Economy

Central banks are raising rates rapidly in the most widespread tightening of monetary policy for more than two decades, according to a Financial Times analysis that lays bare the reversal of their previous historically loose stance. Policymakers around the world have announced more than 60 increases in current key interest rates in the past three months, according to an FT analysis of central banking data — the largest number since at least the start of 2000. The figures illustrate the sudden and geographically widespread reversal of the very accommodative monetary policies adopted since the global financial crisis in 2008 and boosted further during the coronavirus pandemic. Interest rates hovered near unprecedented lows in most advanced economies for the past decade, and in some cases went negative.The sudden shift in policy comes as inflation has reached multi-decade highs in many countries, fuelled by soaring energy and food costs since Russia invaded Ukraine in February.Jennifer McKeown, head of global economics service at Capital Economics, a research firm, said: “The world’s central banks have embarked on the most co-ordinated tightening cycle in decades.” 

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Among the 55 key policy rates that have recently increased are those of the Federal Reserve and the Bank of England, which have both called time on decades of ultra-loose monetary policy and responded to surging prices with rate rises at successive meetings. Christian Keller, economist at Barclays, said: “The tightening cycle is truly a global phenomenon.”In early May the Fed raised its benchmark policy rate by 50 basis points to a range of 0.75 per cent to 1 per cent, the largest increase since 2000. The Bank of England has raised rates at the past four meetings, with May’s increase taking the main rate to 1 per cent. The European Central Bank looks set to raise borrowing costs for the first time since 2011 in July and end its eight-year experiment with negative rates in September. The Canadian, Australian, Polish and Indian central banks are all expected to raise rates in the coming weeks. Despite this, rates are still low by historical standards and economists warned that the recent increases are just the beginning of a global tightening cycle.

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McKeown said that of 20 major central banks around the world, 16 are likely to raise interest rates over the next six months. Tightening is expected to be fastest in the US and UK. Markets expect an increase in policy rates by at least 100 basis points by the end of this year or early next year in the eurozone, Canada, Australia and New Zealand. Keller said the widespread trend made it more likely policymakers would consider more substantial moves: “Announcing unexpectedly larger or earlier policy steps feels easier if everyone else is doing them.”Emerging markets in Latin America embarked on tightening cycles last year, as their economies were damaged by the pandemic. Brazil has raised rates 10 times in just over one year to 12.75 per cent, up from only 2 per cent in March last year. Mexico, Peru, Colombia and Chile have also raised borrowing costs.Silvia Dall’Angelo, economist at the investment management company Federated Hermes, said central banks in emerging markets “have been more reactive to the appearance of elevated inflation”. In Africa, Ghana, Egypt and South Africa have all increased their rates.

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While inflation has been lower in East Asia, the Bank of Korea last Thursday raised its benchmark rate for the second consecutive month, and Bank Negara Malaysia surprised markets with a 25 basis point rise earlier this month.One major economy bucking the trend is China, where mounting economic damage from widespread virus restrictions and troubles in the property sector prompted officials to cut the one-year loan prime rate by 10 basis points from 3.8 per cent to 3.7 per cent. Private lenders have also lowered their mortgage rates. The Bank of Japan has maintained its pledge to keep yields at zero, including by expanding its balance sheet if necessary. The Bank of Russia, which aggressively raised rates last year and at the start of its invasion of Ukraine, has cut them three times in recent months, reflecting the stabilisation of the rouble. More

Egypt had been increasing its borrowing to plug current account and budget deficits even before Russia’s invasion of Ukraine in February and the first U.S. Federal Reserve rate hike in March, analysts say.Fed hikes have put pressure on Egypt to raise its own interest rates, pushing borrowing costs higher, and the Ukrainian crisis has increased the cost of imported commodities and cut into tourism revenue.Egypt has raised its benchmark overnight interest rates by three percentage points since March.Egypt’s total external debt rose to $145.5 billion at the end of December from $137.4 billion as of the end of September, the central bank data showed.Foreign debt was equivalent to 33.2% of gross domestic product at the end of December, up from 32.6% at the end of September, the data showed. More

