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By GEOFFREY SMITH
with JOHANNA TREECK, ANJULI DAVIES, HANNAH BRENTON, BEN MUNSTER and IZABELLA KAMINSKA
— UK’s Hunt to meet lenders as the Bank of England bites the bullet.
— The price of an Oktoberfest beer is getting even more obscene.
— June flash PMIs for the eurozone and UK.
ECB 3.50% ⇡ — BOE 5.0% ⇡ — FED 5.25% ⇡— SNB 1.75% ⇡— BOJ -0.10% ⇣— RBA 4.10% ⇡— PBOC 3.55%⇣— CBR 7.5% ⇣ — BOC 4.75 ⇡— CBRT 15% ⇡
Good morning, everyone. I think we can all agree what the biggest, scariest, monetary policy-related news of the day was yesterday. The price of a liter of beer at the Munich Oktoberfest is going up to nearly 15 euros. Not bad for a bit of boiled barley water, you might think. Der Spiegel reported that the average price of a Mass will go up by 6.1 percent, a move that the organisers are blaming on energy prices and, you guessed it, high inflation. Yes, high inflation is now the reason for high inflation. A clearer example of second-round effects could hardly be imagined.
In fairness, energy costs are a valid excuse. Much of the beer that was consumed at last year’s Fest was produced with energy that was supplied at 2021 prices. Those contracts have now rolled off, and this year’s Spatenbräu and Hacker-Pschorr will have been made with the help of expensive LNG from the U.S. rather than cheap-but-politically-tainted Gazprom gas.
But as anyone who has ever visited it knows, most of the energy that goes into putting on the Oktoberfest comes from humans — to put up and dismantle the stands, to serve the food, to pour the drinks, and to play the — if this is the right word — music. That labor has to be paid, and that is where the bulk of the cost push is coming from.
There is no surer sign of excess demand than big price hikes from those who are selling fun. Inflation is nowhere near being tamed.
Oh, and there was a bit of central bank action yesterday too. Read on!
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— UK government to meet with mortgage lenders, as BoE smites homeowners with half-point rate hike.
— S&P Global publishes its flash Purchasing Managers Indices for June; services seen keeping the ship afloat.
— ECB speakers: Panetta on crypto, Elderson on climate and De Cos on Spain’s economy from 1981 to 2020.
The U.K. Chancellor of the Exchequer Jeremy Hunt will meet representatives of the big mortgage lenders to see what can be done about cushioning the blow from the Bank of England’s surprise half-point rate hike on Thursday (click here for Anjuli’s account of the day).
Flash estimates are expected to show the economy losing momentum in both the eurozone and the U.K., although robust services will still keep the composite numbers in growth territory.
There’s a bevy of ECB speakers in the course of the day, with Frank Elderson returning to his Climate-Change-as-a-Financial-Stability-Threat theme and Fabio Panetta talking about crypto at the BIS’s annual conference. Pablo Hernandez de Cos will take you on a walk down memory lane, tracing Spain’s economy from its entry into the EU up until the pandemic.
PANIC ON THE STREETS OF LONDON: After months of hoping for the pass-through to actually pass through, the Bank of England bit the bullet and tried to get ahead of the game on Thursday. The half-point increase in Bank Rate surprised at least half of the market.
We wonder to ourselves: The biggest surprise of all was arguably the 7-2 split in the Monetary Policy Committee, with all of the deputy governors and chief economist swinging behind the need for more drastic action. At this stage of the game, you don’t get points for noting that this is an admission of previous mistakes. A cynic might say this was the act of some people realizing that their jobs are on the line, less than a week after the Bank was pressured into an externally-led review of its forecasting failings. We can only speculate.
Hang the DJ? The move triggered a predictable howl of misery from representatives of the mortgage industry, who now seem condemned to an even steeper drop-off in new business. Asking prices will soon be buckling on the Leeds side-streets that you slip down. Homeowners and mortgage brokers will join the lengthening line of people who have it in for Governor Andrew Bailey, although they’ll need to form an orderly queue behind a good few dozen Conservative MPs due to defend marginal seats in 2024.
How can you say I go about things the wrong way? Bailey, for what it was worth, made a perfectly cogent defense of the move to Sky News after the decision, saying: “We expect inflation to come down, and it’s important then that price-setting and wage-setting reflects that, because the current levels — I’ll be absolutely honest — are unsustainable.”
RATES HEAD NORTHWARD: Norway’s central bank raised its key policy rate to a 15-year high of 3.75 percent and indicated continued policy tightening down the road. The bank raised all three of its official rates by a full half point instead of the quarter-point expected. It also raised its estimate for the peak rate in the current cycle to 4.25 percent. from a March forecast of 3.5 percent.
