Central banks take divergent paths in battle against inflation

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Good evening.

Pause, cut, raise, stick or twist? A series of contrasting policy decisions from central banks this week have highlighted the uncertain nature of global economic recovery and policymakers’ continuing struggle to rein in inflation.

The Federal Reserve was first to declare on Wednesday, suspending its rate-raising programme but signalling that two more increases were on the way. Fed chair Jay Powell struggled to explain the “hawkish pause”, leaving a former official to describe the move as “a policy mistake wrapped in a communication error”. Figures on Tuesday had showed the annual pace of US inflation eased last month to its lowest level in more than two years.

By contrast, China on Thursday cut its main policy rate for the first time in 10 months, as poor retail sales and industrial production reports reinforced concerns that its post-Covid recovery was faltering (see also our explainer on why the rebound is hanging in the balance).

Later that day, the European Central Bank raised rates to 3.5 per cent — the highest level in 22 years — as it struggles with a wage-price spiral and a stagnant economy. The ECB also raised its inflation forecast and cut growth predictions for the next three years.

Bundesbank chief Joachim Nagel said today that ECB rate-setters still had “a long way to go” to reach their 2 per cent inflation target. The IMF concurred, arguing that “persistently high inflation” meant further rate rises were necessary. 

Attention now turns to the Bank of England, which makes its decision next Thursday, with markets believing rates will go higher than previously expected, potentially topping 5.7 per cent by the end of the year.

BoE governor Andrew Bailey admitted this week that it would take “a lot longer than we expected” for inflation to fall. Figures on Tuesday showing wage growth accelerating pushed UK short-term borrowing costs above the level reached during the turmoil following the “mini” Budget last autumn.

The prospect is more grim news for mortgage holders. NatWest and Nationwide, two of the UK’s largest home loan providers, said yesterday they were increasing rates, piling further pressure on household budgets.

The BoE has launched a review of how it makes and uses economic forecasts after coming under fire from politicians for repeatedly failing to predict the rise and persistence of inflation. Public confidence in its efforts has hit a record low, according to a survey published today.

Although the interest-rate raising cycle is within sight in the US and the EU, it will be harder for BoE policymakers to convince markets that is the case for the UK, the FT editorial board says. A 25 basis point increase makes sense, while a 50bp rise, as some are pushing for, may be too much of a shock for markets. 

But the central bank’s communications will be just as important as the rate rise increment, the FT argues. “It will need to convince the public that it understands its recent errors, to help maintain its influence over rate expectations. The bank may also wish to reassert more forceful language on its determination to bring inflation back down to 2 per cent. It needs to get a grip quickly.”

Need to know: UK and Europe economy

Germany and France clashed over how strict the EU’s revamped budget rules should be. Brussels wants to overhaul its Stability and Growth Pact to better tailor the rules to individual member states’ economic circumstances.

European gas prices have doubled in just 10 trading days, highlighting how the market still remains on the edge despite storage levels at record highs.

Turkey’s new economic team faces a huge challenge to fix its $900bn economy after the unorthodox policies of president Recep Tayyip Erdoğan are ditched. Expectations are for a big jump in interest rates next week.

Russia said it would seize “naughty western companies” and make it harder for them to exit the country. A carrot-and-stick approach aims to punish western countries that seize Russian assets while rewarding those that play by the Kremlin’s rules. US senators are launching an attempt to allow the seizure and transfer of Russian assets to Ukraine.

Need to know: Global economy

A delegation of African leaders began a peace mission to Ukraine and Russia. They have sought to display neutrality but have suffered from the war’s impact on global food and fertiliser prices.

New Nigerian leader Bola Tinubu has scrapped fuel subsidies, stopped bolstering its currency and suspended the heads of the central bank and anti-corruption agency, moves welcomed by investors in Africa’s largest economy.

The IMF said Pakistan’s proposed budget needed more work before it could get a $7bn bailout that many analysts believe is needed to avoid default.

Need to know: business

Tesco, Britain’s biggest supermarket chain, said there were “encouraging signs” that inflationary pressures were easing.

Big Tech companies are in talks with leading media outlets over the use of news content to train AI systems.

The hacker gang Clop (Russian for bedbugs) that compromised large UK employers such as British Airways and the BBC has threatened to release sensitive information from international institutions, including US investment firms and European manufacturers, unless it receives “substantial” sums.

A new Big Read highlights how just seven tech companies are driving the US stock market rally, with the S&P 500 enjoying its best first-half of the year for two decades, despite worries about the direction of the economy. Some of the biggest tech stocks were hitting all-time highs by the end of the week after investors sensed the Fed’s policy tightening was coming to an end.

Science round up

FT commentator Anjana Ahuja condemns India’s decision to scrap the periodical table from textbooks. The famed graphic is literally elemental to our understanding of the world, she writes, and its removal will dent India’s reputation for science and technology.

Experts are waking up to the threat posed by artificial intelligence programmes if they fall into malevolent hands, writes Gillian Tett.

New research showed cruise ships emitted four times more harmful sulphuric gases into the atmosphere in Europe than passenger vehicles last year. Although a cap on sulphur content in fuels has helped cut emissions per tonne of fuel, dozens of extra cruise ships have been added to fleets since 2019.

Watch the new FT film to learn how hydrogen, the lightest, most abundant element in the universe, could play a crucial role in that fight against emissions. One of the west’s biggest hydrogen investors said the UK was falling badly behind in green hydrogen development. Here’s how green hydrogen could eventually enable carbon-free flying.

Something for the weekend

Try your hand at the range of FT Weekend and daily cryptic crosswords.

Some good news

Synthetic human embryos, built using stem cells, could further our understanding of genetic disorders and causes of miscarriage.