The People’s Bank of China said it will strive to achieve best possible results in economic operations, while balancing economic growth and price stability, in its quarterly policy implementation report.The central bank said it will also closely monitor domestic and external inflation changes, and that it expects domestic consumer inflation to exceed 3% in some months in the second half of 2022. More
Good morning. It was the first time in American history that the FBI had searched a former president’s home. Now Donald Trump’s backers, challengers and officials from both the Republican and Democratic party are demanding answers. The Department of Justice and FBI have yet to comment on the probe of Trump’s Florida residence. The White House said it “did not have advance notice” of the FBI’s plans to storm his home. But people close to Trump said the search on Monday night concerned the former president’s removal of classified materials from the White House after leaving office. Focus is now turning to what this means for his ambitions to run again for the presidency in 2024. The raid on Mar-a-Lago quickly morphed into a political campaigning card, with Trump releasing an ad-style video in the wake of the operation. Republican candidates sent fundraising emails to supporters citing the FBI search in attempts to rally the party’s base ahead of midterm elections. Although Trump was quick to denounce the raid — calling it “an assault which could only take place in broken, Third-World countries” — experts say he is treading on thin ice, as multiple legal challenges trail the former president. Go deeper: How big are Trump’s legal troubles?Thank you for spending part of your morning with FirstFT Americas — Georgina. Five more stories in the news1. Elon Musk sells $7bn of Tesla stock ahead of court fight with Twitter The SpaceX chief executive took advantage of a recent rebound in Tesla’s stock price to offload $6.9bn worth of shares in the electric car maker since the end of last week, according to a series of regulatory filings yesterday.2. Carlyle boss quits after being denied $300mn pay package Ousted chief executive Kewsong Lee resigned from the US private equity group after its co-founders refused to discuss his request for a package worth up to $300mn over five years, people with knowledge of the matter said.3. Joe Biden tax proposals fall short of OECD standards for minimum rate Washington’s application of a global tax deal proposed by the OECD last October — in particular, a minimum corporate tax floor of 15 per cent — is at odds with how the agreement is likely to work elsewhere. Where does Biden’s Inflation Reduction Act fall short?4. Investors watch for cracks in US consumer loan market US household debt levels have skyrocketed this year as Americans borrow more to pay for increasingly expensive homes and cars. As the Federal Reserve tries to rein in price growth by lifting interest rates, analysts and economists are getting worried. 5. Foxconn stake in Chinese chipmaker under scrutiny Taiwanese national security officials want to force the Apple supplier to unwind an $800mn investment in Tsinghua Unigroup as Taipei seeks to align itself more closely with the US in the face of escalating threats from Beijing.Cross-Strait relations: Taipei’s foreign minister warned that China could use military drills to impede shipping and air traffic and deny access to the US.The day aheadInflation data All eyes will be on a crucial US inflation report coming at 8:30am Eastern Time which could influence the path ahead for the Federal Reserve’s monetary policy. US July headline consumer prices are expected to have risen 0.2 per cent from June, while its annual gain is forecast to moderate to 8.7 per cent, according to economists polled by Reuters. Core inflation — stripping out food and energy costs — is projected to have risen 0.5 per cent in July.These numbers would mark a slight easing of inflation compared with the 9.1 per cent annual increase and the 1.3 per cent monthly rise recorded in June.Chicago Fed president Charles Evans and Minneapolis Fed president Neel Kashkari are due to make comments later at separate events. Monthly retail sales in Brazil are expected to have dropped 1 per cent in June, according to economists polled by Refinitiv, as persistently high inflation may have caused consumers to pull back spending.Corporate earnings Walt Disney is expected to post a rise in third-quarter revenue. The company has been buoyed by steady subscriber growth on its streaming platforms coupled with the return of theme park goers. Disney shares have fallen more than 30 per cent over the past year. Investors are questioning the stability of the streaming