UK employers who commit to pay the voluntary “living wage” are being urged to bring forward a bumper pay rise to match soaring prices and utility bills, as inflation is expected to reach double digits in the autumn.The Living Wage Foundation, a charity that campaigns for fair pay, said on Sunday it would bring forward its announcement of the 2022-23 living wage rate from November to September because prices were rising at a rate “unprecedented” in the campaign’s 20-year history. It will encourage employers to pay the new rate as soon as possible.“Rising prices are eating away at all of us, but nobody is feeling the pinch more than the 4.8mn low paid workers across the UK,” said Katherine Chapman, the foundation’s director. “It’s never been more important that employers who can afford it protect those who will be most affected by price rises.”More than 10,000 employers, including large companies such as Google and more than half the FTSE 100, are now accredited with the foundation, meaning they have committed to pay all employees and contractors in their supply chain at an hourly rate that is higher than the statutory minimum, and recalculated each year to reflect everyday living costs.The announcement could boost pay for a significant proportion of the UK’s workforce — helping to ease the squeeze on low income households, but adding to the difficulties the Bank of England faces as it battles to bring inflation under control. The BoE has made it clear it thinks wages are already rising at an unsustainable pace­­; and now also has to determine whether the £15bn of government support for households announced last week, which is targeted on the most vulnerable, will add to inflationary pressures.Research by Cardiff Business School has found that one in 13 employees now works for a living wage employer, with 300,000 benefiting directly. The living wage is also often used as a benchmark by large employers even if they do not seek formal accreditation.The rate currently stands as £9.90 an hour across the UK, with a London rate of £11.05 to reflect the higher costs of living in the capital. The statutory minimum, which is set by government with advice from the independent Low Pay Commission, rose by 6.6 per cent to £9.50 in April.

The BoE said this month it expected inflation to reach 10 per cent in the autumn, but the new living wage rate will not necessarily match consumer price inflation, because it is based on a basket of goods and services chosen to represent a “minimum income standard”, and also factors in changes in the tax and benefits system. Two-thirds of the £15bn support announced by chancellor Rishi Sunak last week will flow to the 8mn households in receipt of benefits.The worry for the BoE is that companies say they are currently finding it easier than normal to pass on higher costs to their consumers — so that higher wages and government help for households could simply drive up prices again, leaving people no better off.Reflecting ministers’ frustration with this dynamic, the Sunday Telegraph reported that Prime Minister Boris Johnson had ordered officials to draw up proposals to name and shame petrol stations that failed to pass on the 5p cut in fuel duty fully to customers. More

