Economy

BENGALURU (Reuters) – The European Central Bank is expected to raise the deposit rate for the first time in over a decade in July and bring it out of negative territory at its following meeting in September, despite a 30% chance of recession within a year, a Reuters poll of economists showed.With inflation hitting a multi-decade high of 7.5% in April and almost every other major central bank having already raised interest rates, ECB President Christine Lagarde backed calls for an early rate hike by policymakers last week.The bank is now expected to end its bond purchases programme in July and follow that with a 25 basis-point deposit rate hike a few weeks later, according to a majority of economists polled from May 10 to 16.Until recently, forecasters were expecting the ECB to wait until the final quarter of the year to raise the deposit rate, currently at -0.50%.Of the 46 of 48 economists who expect the deposit rate to rise in the third quarter, 26 said rates would rise by 50 basis points by the end of the period, implying quarter-point moves at both the July and September meetings.Another 18 respondents said the deposit rate would only rise 25 basis points in Q3 and two said it would only climb 10 basis points to -0.40% by the end of the quarter.An even clearer majority expect rates to no longer be negative by the end of the year. About 90% of economists, or 43 of 48, said the deposit rate would be 0% or higher by then, with 44%, or 21 of 48, saying it would be at 0.25% by then and 8%, or 4 of 48, saying it would be at 0.50%.”There is widespread support for ending negative interest rate policy at the ECB, but they will take a very cautious approach to policy normalisation, in light of substantial macro uncertainty and concerns about a growth slowdown,” said Jens Eisenschmidt, chief European economist at Morgan Stanley (NYSE:MS).”This will be the first time in over a decade that the ECB is lifting rates – with no support from asset purchases – so taking smaller steps would allow the ECB to observe the reaction in markets, with a possible fragmentation of financing conditions in the euro area likely a key concern”.The latest poll results are still lagging rate futures, which are pricing in a cumulative 90 basis points of rate increases for the rest of the year or between three and four 25 basis-point moves. Even that would leave the ECB well behind the U.S. Federal Reserve, which is currently expected to have its federal funds rate around 2.00-2.25% by the end of this year. [ECILT/US] However, the poll also found the time window to raise rates is closing for the ECB, with a steady median 30% probability of a recession in the next 12 months, as the war in Ukraine pushes energy prices higher and saps consumer spending power.The bloc’s economy was expected to grow 0.3%, 0.5% and 0.6%, in the second, third and fourth quarters. This is a downgrade from 0.4%, 0.6% and 0.6% predicted last month.On an annual basis, it was expected to grow 2.7% this year, down from 2.9% and 2.3% next, the same as predicted last month.The European Commission cut its growth forecast for the euro zone this year to 2.7% from 4.0% projected in February, and upgraded its inflation forecasts to 6.0% this year from 3.5%.Rising inflationary pressures, driven by a persistent surge in food and energy prices, have deepened the cost of living crisis in the euro zone.Prices are set to rise 7.7% this quarter, over three times the ECB’s 2.0% target and higher than the 7.3% prediction given last month. It will ease gradually over coming quarters but medians did not show it at target through next year, the forecast horizon.Asked what impact the cost of living crisis would have on growth, 19 of 25 economists said it would be severe and two said very severe. Only four said it would be mild.It will be over six months before the crisis eases significantly according to 90% of the respondents to another question.Despite recession risks, unemployment in the single currency bloc is expected to remain near record low levels at 6.9% and 6.8% this year and next.Meanwhile, average wage growth was expected to be 3.0% this year, the poll median showed.”While current dynamics are triggering higher wage demands, companies are still being cautious due to the weakening outlook,” said Bas van Geffen of Rabobank.”Anecdotal evidence is therefore also pointing to shorter wage agreements so that there’s flexibility to adjust next year, either higher or lower, depending on inflation. So, so far it still seems to be mostly catch-up wage growth rather than forward-looking”.(For other stories from the Reuters global economic poll:) More