market after seeing Netflix subscriber counts drop in the past two quarters. Media company Fox and fast-food chain Wendy’s are reporting before the bell. The dating app Bumble is reporting after the bell. A full list is in our Week Ahead. Sign up here to receive the newsletter in your inbox every Sunday.Rishi Sunak BBC interview The former UK chancellor and Conservative party leadership contender will be interviewed by Nick Robinson. Opponent Liz Truss has a clear lead in the betting market.What else we’re reading‘Painstaking’ work to help mitigate California wildfires In the Napa Valley, private groups and local businesses are doing what they can to protect the land from catastrophic fires. In California, a state with 33mn acres of forest that has been in drought for much of this century, the past two years have seen fires reach unprecedented levels, according to Cal Fire.Netflix seeks to become a big player in the gaming sphere The group’s plans to release more video games comes at a precarious moment for the company, writes Tom Faber. Are these game offerings just a desperate attempt to retain dominance in an increasingly competitive streaming market?Rich and poor should mingle more New research suggests that children from low-income families who are friends with wealthier peers will earn more later in life. “Economic connectedness” — in short, having rich acquaintances — can be a valuable early rung on the economic ladder, writes Anjana Ahuja.Lessons from Irish history on the famine in Somalia The UN has warned that following a drought that killed 3mn animals and caused crops to fail, parts of Somalia could face full-blown famine next month. Looking back to Ireland in 1846 in the midst of a potato famine gives insight into the potential scale of the devastation, writes Jude Webber.Europe can withstand a winter recession There is virtually no way to escape a Europe-wide recession after Russia tightened natural gas supplies, but it need be neither deep nor prolonged. Substitution, solidarity and conversation can help overcome a gas embargo, writes Chris Giles.SportTennis star Serena Williams will retire after the US Open tournament. Her achievement of 23 Grand Slam singles titles stands alone but Williams’ tennis legacy goes far beyond statistics. Writing in Vogue, she reflects on how coming to this crossroads has highlighted what she hopes has been her enduring message for women athletes: “They can wear what they want and say what they want and kick butt and be proud of it all.”FT Globetrotter: Up your game with these 10 intriguing tennis gadgets.
Serena Williams’ quest to break Margaret Court’s record of 24 career Grand Slam titles has made her a consistent television ratings and ticket sales draw at tournaments around the world © Chris Symes/Photosport/AP More
LAS VEGAS (Reuters) -United Steelworkers union (USW) International President Thomas Conway said on Monday the U.S. climate, tax and health bill will create new opportunities for U.S. companies and union members. The U.S. Senate approved the Biden administration’s $430 billion bill on Sunday and it will go to a Democratic Party-controlled House of Representatives where it is expected to pass. Conway told Reuters in an interview the USW plans to add 30 new organizers to increase the union’s presence in old-line steel, oil and other industries and to expand into industries the bill is designed to encourage such as electric cars, wind-power, solar and biofuels.The Inflation Reduction Act, as the bill is called, will offer opportunities for union workers, Conway said, and provide businesses a long-term horizon to invest in new technologies. Conway spoke to Reuters on the sidelines of the Steelworkers’ constitutional convention in Las Vegas, which runs through Thursday. The USW will add new organizers to develop recruiting campaigns in existing and new industries, he said.”I’m going to let the work decide the size of it, as opportunities present themselves. We’re going to look at regions, we’re going to look at industries,” he said declining to break out the split between the old and new. The bill includes incentives for companies that include union workers, but the overwhelming focus is on boosting U.S. production and employment, he said.”There is a focus on buy American, buy North American” products, Conway said. “If they write buy American legislation in there, a requirement like that, the opportunity for some of this stuff will naturally fall to unionized shops, particularly in the mining sectors.” The USW represents 850,000 workers in metals, mining, pulp and paper, chemicals, energy producing, health care, education and other service industries. “We need copper, we need nickel. We’re going to need lithium and cobalt. Whatever we can discover here, I think you’ll find that employs union miners,” he said. More
