm in the Philadelphia Fed’s district reported a slowdown in orders “approaching levels consistent with prior recessions.”U.S. employers hired more workers than expected in August, the Labor Department reported on Friday in its closely-watched monthly jobs report, but moderate wage growth and a rise in the unemployment rate also suggested labor shortages may be easing.Elsewhere in the Beige Book, the Fed’s stated aim of cooling inflation without causing a sharp spike in unemployment still appeared possible. “Generally softer economic conditions and slight relief from supply disruptions appeared to alleviate some inflationary pressures,” the Cleveland Fed district said. “Though still high, both the share of contacts reporting higher input costs and the share reporting higher selling prices dipped to their lowest levels in more than a year.” More

As a member of parliament, new British Prime Minister Liz Truss introduced legislation to undo the Northern Ireland Protocol, which was part of Britain’s withdrawal agreement from the European Union. It prioritized protecting the 1998 Good Friday Agreement, or Belfast Agreement, for peace in the British-run region.”There is a no formal linkage on trade talks between the U.S. and the UK and the Northern Ireland protocol, as we have said, but efforts to undo the Northern Ireland protocol would not create a conducive environment,” Jean-Pierre said.On Tuesday, the White House said U.S. President Joe Biden and Truss “discussed their shared commitment to protecting the gains of the Belfast/Good Friday Agreement and the importance of reaching a negotiated agreement with the European Union on the Northern Ireland Protocol.”Biden, who often speaks with pride of his Irish roots, has been insistent that Britain do nothing that could endanger a quarter century of peace in Northern Ireland.The two leaders could meet as soon as the U.N. General Assembly later in September. Truss won a leadership race for the governing Conservative Party on Monday and took over from Boris Johnson as prime minister on Tuesday, as Britain faces its most daunting set of challenges in decades. More

Just as the yen’s eye-popping plunge against the dollar grabs the world’s financial market spotlight, investors will get a closer look on Thursday into the underlying state of the Japanese economy.Revised second quarter GDP data, and trade and current account figures for July, will give an insight into the yen’s economic fundamentals, and offer clues to whether the level and pace of the currency’s depreciation are justified.Economists expected Japan’s Q2 GDP growth to be revised up to an annualised 2.9% rate from 2.2%, and quarterly growth to be revised up to 0.7% from 0.5%. They also expect that the current account balance swung back into surplus in July.All things considered, Japanese officials seem pretty relaxed about the yen’s slump to a 24-year low through 144.00 per dollar. It has depreciated 20% so far this year, and 30% since the start of last year. Remarkable for a G3 currency.Plenty other Asian currencies are getting steamrolled by the Fed-pumped dollar. China’s yuan is at a two-year low near 7.00 per dollar, the Thai baht is close to July’s 16-year low, and India’s rupee is hovering near July’s all-time low.Broader market sentiment on Thursday will probably be brighter than most days lately following the decent rebound on Wall Street, pull back in U.S. bond yields and 5% slide in oil prices on Wednesday. On the corporate front, investors will scour full-year earnings from Hong Kong property developer Sun Hung Kai Properties to gauge the state of China’s bloated and creaking real estate market. Key developments that should provide more direction to markets on Thursday: Japan trade, current account (July)Japan GDP (Q2)Australia trade (July)Indonesia consumer confidence (Aug)ECB policy decision More