Setting out guidance in a mid-term presentation, Nomura said it would target annual pretax income of between 350 billion yen and 390 billion yen ($2.7 billion and $3.0 billion) for its three core divisions in the year to end-March 2025.That compared to 205.2 billion yen it posted for the year ended in March 2022.Nomura also said it will create a new digital asset company later this year that will allow institutional investors to trade products linked to cryptocurrencies, stablecoins, decentralized finance and non-fungible tokens.($1 = 128.9100 yen) More

Treasurer Josh Frydenberg said Tuesday the government planned to increase an efficiency dividend for public service agencies to 2% from 1.5% over the next three years if re-elected on May 21. The measure will cover the costs of all the coalition’s election announcements while leaving the budget better off.“It’s a responsible approach,” Frydenberg told reporters in Melbourne. “It ensures our budget bottom line actually improves over time.”The opposition Labor party is due to release its policy commitment costings on Thursday ahead of Saturday’s ballot.Australia’s books will remain deep in the red over the four-year horizon set out in this year’s budget, reflecting the hit to growth and vast fiscal spending deployed to support the economy through the pandemic. The center-right government, which is trailing in opinion polls, maintains Labor will increase taxes to pay for higher spending. ©2022 Bloomberg L.P. More

WELLINGTON (Reuters) – New Zealand has long been seen as the moderate, even absent, voice on China in the “Five Eyes” western alliance, so much so that its commitment to the group was questioned just 12 months ago. The recent signing of a security pact between China and nearby Solomon Islands appears to have changed that.New Zealand’s tone on both security and Beijing’s growing presence in the South Pacific has toughened, a shift analysts say reflects concerns the agreement will give Beijing a strategic foothold and potentially a military presence in the Pacific that could destabilise Western influence.”It’s a real challenge to New Zealand’s sense of where the Pacific is heading,” said Robert Ayson, Professor of Strategic Studies at Victoria University of Wellington.Prime Minister Jacinda Ardern described the pact as “gravely concerning” and called on Solomon Islands to discuss it within the Pacific Islands Forum. “What is really changing around us is the level of assertiveness and aggression we see in the region,” Ardern said later at a United States-New Zealand Business Summit.New Zealand has previously often shied away from such criticisms, which analysts put down to the country’s heavy trade reliance and close economic relationship with China. Both China and the Solomon Islands have said the new pact will not undermine peace in the region. Details of the final agreement have not been released but Chinese foreign ministry spokesman Wang Wenbin said the agreement called for China to help the Solomon Islands maintain social order and cope with natural disasters, and did not pose a risk to the United States.SOFT POWERBut statements by Ardern and Foreign Minister Nanaia Mahuta were a clear signal they shared U.S. and Australian concerns about Chinese security engagement in the Pacific, said Anna Powles from the Centre for Defence and Security Studies at Massey University. “It also sent a signal to the Pacific that New Zealand supported regional collective security initiatives, and to third parties, specifically China, that regional crises in the Pacific would be managed by the region,” she said.While small and with limited military capabilities, New Zealand’s soft power in the Pacific is arguably stronger than its allies. It has a large Pacifika population and strong family, business, sporting and cultural ties along with territories in the region.New Zealand sees itself as a Pacific country and wants stability and prosperity for its neighbours, and needs a free and open Indo-Pacific to protect trade and telecommunication connections. David Vaeafe, programme manager at non-governmental organisation Pacific Cooperation Foundation, said the relationship with the Pacific was not all about money but about listening and understanding what the region needs.”New Zealand’s foreign policy towards the Pacific is slowly evolving and engaging from being ‘you shouldn’t do this’ to consulting and being part of that process,” he said. FIVE EYES CRITICISMSA year ago, there were questions over Wellington’s commitment to the Five Eyes alliance with Australia, Britain, Canada and the United States, after Mahuta said Wellington was uncomfortable with expanding the role of the group.There had been criticism after New Zealand opted not to sign joint statements from other Five Eyes members, including one on Hong Kong and another on the origins of COVID-19.White House Indo-Pacific coordinator Kurt Campbell told a business summit earlier this month that New Zealand’s underestimation of security risks in the past appeared unlikely to be an issue. “I think there is an understanding that the challenges that are presenting themselves on the global stage are not so distant – they’re closer and they have direct implications,” he said.Already New Zealand and Japan have announced plans to increase security ties and other moves are afoot. Mahuta visited Fiji at the end of March and signed an agreement that among things will facilitate information on shared security challenges.At the start of the month, a partly New Zealand-backed tuna processing plant for the Solomon Islands that is set to create more than 5,500 jobs was announced. The Ministry of Foreign Affairs and Trade has quietly shuffled more money into Pacific development cooperation budget for 2021-2024, according to changes made on its website. The fund has been increased since December by nearly NZ$120 million ($75 million) to $1.55 billion. New Zealand’s budget on Thursday will likely give further detail on Pacific spending with New Zealand’s defence minister previously highlighting the region as a priority. “New Zealand is quite strongly aligned to the United States and Australia,” VUW’s Ayson said. “That doesn’t mean we always see eye-to-eye and it doesn’t mean the we’re as closely aligned as Australia, but New Zealand’s security alliance is quite strong.”($1 = 1.6038 New Zealand dollars) More