The writer is director of economic policy studies at the American Enterprise Institute After years of pandemic spending, both US political parties are refocusing on the budget deficit. Republicans blame last year’s American Rescue Plan for today’s troubling inflation. Democrats by and large dispute this, but Joe Biden is touting his deficit reduction measures and championing long-term fiscal responsibility.This represents a welcome turn in US politics. However candour about the long-term fiscal imbalance should be coupled with honesty about the solution: the middle class will bear much of the burden of stabilising budget deficits and the national debt.Of course, neither political party would have you believe that. There is bipartisan agreement in Washington that the middle class should not face tax increases or spending cuts. Republicans don’t want to hike taxes, and the White House has repeatedly promised that its deficit-reduction plans will not increase taxation on those earning less than $400,000. In its populist incarnation, the GOP has abandoned any pretence of wanting to reduce spending on Social Security and Medicare, the middle-class entitlement programmes. Democrats have long opposed such cuts.Deficits and debt are on an upward, unsustainable trajectory. The year before the 2008 financial crisis, the national debt was roughly one-third of annual economic output. By 2012, the debt-to-GDP ratio had exceeded two-thirds. As a share of GDP, the non-partisan Congressional Budget Office expects the deficit to be 6.1 per cent and the debt to be 109.6 per cent by 2032. This situation can’t be fully remedied by cutting spending on low-income households. In 2019, before the pandemic, around one quarter of (non-interest) spending went to safety net programmes such as housing, nutrition, energy assistance, cash welfare and healthcare. That would have been enough to balance the budget in that year, but doing so would have left only 10 cents on the dollar for financially-vulnerable households.More importantly, spending on the entitlement programmes that benefit the middle classes is projected to grow rapidly. Due to rising healthcare costs and the ageing population, the CBO expects Medicare and Social Security spending to increase by 56 per cent over the next three decades. This is expected to dwarf the projected increase in spending on the healthcare portion of the safety net. The remainder of federal spending — including other safety net programmes — is expected to decline as a share of annual economic output over this period.Increasing taxes on the well-off would also fail to put the federal budget on stable footing. The non-partisan Committee for a Responsible Federal Budget estimates that repealing the 2017 tax cuts for high earners, increasing taxes on capital income and imposing a 5 per cent surtax on incomes above $10mn and 8 per cent on incomes above $25mn would still leave the debt on an unsustainable path. According to their forecasts, it would grow by around 80 per cent from 2032 to 2050.Biden is focusing on people with incomes above $400,000 per year, less than 2 per cent of all tax filers. According to my estimates, increasing the tax rate on this group to a politically infeasible 95 per cent would generate an additional $421bn of tax revenue in 2022. This would reduce the primary deficit by 74 per cent. But since the deficit is projected to increase faster than the overall economy, even a tax rate this aggressively high would reduce the primary deficit by less than one-half by the end of the decade and by around one-third in 2050. The debt would still be growing, not shrinking.In reality, such a high rate would lead to less work, fewer savings, more tax evasion and avoidance as well as an exodus of high earners — and substantially less revenue than I estimated. Raising the rate on income above $400,000 to 60 per cent would have relatively fewer behavioural effects, but still wouldn’t solve the problem: the primary deficit would be 19 per cent lower in 2032 and 14 per cent lower in 2050 with this rate, according to my calculations.Ever-higher debt and deficits are a threat to long-term economic growth, wage growth and living standards. Ever-growing interest payments will reduce the political space for investments in infrastructure, basic research and upward economic mobility. If anything, politicians will make the problem worse, not better. Democrats continue to propose spending initiatives and if they return to power, Republicans will probably attempt to reduce tax revenue.This threat can be addressed, but there simply is not enough revenue held by the top 2 per cent or enough spending on low-income households to correct the nation’s long-term fiscal imbalance. The middle classes will have to bear much of the burden — a reality that US elected leaders are reluctant to face. More

ADQ has become the leading vehicle for outbound investments from Abu Dhabi, managing about $110 billion in assets, according to Global SWF. It acquired a 45% stake in commodities trader Louis Dreyfus Co (LDC) in 2021. The partnerships will focus on areas of mutual interest including agriculture, pharmaceuticals, minerals, petrochemicals and textiles, state news agency (MENA) reported in a separate statement on Sunday. More

Switzerland and China signed a free trade agreement in 2013, Beijing’s first such deal with an economy in continental Europe. The move was styled as a mutually beneficial pact aimed at contributing to increased trade between the two economies.Switzerland has been trying to update the accord to extend tariff reductions to more Swiss products and to expand the agreement to include sustainability features. However, Beijing is not engaging, the newspapers said.”So far it has not been possible to agree on a common list of topics that should be explored in greater depth,” Switzerland’s State Secretariat for Economic Affairs (SECO) said in a statement to newspaper SonntagsBlick.NZZ am Sonntag, under the headline “The Chinese impasse”, said Switzerland had become more critical of China’s human rights record.A Swiss parliamentary initiative recently passed by the National Council’s Legal Affairs Committee denounced forced labour of Uyghurs in northwest China as “a real problem”.Western states and rights groups accuse Xinjiang authorities of detaining and torturing Uyghurs and other minorities in camps. Beijing denies the accusations and describes the camps as vocational training facilities to combat religious extremism.Jean-Philippe Kohl, head of economic policy at industry association Swissmem, told the NZZ am Sonntag that Switzerland should pursue quiet diplomacy on China’s human rights record. “If we, as a small economy, constantly point the finger of rebuke at China, nothing will change, except that relations will eventually break down,” he told the newspaper. More