Investing.com — The main focus of the day will be the release of the latest U.S. consumer price data and the potential impact this has on Fed thinking. Elon Musk’s sale of more Tesla stock will also put the electric car maker in the spotlight, along with Disney’s third quarter results and official crude inventory numbers. Here’s what you need to know in financial markets on Wednesday, August 10.1. U.S. CPI in spotlightThe main focus of investors’ attention Wednesday will be the release of the U.S. consumer price index for July, which is expected to play a significant part in the thinking of Federal Reserve policymakers over future interest rate hikes.The U.S. CPI is due at 8:30 AM ET (1230 GMT) and is expected to have risen 0.2% last month after advancing 1.3% in June. This would equate to an annual increase of 8.7%, down slightly from the 9.1% seen in the prior month.While that would be the largest month-on-month deceleration of price increases since 2005, largely on the back of a sharp drop in the cost of gasoline, the report, however, is still likely to show that underlying inflation pressures remain elevated.The annual core CPI figure, which excludes volatile food and energy prices, is seen actually rising to 6.1%, from 5.9% in June.The Fed has indicated that several monthly declines in CPI growth would be needed before it lets up on the aggressive monetary policy tightening. This suggests that a much more substantial move lower is needed for the central bank policymakers to decide against another super-sized interest rate hike in September.2. Musk sells more Tesla stockElon Musk has boosted his legal war chest, with the Tesla (NASDAQ:TSLA) CEO selling an additional $6.9 billion worth of shares in the electric vehicle maker over the past week, an SEC filing revealed on Wednesday.Musk stated, in a series of tweets, that he wanted to avert an emergency sale of stock if he is compelled to complete the $44 billion takeover of Twitter (NYSE:TWTR), which he has subsequently tried to back away from.The billionaire is set to go to court in October and faces either a forced buyout of Twitter or a hefty fine for calling off the deal.Musk has now sold around $32 billion worth of stock in Tesla over the past 10 months, but this move comes just four months after he said he had no further plans to further dispose of stock after an $8.5 billion sale in the wake of his initial offer to buy the social media platform.3. Stocks set to edge higher; Roblox SlumpsU.S. stock markets are set to open marginally higher Wednesday, bouncing back after a series of weaker sessions, with the focus on the release of a key inflation report.By 6:00 AM ET (1000 GMT), Dow Jones futures were up 65 points or 0.2%, S&P 500 futures were up 0.3%, and Nasdaq 100 futures were up 0.3%.The main Wall Street indices all closed lower Tuesday, with the broad-based S&P 500 and the tech-heavy Nasdaq Composite dropping for their third straight sessions, after the likes of Micron (NASDAQ:MU), Novavax (NASDAQ:NVAX), and Upstart (NASDAQ:UPST) warned of future earnings weakness.The latest consumer prices report [see above] is set to drive activity Wednesday as it could influence future Fed interest rate moves.In corporate news, results from Disney [see below] lead the way, but Coinbase (NASDAQ:COIN) will also be in the spotlight after the crypto exchange reported a massive $1.1 billion net loss in the second quarter, citing a “fast and furious” downturn of the crypto markets.Roblox (NYSE:RBLX) stock was sharply lower premarket after the video game publisher reported a wider-than-expected loss in the second quarter, while Wynn Resorts (NASDAQ:WYNN) disappointed as the gaming company’s Macau Resort struggled with COVID issues.4. Disney+ streaming subscribers in focusWalt Disney (NYSE:DIS) will be in the spotlight Wednesday, as the entertainment giant is scheduled to publish its fiscal third quarter results after the market close.The focus will be on the Disney+ streaming service following the loss of streaming rights to Indian Premier League cricket and after rival Netflix (NASDAQ:NFLX) impressed with its subscriber figures a couple of weeks ago.Demand for Disney’s theme parks is expected to have bounced back strongly, and the segment may outperform expectations despite a $350 million hit from overseas closings.Investors could also be looking for more information following a New York Times report that Walmart (NYSE:WMT) has held talks with media companies, including Disney, about including streaming entertainment in its membership service.5. Oil falls; EIA inventory data dueCrude oil prices weakened Wednesday after an industry report showed a surprise increase in U.S. inventories, prompting concerns of falling demand in the world’s largest consumer.Data from the American Petroleum Institute, released on Tuesday, showed that U.S. crude stocks rose by around 2.2 million barrels last week, much more than the 100,000 barrels predicted.Such a result, if confirmed by official government data later Wednesday from the Energy Information Administration, would mark a second straight week of an unexpectedly large build in U.S. oil inventories.