WASHINGTON (Reuters) – The U.S. Senate voted on Monday to advance $40 billion more aid for Ukraine in its war against Russia, setting the stage for a vote on the bill possibly later this week, after the military and humanitarian assistance was delayed due to opposition from one Republican senator.The tally was 81 to 11 on the first of a potential three procedural votes paving the way for final Senate passage of the funding, requested by President Joe Biden’s administration to keep aid flowing and boost the government in Kyiv nearly three months after the start of the Russian invasion.All 11 “no” votes were from Republicans.The House of Representatives approved the aid on May 10. But it stalled in the Senate after Republican Senator Rand Paul refused to allow a quick vote. Biden’s fellow Democrats narrowly control both the House and Senate, but Senate rules require unanimous consent to move quickly to a final vote on most legislation.Paul said he wanted an inspector general to be appointed to oversee the funds, but declined an offer from Senate leaders to hold an amendment vote on his proposal. Changing the bill would force the House to vote on it again, causing further delay.There is strong support from both parties for assisting Ukraine. The House passed the measure by 368 to 57, with substantial Republican support, despite all 57 of the “no” votes in the House coming from Republicans. Mitch McConnell, the top Republican in the U.S. Senate, led a small delegation to Ukraine this weekend. He said on Sunday the Senate could approve the aid on Wednesday.The Biden administration had said additional money for Ukraine must be approved by Thursday in order to avoid a lapse in U.S. assistance. More