A leading Federal Reserve official has warned the US central bank must hold its nerve as it tries to tame soaring inflation, adding her name to the list of policymakers sounding a hawkish note on future rate rises. Lael Brainard, vice-chair of the Fed, reinforced expectations that the central bank would opt for a third consecutive 0.75 percentage point rate rise at its meeting later this month. “We are in this for as long as it takes to get inflation down,” she said. Brainard said the Fed had “both the capacity and responsibility” to maintain public confidence in its ability to keep inflation in check in the long run, adding higher rates that restrict the economy would be necessary “for some time”. The forceful intervention from Brainard, generally seen as a dove on monetary policy, comes as investors increased their bets on the Fed implementing another increase of 75 basis points when officials meet on September 21. Futures markets on Wednesday implied an 81 per cent chance that they will opt for an increase of that magnitude. Expectations of further large interest rate rises have propelled the dollar higher in recent months, contributing to downward pressure on other major currencies. A measure of the dollar against six other peers has jumped almost 15 per cent in 2022. Sterling has slumped by the same magnitude to hover near its weakest level since 1985. The widening gulf between the Fed’s tightening programme and the Bank of Japan’s ultra-loose monetary policy has driven the yen to its lowest level in 24 years.Brainard, who was speaking at a banking industry conference in New York, said the Fed’s recent rate rises had started to cool some sectors of the US economy. At some point, she said, the central bank would need to consider the risk of overshooting with monetary policy that was too tight. But she added that before the Fed contemplated easing off in its efforts to tame higher prices it would need to see “several months of low monthly inflation readings” and be confident that it was moving closer to its 2 per cent target. Brainard’s focus on inflation expectations underscored the Fed’s fear that persistently high inflation will result in a vicious cycle, with companies raising prices and workers demanding higher wages. That could force the central bank to take even more aggressive action and cause further economic pain. However, she said events in other countries might result in lower inflation in the US, with Europe confronting a weaker economy and a “severe energy shortage” while China extends its coronavirus lockdown measures. “The disinflationary process here at home should be reinforced by weaker demand and tightening in many other countries,” she said.Brainard said the US labour market continued to “exhibit considerable strength”, which she said was “hard to reconcile with [a] more downbeat tone of activity”.

Shortly after Brainard’s remarks, the Fed published its most recent Beige Book, an anecdotal assessment of regional economic conditions, which found evidence of a tight labour market across the country. Brainard is the latest Fed official to reinforce the hawkish message delivered by chair Jay Powell last month in Jackson Hole, Wyoming. Thomas Barkin, president of the Richmond Fed, this week told the Financial Times he had a “bias” towards tightening monetary policy quickly “as long as you don’t inadvertently break something”. Meanwhile, Michael Barr, the Fed’s vice-chair for supervision, said on Wednesday that the risk of letting inflation spiral higher was “far worse” than being too aggressive. Barr, who is one of the most senior banking regulators in the US, also said the Fed would “consider adjustments” to various banking rules, including stress tests, capital buffers and its system for assessing bank mergers. More

Oil prices fell on Wednesday as a renewed fear over recession and a strong US dollar weighed on the commodity.Brent crude, the international oil benchmark, fell as low as $88.50 a barrel, a 4.6 per cent drop on the day and a seven-month low dating back to before the Russian invasion of Ukraine. It was the first time Brent had dropped below $90 a barrel since February.West Texas Intermediate, the US marker, fell as much as 5.2 per cent to $82.37 a barrel, the lowest since January.Wednesday’s fresh falls come only days after Opec+’s decision on Monday to cut crude supply to prop up prices, defying calls from western governments battling to curb inflation in the face of a mounting global energy crisis.The producer group will cut 100,000 barrels a day from supply from October. While only a fraction of the 100mn b/d oil market, it reversed an increase of the same amount agreed last month following a visit to Jeddah by US president Joe Biden.The decision came after a decline in oil prices in recent weeks amid growing fears of recession in Europe and weaker oil demand from China because of its Covid-19 lockdowns.The message from Opec+ was that it will protect oil prices, which duly rallied on Monday. However, a fall in potential demand because of recession continues to weigh on traders.“The spectre of a demand-sapping recession across the western world is closer to becoming reality as soaring inflation and rising interest rates dents consumption,” said Stephen Brennock of PVM, a brokerage. “Simply put, the [Opec+] cut is being inferred by market players as a clear sign of the deteriorating demand outlook,” he added.The strength of the US dollar, which is typically seen as a headwind to commodity prices, is also weighing on oil. The dollar index, which tracks the greenback against a basket of currencies, has hit a two-decade high.“Any rallies continue to get sold. The Opec cut was ignored,” analysts at Oilytics said. The strong greenback “continues to be the major headwind for most commodities”, they added.

The drop in prices is being cheered by the Biden administration ahead of midterm elections in November. Despite pledges to shift the US economy away from fossil fuels, Biden has pushed domestic suppliers to increase production while releasing record amounts of crude from the nation’s strategic stockpile in an attempt to tame soaring prices at the pump. The US national average petrol price has fallen sharply in recent weeks to $3.76 a gallon after topping $5 a gallon in June. More