“EIA weekly data shows that implied gasoline demand in the U.S. has been seasonally weak so far this summer, given the higher pump prices,” said analysts at ING, in a note. “The more recent weakness in prices may limit the demand destruction that some may feel is needed in order to keep the market balanced.”By 6:00 AM ET, U.S. crude futures were down 0.9% at $89.72 a barrel, while Brent crude was down 0.9% at $95.47 a barrel. 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NEW DELHI (Reuters) – Indian companies are using Asian currencies more often to pay for Russian coal imports, according to customs documents and industry sources, avoiding the U.S. dollar and cutting the risk of breaching Western sanctions against Moscow. Reuters previously reported on a large Indian coal deal involving the Chinese yuan, but the customs data underline how non-dollar settlements are becoming commonplace.India has aggressively stepped up purchases of Russian oil and coal since the war in Ukraine began, helping to cushion Moscow from the effects of sanctions and allowing New Delhi to secure raw materials at discounts compared to supplies from other countries.Russia became India’s third-largest coal supplier in July, with imports rising by over a fifth compared with June to a record 2.06 million tonnes.In June, Indian buyers paid for at least 742,000 tonnes of Russian coal using currencies other than the U.S. dollar, according to a summary of deals compiled by a trade source based in India using customs documents and shared with Reuters, equal to 44% of the 1.7 million of tonnes of Russian imports that month. Graphic: India coal imports from Russia vs rest of World, https://fingfx.thomsonreuters.com/gfx/ce/gkplgodklvb/IndiaCoalImportsRussiaRow.png Indian steelmakers and cement manufacturers have bought Russian coal using the United Arab Emirates dirham, Hong Kong dollar, yuan and euro in recent weeks, according to customs documents separately reviewed by Reuters.The yuan accounted for 31% of the non-U.S. dollar payments for Russian coal in June and the Hong Kong dollar for 28%. The euro made up under a quarter and the Emirati dirham around one-sixth, the data from the trade source showed.India’s Ministry of Finance, which administers the customs board, did not respond to emails seeking comment confirming the documents. The Ministry of Commerce and Industry declined to comment. The Reserve Bank of India also did not respond to requests for comment. The RBI has approved payments for commodities in the Indian rupee, a move it expects to boost bilateral trade with Russia in its own currency.The U.S. dollar has been the dominant currency for Indian commodity imports, traders said, and the greenback makes up most of the country’s foreign exchange reserves.For deals in a currency other than the dollar, lenders would potentially have to send dollars to bank branches in the country of the original currency, or banks they have tie-ups with, in exchange for that currency to settle the trade.KEEPING DOLLAR AT A DISTANCETwo traders based in India that purchase coal for domestic customers and a trader based in Europe that deals with Russian coal said they expected the share of non-dollar transactions for Russian coal to increase as banks and other parties explore ways of cushioning themselves against any further tightening of sanctions.Buying Russian coal using the U.S. dollar is not illegal for Indian firms.Reuters was able to corroborate customs documents for four of the 11 vessels in the summary of Russian coal trades in June provided by the trade source, which showed payments made using the yuan, euro and the Emirati dirham, using shiptracking data and by speaking to a private customs agent based in India.Another three vessels in the 11 deals in the trader’s summary were paid for using the Hong Kong dollar and the yuan, two trade sources familiar with the transactions confirmed. In one of those three deals, Jindal Steel and Power Ltd (JSPL) imported 79,721 tonnes of so-called PCI coal in the vessel Zheng Kai from Russia’s Ust-Luga port using yuan, according to the two sources.Rival steelmaker Arcelormittal (AS:MT) Nippon Steel India shipped in 35,000 tonnes of Russian anthracite coal using euros, a customs document dated June 15 showed.JSPL and Arcelormittal Nippon declined to comment. Non-dollar imports continued into July.Two Indian customs documents from last month reviewed by Reuters showed that Indian companies agreed to pay for Russian coal using Hong Kong dollars and Emirati dirhams.India’s JK Lakshmi Cement imported 10,000 tonnes of Russian thermal coal in the bulk vessel Ada, according to a customs document dated July 20. The invoice was valued at 14.62 million Emirati dirhams ($3.98 million), and trader Swiss Singapore facilitated the deal.JK Lakshmi did not respond to calls or emails requesting a comment. Swiss Singapore, owned by Indian conglomerate Aditya Birla Group, did not respond to requests seeking comment. Indian coal trader Chettinad Logistics imported 25,000 tonnes of Russian thermal coal from Singapore-based trader Avani Resources and paid in Hong Kong dollars, another customs document dated July 20 showed.Reuters was unable to contact Chettinad Logistics. Avani did not respond to an email seeking comment.($1 = 0.9764 euros)($1 = 7.8497 Hong Kong dollars)($1 = 3.6729 UAE dirham) More
BANGKOK (Reuters) -Thailand’s central bank raised its key interest rate for the first time in nearly four years on Wednesday, lifting it by a quarter point as expected to fight surging inflation as the economic recovery gains momentum.The Bank of Thailand (BOT), which had been among Asia’s least hawkish central banks, finally joined most of its peers in raising rates as consumer inflation hovers near 14-year highs, though it stressed further hikes will be gradual.The Southeast Asian country had maintained its policy focus on supporting the economic recovery, which has lagged that of its neighbours due mainly to tourism curbs during the COVID-19 pandemic. The vital tourism sector has just begun to recover this year as restrictions were eased.The monetary policy committee (MPC) voted 6-1 to increase the one-day repurchase rate to 0.75% from a record low of 0.50%, which had been unchanged since May 2020.One member voted to raise the rate by 0.50 percentage points, saying that would reduce the risk of having to increase the rate aggressively later on and adding that such an increase would not significantly affect the recovery. The rate was last raised in December 2018.Seventeen of 20 economists surveyed by Reuters had expected a quarter-point hike, with the remainder predicting a half-point rise.”The Thai economy is projected to continue recovering with strong momentum” from higher-than-expected foreign tourism, Piti Disyatat, secretary of the MPC, said in a statement https://www.bot.or.th/English/PressandSpeeches/Press/2022/Pages/n4065.aspx.”The economy is expected to return to the pre-COVID level by the end of this year and will continue to gain traction.”The BOT may revise up its 2022 economic growth forecast of 3.3% when it reviews it next month, Piti added, saying foreign tourist numbers were expected to beat its forecast of 6 million this year.The economy expanded 1.5% last year, among the slowest in Southeast Asia.Driven by energy prices, the consumer price index (CPI) rose 7.61% in July from a year earlier, far above the BOT’s target range of 1-3%.The bank said it expected inflation to remain high for the rest of the year before gradually falling to its target range in 2023 as supply-side price pressures ease.”The Committee views that the policy rate should be normalized to the level that is consistent with sustainable growth in the long term,” the statement said. “If inflation continues to weaken as we expect and growth struggles, the central bank will take a gradual approach to its tightening cycle. We think rates will peak at 1.5% next year,” Gareth Leather of Capital Economics said, noting its forecasts were more conservative than what financial markets are expecting. Miguel Chanco, chief Emerging Asia economist at Pantheon Macroeconomics, said Wednesday’s hike was “inevitable and long overdue” and will be followed quickly by another 25 bps move next month.”That said, if the MPC decides to pause in September, then a hike in November probably should be ruled out, as the inflation picture would’ve improved substantially…” More