Taiwan Semiconductor Manufacturing Co has warned clients for the second time in less than a year that it plans to raise prices, citing looming inflation concerns, rising costs and its own massive expansion plans to help alleviate a global supply crunch, people briefed on the matter told Nikkei Asia.TSMC, the world’s biggest contract chipmaker, is planning to raise prices by “single-digit percentages” across both mature and advanced chip production technologies, according to six people with knowledge of the matter. The planned price increase would take effect by the beginning of 2023, they said.Two people said the price increases would be around 5 to 8 per cent for different process technologies, from cutting-edge to legacy nodes, making products from advanced processors, connectivity chips and sensors to microcontrollers and power management integrated circuits.“The early notice is to give customers some buffer to prepare for the price adjustments, while TSMC’s move to raise prices is to address increasing costs and capital needs for historic expansions,” one of the people with knowledge told Nikkei Asia.Another executive familiar with the matter said given the slowing demand for products such as smartphones and PCs, it might be difficult for clients to fully accept TSMC’s planned price rise “For the advanced chips it might work, but for matured nodes it could be quite challenging for customers to accept,” the person said.Rising production costs are putting pressure on chipmakers at a time when demand for smartphones and personal computers has slowed on market uncertainties sparked by inflation, the Ukraine war, and Covid-related lockdowns in China. The price increase also reflects the hefty costs of TSMC’s own expansion push. It is spending $100bn through to 2023 to increase capacity, with $40bn to $44bn earmarked for this year alone.TSMC’s notification comes less than a year after its biggest price increase in a decade. Last August, it told its clients it would increase prices by up to 20 per cent amid the unprecedented global chip shortage and its historic expansion plans. Smaller rivals such as United Microelectronics and Semiconductor Manufacturing International Co raised prices several times last year and in some cases actually charge more than TSMC. Still, such a rare move by TSMC rattled the chip industry.In another surprise, TSMC said last year it would halt its practise of lowering prices each quarter for its chip design clients after their products go into mass production and the process is running smoothly.TSMC chair Mark Liu said in March all semiconductor manufacturers had been directly affected by the rising prices of components and materials, which were driving up production costs.TSMC’s move comes as the chipmaking equipment industry grapples with severe shortages of everything from components to parts to materials. These shortages are prolonging the delivery times of machines to up to 18 months for customers such as TSMC, potentially threatening the chip industry’s expansion plans.ASML, Europe’s biggest chip production tool maker, told investors that it faces inflation concerns, costs increases in labour, materials and energy, as well as additional fees for securing parts, all of which would hurt its gross margin by 1 percentage point.TSMC said it does not comment on its pricing policies.A version of this article was first published by Nikkei Asia on May 10, 2022. ©2022 Nikkei Inc. All rights reserved.Related storiesChina’s chip strategy setbacks hold lesson for Japan on self-relianceTaiwan’s share of contract chipmaking to hit 66% this year: reportTaiwan’s $34bn southern tech building frenzy sparks property boomJapan and US to deepen co-operation in cutting-edge chips More