Last Thursday, the UK government unveiled a £15bn-plus policy package to address energy prices, big enough to redistribute close to one per cent of national output. That a Tory chancellor, Rishi Sunak, should preside over such massive redistribution and market interference illustrates the scale of the challenge faced by most European governments today.Addressing the cost of living crisis is their most acute political imperative. It is tempting to do so with short-term solutions. But this risks aggravating even greater medium-term challenges: the carbon transition and the need to resist Russian President Vladimir Putin’s designs on the balance of power in Europe. Both require fundamental reform of our energy systems, not financial sticking plasters.Sticking plasters are needed too, of course. The rise in energy prices in Europe has been breathtaking. Prices for natural gas have grown five to tenfold higher than normal since last autumn, when Putin began to tighten supplies. Electricity has followed suit, because gas-fired power plants often provide the balance of fluctuating energy demand in Europe’s power markets. Global oil prices are double their 2019 levels. Such price movements are politically potent because they entail two significant economic redistributions. One international, from energy importers to exporters; the other within countries — even within energy exporters such as Norway — from consumers to producers of energy. Since energy takes a larger bite out of the budgets of those on lower incomes, this is regressive — and is made worse as energy costs push up the price of everything else.Together this makes for a dire predicament. Most countries face a hit to their real incomes just when it becomes indispensable to help those of their citizens who can least bear greater hardship. So what principles should guide their policies?Governments have, roughly, four ways of mitigating higher energy costs. First, they can directly cap prices. Second, they could reduce or eliminate any taxes on energy purchases. Third, they might leave prices untouched, but directly compensate groups of people for the higher costs. Fourth, they could leave prices themselves untouched, but change the market structures through which they are set — in particular so that consumers can benefit from renewable electricity’s low marginal generation cost. For example, in the EU there is a push to make electricity pricing less linked to the marginal cost of generation, which at the moment means the cost of using gas in thermal power plants. Another example is to strengthen incentives for buyers and sellers of energy to enter into long-term contracts with more stable prices. What most distinguishes these approaches is whether they work with or against the market, and as a consequence align with or frustrate the longer-term interests of the governments that adopt them.The first two, by trying to push prices below their true marginal costs, encourage consumers to use more of the energy sources whose relative scarcity is responsible for driving prices so high: gas for heating and electricity, oil for non-electrified transport. Price caps on energy prices, such as the UK’s one on what households pay, and reduction in taxes such as fuel duty, are guilty of this flaw. Trying to blunt fundamental relative price signals in order to lower average price inflation is bound to store up problems for the future. It increases demand for fossil energy — and by extension for energy sold by Russia — and reduces the incentive to invest in renewables.The third and fourth approaches are therefore preferable. By allowing marginal prices for the energy source getting us into trouble to rise as high as necessary, they protect the incentive to economise or shift into substitutes. Direct financial support is easy to design and can be targeted at those in greatest need. Structural reform of energy markets is harder and may have to include elements of implicit rationing.But most importantly, compensating measures must be matched with plans to change how we generate and consume energy: big and rapid rollout of low-marginal cost renewables and much greater capacity in storage to allow people to shift away from spiking costs.How does the UK’s current set of policies measure up? The good: new direct support announced this week. The bad: retaining ill-designed price controls. And the ugly: far too little in the way of investment in a smarter energy system. As a sticking plaster, it does the job. It fails badly as a sustainable solution to our [email protected] More