Investors are watching closely for hairline cracks in the US consumer loan market as lower-income borrowers feel the squeeze of high prices and rising interest rates.US household debt levels have skyrocketed this year as Americans borrow more to pay for increasingly expensive homes and cars.It’s not just big-ticket items: rising rents as well as higher prices at the petrol pump and in the grocery store have pushed consumers to rely more on credit cards. Research from the Federal Reserve Bank of New York shows that US households held a record-breaking $16tn in debt as of the second quarter of this year, an increase of roughly $2tn since before the pandemic. For now, overall delinquencies — debts past their due date — remain historically low at around 2.7 per cent and big lenders including banks have not yet registered a significant uptick in losses on consumer loans. Unemployment has been steady at pre-pandemic lows and Americans have continued to feel the benefit of early pandemic stimulus. But while overall delinquencies did not rise in the second quarter and are still 2 percentage points lower than they were pre-pandemic, the composition has changed. A growing share are now in the early stages of delinquency, according to the New York Fed data, which could signal developing problems. These are particularly notable in credit card and car loans, where delinquencies are picking up in lower-income areas and among subprime borrowers.Analysts and economists warn that these problems could proliferate as the US Federal Reserve rapidly lifts interest rates to rein in price growth that continues to run at 40-year highs. The central bank’s tightening has not yet hit the US labour market, with the unemployment rate at a half-century low, but economists expect it to do so eventually as companies scale back hiring. Tighter monetary policy is also expected to make new credit harder to access, all while borrowers face higher debt payments on credit cards and other variable-interest loans. Figures from Dv01, a market data platform that tracks consumer loans offered by financial technology companies such as SoFi, LendingClub, Prosper and Marlette, showed that new credit impairments which were not fixed within 30 days exceeded pre-Covid levels for the first time in May. An impairment occurs when negative information about the borrower — late payments, defaults, delinquencies — are added to their file. The trend was driven by borrowers with low credit scores but Dv01 data also indicated rising impairments among households that earned up to $120,000 a year.The pool of loans outstanding that is tracked by Dv01 sits at roughly $30bn. That is a much small number compared to credit cards or mortgages, but still notable because these fintech loans are likely to be “charged off” — a delinquent loan flagged by the lender as unlikely to be paid off — faster than more traditional consumer loans, said Jason Callan, head of structure products at Columbia Threadneedle, potentially revealing problems in the sector sooner. “Most high-level data still looks incredibly low. But these problems start from somewhere. And as you tighten lending standards, you cut off access to credit, you charge more for that credit, which leads to worse and worse outcomes,” said Callan.Delinquency rates have begun to pick up in car loans as well, driven by subprime borrowers — with the rate in June at 2.7 per cent, up 0.8 percentage points from a year ago, data compiled by Moody’s show. While that trend is still well below historical averages, those rates are expected to continue to rise as the last of the Covid stimulus savings are drawn down, the Moody’s report said. The rise in delinquencies so far has been too low and limited to signal growing risk of recession. But each of these data points suggests that despite an unemployment rate that is at 3.5 per cent and a still-robust consumer, economic strains are building for lower-income households. Those strains began as inflation eroded pandemic savings and will worsen as the Fed tightens monetary policy in a deliberate effort to cool the US economy. The Fed is due to raise interest rates by between 0.5 and 0.75 percentage points at its next meeting in September. Evidence of a slowdown in the world’s largest economy — a second consecutive quarter of contraction in gross domestic product reported in July — had initially prompted investors to bet that the Fed would slow its pace of rate rises in September after two 0.75 percentage point increases in June and July. However, a strong jobs report released last Friday, showing a continued rise in wages across sectors, has changed the outlook for now. “I think that we are very likely to see a sustained period of very slow growth,” said Eric Winograd, an economist at AllianceBernstein. “In that sort of environment, I would expect to see an increase in consumer delinquencies. I suspect that the labour market will weaken. And as the labour market weakens, people are going to struggle to stay current (on their debt payments).” More