Research analysts at JPMorgan Chase have endorsed a clutch of Chinese internet stocks deemed “uninvestable” just two months ago in a significant shift of sentiment towards the sector. In a series of rating changes on Monday, technology analyst Alex Yao and his team upgraded seven companies to “overweight” having assigned them “underweight” ratings in March. JPMorgan also upgraded several other Chinese stocks from “underweight” to “neutral”. An “overweight” classification typically means an analyst is recommending that their clients hold more of the stock than the relevant benchmark index as opposed to less. The labels are similar to a change from “sell” to “buy”. Ratings on NetEase, Tencent, Alibaba, Meituan, iQIYI, Dingdong and Pinduoduo were all upgraded on Monday, as the companies begin to recover from a sharp sell-off earlier this year. NetEase slumped more than 30 per cent for the year to March 15, but has since recovered and trimmed its year-to-date loss to about 10 per cent.While technology companies’ stocks improve, China’s economic activity has plummeted amid Covid lockdowns. Retail sales slumped 11.1 per cent year on year, compared with forecasts of a 6.6 per cent fall by economists polled by Bloomberg. Industrial production dropped 2.9 per cent.Wall Street stocks fell in choppy trading on Monday as weak economic data from China put further pressure on the global economic outlook.Do you have feedback on today’s newsletter? Email me at [email protected]. Thanks for reading FirstFT Asia — EmilyFive more stories in the news1. Putin signals acceptance of Finland and Sweden joining Nato Vladimir Putin has signalled Russia will tolerate Finland and Sweden joining Nato, but warned that the Kremlin would respond if the alliance installed military bases or equipment in either country. Turkey president Recep Tayyip Erdoğan, however, has objected to the two nations’ applications, accusing the countries of supporting Kurdish militants.More Ukraine war news: Moscow said an evacuation of wounded Ukrainian fighters from the Mariupol steel mill was underway. Meanwhile, McDonald’s is to sell its business in Russia because of the war.2. Buffalo shooting suspect planned further attacks, police say The teenager suspected of the racially motivated mass shooting in Buffalo, New York, this weekend planned to continue his “rampage” had he not been stopped, the city’s police commissioner said on Monday. “He had plans to continue driving down Jefferson Avenue to shoot more black people,” Joseph Gramaglia, police commissioner in Buffalo, told ABC News. 3. India’s wheat export ban shakes markets Wheat prices rose by the maximum amount allowed on Monday after India imposed a ban on exports, stoking pressure on food costs as tight global supplies roiled international markets. Futures traded in Chicago rose as much as 5.9 per cent to $12.47 a bushel, their highest level in two months.4. Nomura prepares to launch crypto subsidiary Japan’s largest investment bank is to launch a new company to help institutional clients diversify into cryptocurrency, decentralised finance and non-fungible tokens, despite a recent run of volatility in the crypto market that has raised fundamental questions over its safety for investors. More crypto news: Bitcoin has no future as payments network, said the founder of digital asset exchange FTX. Meanwhile, while India’s complex relationship with crypto continues. 5. Harrow Beijing school loses its hallowed British branding A Beijing school affiliated with the 450-year-old English public school Harrow has been forced to drop its famous brand name as part of a broad tightening of controls on education providers in China. Harrow Beijing has told parents that the bilingual school will in the future be known by the name Lide.The day aheadJD.com earnings The Chinese ecommerce group will report first-quarter earnings. Last month its founder Richard Liu stepped down, marking the latest exit for one of the country’s top entrepreneurs.Sweden hosts Finland president Finnish president Sauli Niinistö makes a state visit to Stockholm as the two countries prepare to join NatoECB supervisory board chair speech Andrea Enria, chair of the European Central Bank’s supervisory board, gives a keynote speech at the Institut Montaigne in Paris.Correction: In Friday’s quiz one of the questions did not match the answer. We apologise for an error.What else we’re readingCardinal Zen will not fear the fate that awaits him in Hong Kong When the FT’s Tom Mitchell hosted a talk by Roman Catholic cleric Cardinal Joseph Zen at Hong Kong’s Foreign Correspondents’ Club in June 2009, it never occurred to him that doing so would one day become a legally perilous act. Food insecurity crisis is a bigger problem than energy Governments are spending a lot of time and resources trying to mitigate the soaring cost of energy following Russia’s invasion of Ukraine, writes Meghan Greene. But the war has sown the seeds of an even bigger crisis that is not getting nearly the same amount of attention: the global food shortage.

A food market in Colombo, Sri Lanka. Food insecurity is a source of social unrest and geopolitical risk, with rising prices sparking protests in Sri Lanka © Ishara S Kodikara/AFP/Getty Images

The new ESG realpolitik and the fossil fuel bonanza The world is not ready for an immediate shift to green energy, writes Patrick Jenkins. Pushing businesses out of fossil fuels and into renewables is the next step — but a less obviously appealing one. Being frank about that is as important for the reputation of ESG as it is for the future of the planet. Sign up here for our ESG and sustainable finance newsletter, Moral Money.Is Elon Musk too big to regulate? Many on Wall Street saw Elon Musk’s tweet on Friday announcing he was putting his purchase of Twitter “temporarily on hold” as a way of softening up Twitter’s management to negotiate a lower offer. But legal experts said it was another example of the Tesla chief executive flouting securities regulation, leaving him open to the SEC’s nuclear option.Crimea could be Putin’s tipping point in a game of nuclear chicken The US thinks Vladimir Putin would authorise the use of nuclear weapons only if he perceived an existential threat to Russia. But what would qualify as such a threat, asks Malcolm Chalmers of the Royal United Services Institute.TravelOne of the world’s oldest, most persistent, most chequered, most romantic of roads, the King’s Highway in Jordan, is as legendary and evocative as the Silk Road. Follow along with a trip along the country’s spine, in the footsteps of John the Baptist and TE Lawrence.