Will eurozone inflation accelerate to a new high?Eurozone inflation has been rising for 10 consecutive months and most economists think it has further to go. Annual consumer price growth is expected to have accelerated in May, hitting its highest point since the single currency’s creation in 1999.The fallout from Russia’s invasion of Ukraine has sent energy and commodity prices surging upward and added to global supply chain disruption, while the lifting of Covid-19 restrictions has boosted demand across Europe. All this has pushed inflation higher.Economists polled by Reuters on average forecast the eurozone’s harmonised index of consumer prices would increase 7.7 per cent in the year to May, when these figures are published by Eurostat on Tuesday. That would be up from April’s record of 7.4 per cent.The surge in inflation, which is expected to hit a new 40-year high in Germany of 8 per cent, as well as rising in France, Spain and Italy when national data are released on Monday and Tuesday, has prompted policymakers to promise an imminent response.Christine Lagarde, president of the European Central Bank, said last week it was on track to raise its deposit rate from minus 0.5 per cent to at least zero by September after an “unprecedented combination of shocks” drove inflation far above its 2 per cent target.Goldman Sachs economists recently predicted the ECB would raise rates by a quarter percentage point at each of its eight policy meetings between July and next June, which would lift its deposit rate to 1.5 per cent. “While a sharper slowdown in growth or persistent sovereign stresses could lead to slower policy normalisation, clearer signs of more sizeable inflationary effects could require a faster exit,” they said. Martin ArnoldCould a strong jobs report reignite pressure on the Fed to aggressively raise interest rates? Signs of weakness in US economic data published this week have pushed investors to lower their expectations of how high the Federal Reserve will raise interest rates this year. But another hot employment report could quickly undo that move. The labour department is expected to report on Friday that the US economy added 318,000 jobs in May, a slight slowdown from 428,000 the previous month, according to a FactSet poll of economists. Meanwhile, the unemployment rate is expected to have fallen to its lowest point since February of 2020. What’s more, employment forecasts for three of the previous four months have been well below the reported number.Evidence that there continues to be upwards pressure on wages could reignite inflation fears that had just begun to cool: market measures of inflation have in recent weeks fallen, and the growth in consumer prices in April slowed. A strong report could also help reassure the Fed that the US economy is strong enough to withstand further aggressive rate increases. Bets on where the Fed’s key interest rate would be by December 2022 fell from 2.8 per cent to 2.6 per cent this week after the census bureau’s report that new home sales fell by nearly 17 per cent in April, and the S&P purchasing managers’ index data showing a slowdown in the rate of growth in business activity. The Fed’s main interest rate is currently set at a range of 0.75 per cent to 1 per cent. Kate DuguidHow much are rebalancing flows lifting global stocks? The broad FTSE All World share index was down 7 per cent for May at its worst point this month, as fears about economic growth swirled across global trading desks. A big rally at the end of last week essentially wiped out those losses. Upbeat earnings released at midweek from big US retailers like Macy’s, Dollar Tree and Dollar General helped ease concerns that US consumers, a linchpin of the world’s biggest economy, are putting away their wallets in light of fiery price growth. On Friday, a report showing US consumer spending rose more than expected in April helped bolster that argument. It is a nice narrative, but at the same time, there may also be technical factors driving the recent gains in global stocks. The big fall in equities earlier this month meant that funds that target particular allocations to their portfolios — like 60 per cent equity, 40 per cent bond funds — were thrown out of kilter. That means managers would have had to buy-up equities towards the end of this month to rebalance their portfolios. JPMorgan analyst Nikolaos Panigirtzoglou noted earlier in May that the subject of “rebalancing” has been a topic of conversation recently with clients. “Given that a significant portion of the decline happened in May, we expect to see significant flows by both monthly rebalancing funds towards the end of this month and by quarterly rebalancing funds towards the end of the quarter,” he noted. The bank estimates that balanced mutual funds will have bought $34bn to $56bn in equities before the month ends on Tuesday. US corporate share buyback activity has also been “elevated” in recent weeks, according to the bank, while senior executives appear to be taking advantage of the dip to buy their own company stock. Adam Samson More