The writer is UK economist at Morgan StanleyWith inflation higher than it has been in decades, there is no shortage of critics of the Bank of England. Still, the bulk of the blame seems largely unfounded.The BoE has been criticised for being too slow to raise rates and doing too little since. But the central bank was dealt a particularly bad macroeconomic hand to play. An earlier, tighter policy regime would have had only a limited effect in damping current inflation, and under the circumstances, the BoE’s monetary policy course might be the best choice among a set of difficult options.On our forecasts, higher food and energy bills will directly account for 60 per cent of the anticipated peak inflation figure in October print. Non-core inflation is not something monetary policy can impact.In December last year, the BoE made the point that, given the lags of monetary policy, to address a build-up in imported inflation even prior to the Russian invasion of Ukraine, it would have had to start a fairly aggressive policy tightening as far back as during the first wave of the pandemic in early 2020. That was just as the UK economy was about to be battered by an almost 20 per cent quarterly contraction due to the first lockdown.Implementing such a tight policy may have contained inflation to the BoE’s desired goal of 2 per cent by early 2022, but unemployment would have shot up by about 800,000 jobs, according to the central bank’s modelling.In fact, compared with its peers, the BoE’s reaction was rather timely. As early as last September, it acknowledged that inflationary pressures might not be transient; and by February, it had raised rates twice and announced the start of its balance sheet reduction. In stark contrast, the Fed and the ECB were then still purchasing assets under their QE programmes.Even the UK’s labour market tightness is probably more a supply than a demand story. Employment is still well below its pre-Covid peak — by 210,000 jobs — with labour supply down by 290,000 workers as recently as May. Apart from reduced migrant inflows, the lower domestic participation rate is a problem too. For example, the UK has never had as many potential workers outside the labour market due to health issues. The BoE can impact labour demand by slowing growth, but there is nothing it can do to shorten NHS waiting lists.Moreover, the relatively lacklustre post-pandemic recovery in the UK belies the argument of monetary policy-driven inflation. Business investment growth has been very subdued, and consumption growth is now slowing too despite the simplistic read of real rates of negative 8 per cent after taking forecast inflation for August into account.Instead, it can be argued that a Brexit-related reorientation of imports away from the EU is a possible culprit in surging prices. UK manufactured goods inflation was at its recent peak over 4 percentage points higher than in the euro area. Even the conventional view that higher rates alone can help prop up the currency, and thus damp inflation on imported goods, was undone last week when the sterling-dollar exchange rate fell following the BoE’s bold 0.50 percentage point rate rise, as traders focused on weakening growth.Facing a more difficult employment and inflation trade-off than for other central banks, BoE action has been largely gradual in its approach in the first half of this year. Given it is forecasting a medium-term inflation rate of well below 2 per cent, there is an argument that the current pegging of Bank Rate may already have reached the level consistent with the BoE’s remit of returning inflation to 2 per cent over time.Still, with short-term inflation expectations elevated, and another imported inflationary shock on the horizon as gas and electricity prices are scheduled to rise again in October and January, the Monetary Policy Committee opted for a more forceful approach last Thursday. Increasing rates by 0.50 percentage points while forecasting a prolonged recession demonstrates the MPC’s intent to act against any and all inflationary pressures.So, what then of possible fiscal policy? In our view, fiscal action should be aimed at low-income households, which have seen relatively weaker wage growth thus far and probably have little to no excess savings from the pandemic. Such targeted support would shield the most vulnerable, while having a limited impact on inflation.Easing labour supply shortages could also have the effect of lowering inflation, so supporting the NHS in a faster reduction of its waiting lists is a good option. The BoE has a difficult task and no easy policy choices. Fiscal policy should not make the Bank’s already challenging task even more complicated.The graph in this article has been amended to include the latest rate rise from the Bank of England More