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Bank of England governor Andrew Bailey on Monday said he was unable to stop UK inflation hitting 10 per cent this year, as he admitted sounding “apocalyptic” on food price rises.After senior Tory MPs last week attacked the BoE over its handling of soaring price increases, Bailey accepted inflation was far too high but blamed global shocks including Russia’s invasion of Ukraine.Speaking about future risks, Bailey raised concerns about food prices. “The [risk] I’m going to sound I guess rather apocalyptic about is food,” he told the House of Commons Treasury select committee, saying that Ukraine’s inability to export its crops were “a major worry for this country”. Ukraine is a big producer of grains including wheat, and sunflower oil. His comments came as the CBI, the UK’s largest employers group, called on the government to give immediate financial support to Britons hardest hit by the cost of living crisis, alongside extra help for companies to encourage business investment.Bailey insisted the BoE would raise interest rates far enough to ensure UK inflation falls from an expected peak of more than 10 per cent in the autumn back to the central bank’s 2 per cent target.Consumer price inflation hit a 30-year high of 7 per cent in March, and the BoE Monetary Policy Committee this month raised its main interest rate a quarter point to 1 per cent.“The most important thing we can do is to get inflation back to target and to get back to target without unnecessary disruption to the economy,” Bailey told MPs. He implied the BoE would not shy away from generating a recession to do that if it was necessary. “We have to get [inflation] back to target. And that is clear,” he said.Sir Dave Ramsden, BoE deputy governor, was explicit about the additional financial pain some UK families would face as the BoE sought to curb spending and limit price rises by increasing interest rates.“If you’re remortgaging now, it’s going to cost you a lot more than [it did] a year ago and that means you will have less to spend on other things,” he said.

BoE officials came under sustained probing by MPs on the failure by the central bank to foresee the big rise in inflation and take earlier action to tighten monetary policy.“It’s a very, very difficult place to be,” Bailey said. “To forecast 10 per cent inflation and to say there isn’t a lot we can do about it is an extremely difficult place to be . . . This is a bad situation to be in.”But Bailey deflected criticism by MPs, blaming a series of shocks that he said could not be forecast.“I do see comments based on hindsight, but we have to take [monetary policy] decisions based on the facts and evidence at the time,” he said. The governor pinpointed rising prices for energy and goods as causes of inflation, and highlighted shocks such as Russian president Vladimir Putin’s invasion of Ukraine and the impact of China’s zero-Covid policy.“A sequence of shocks like this, which have come really one after another with no gaps between them, is almost unprecedented,” he said.Bailey acknowledged the MPC had changed its view about the UK labour market and now believes it is “very tight”, something it did not understand until well after the government’s Covid-19 furlough scheme ended.He highlighted a large rise in long-term sickness, which has reduced the UK workforce by about 400,000 people. Bailey said no member of the government had raised questions about the BoE’s independence with him in recent weeks.

“This is the biggest test of the monetary policy framework for 25 years,” he added. “This is when both the independence of the bank and the [2 per cent inflation] target matter more than ever.” Most Conservative MPs on the Treasury committee refrained from attacks on the governor or the BoE. Boris Johnson also declined to criticise the BoE over its handling of inflation, with a spokesperson for the prime minister saying: “It’s not for the government to comment on the conduct or effectiveness of its monetary policy.”Meanwhile CBI director-general Tony Danker said Britons were facing “real hardship” amid surging inflation, adding that “putting pounds in the pockets of people struggling the most should not be delayed” by the government.However, the CBI said this move should not necessarily involve major tax cuts, which could add to inflation. Danker said that “big economic boosters should be deferred until safe to do so”.The CBI also wants the government to extend and expand eligibility for its recovery loan scheme for companies affected by the Covid-19 crisis.Danker added: “The chancellor’s clear intention to use a forthcoming Budget to cut taxes on business investment should become a firm commitment now.”Additional reporting by Daniel Thomas in London More