Thin ice: Despite the larger-than-expected move, the bank acknowledged it was ‘uncertain” how much of the impact of its previous rate hikes is still to be felt. “If inflation declines more rapidly or there is a more pronounced slowdown in the Norwegian economy, the policy rate may be lower than currently envisaged,” it said.
Poles apart: The Nordic bank typically raises rates to defend the stability of the krone, which has struggled this year. But this time it seemed more concerned by domestic inflation pressures. Inflation, both headline and core, hit 6.7 percent in May.
Chilling figures: With the exception of the inflation-blighted U.K., that’s significantly higher than in most other Western democracies, says ING forex analyst Francesco Pesole. “We are at a time where in the U.S. and eurozone, inflation is declining, but in Norway it’s accelerating,” Pesole told Morning Central Banker.
SNB JOINS THE PARTY: The Swiss National Bank’s quarterly meeting was slightly less dramatic, but still generated a 0.25 hike in the policy rate and a warning that more may be necessary, along with sustained selling of the FX stash accumulated in the decade after the GFC.
Ain’t nuthin’ going on but the Hypothekarischer Referenzzinssatz: SNB President Thomas Jordan went out of his way to slay the canard that higher rates drive inflation by leading to higher rents, a fallacy that is getting way more attention than it deserves in markets from Turkey to Britain. In Switzerland, many rents have indeed been indexed since 2008 to a federally-set reference rate (the catchily-named Hypothekarischer Referenzzinssatz), which is adjusted in line with the SNB’s policy rate. They’ll now go up, temporarily exerting upward pressure on the CPI.
Don’t cross the Jordan: But! “This feedback effect must not be taken as a reason for refraining from necessary policy rate increases,” Jordan said. “For without a more restrictive monetary policy, there would be a danger of inflation becoming entrenched and much stronger rate increases being required in the future.”
DON’T CROSS RECEP EITHER: It’s suitably confusing that the biggest of Thursday’s hikes was also by far the most dovish. Hafize Gaye Erkan, in her first meeting as head of Turkey’s central bank, raised the benchmark one-week repo rate to 15 percent from 8.5 percent — a big step, but much more modest than expected. Market analysts had reckoned with anything from 20-25 percent. Click here for our story on the slow-motion attack on Erdoğanomics.
Shadow central banking: The move was consistent with other reports suggesting that President Recep Tayyip Erdoğan continues to cast a long shadow over his new policy team, and that Erkan and Finance Minister Mehmet Şimşek will have to tread carefully as they try to undo the damage done by the previous policies of their newly re-elected boss.
Remember Naci: Bartosz Sawicki, an analyst with fintech Conotoxia, said the hike was “disappointing, as many market participants hoped for a much stronger move” back toward economic orthodoxy. “Gradual tightening might not be enough to convince the world that Turkey is determined to shift its course” away from “permanent crisis and macroeconomic instability,” Sawicki said in emailed comments. Erkan, however, appeared mindful of what happened to the last governor who dared to cross Erdoğan on the issue of interest rates: Naci Ağbal was fired in 2021, only four months after being appointed.
**Are you keen to know what’s on the agenda for the Spanish presidency to the EU? We’ve got you covered with today’s POLITICO Pro Briefing Call – The incoming Spanish Presidency of the Council of the EU, where we’re giving you an overview of the people, politics and policies that will shape the next six months. Register now to tune in or email us here if you have any questions! **
STOP. SUBSIDIES. NOW. Bundesbank President Joachim Nagel urged governments to ensure that fiscal policy doesn’t make the ECB’s task more difficult. He said Germany and other eurozone countries should unwind broad-based crisis support measures “in a timely manner”.
Take a break from the Brake: Nagel singled out the so-called ‘energy price brake’ which caps household and business energy prices, saying it would “make sense not to extend the energy price brakes beyond the end of this year.” The Energiepreisbremse is due to run all year with a possible extension of three months, but Kevin Kühnert, general secretary of Chancellor Olaf Scholz’ Social Democrats, had said at the weekend that they’re looking at extending it through the whole of next year.
Stability Pact threat: Nagel, an ECB hawk, also took aim at the current reform proposal for the region’s fiscal rules – the Stability and Growth Pact, which he wants made more uniform, transparent and binding. Failing to do that “would be a heavy burden for monetary policy,” he said.
CREDIT SUISSE POST-MORTEM: Credit Suisse collapsed after “a massive loss of confidence” triggered a cash crisis at the lender, the Swiss National Bank said on Thursday, in its first assessment of what went wrong at the 167-year-old bank — which was forced to merge hastily with rival UBS in March to avoid a major financial crisis. Despite meeting regulatory requirements for its reserves and easy-to-sell assets, Credit Suisse teetered on the edge as clients “withdrew deposits at a rapid rate and on a massive scale,” counterparties cut their credit limits and clearing houses and payment institutions asked for more cash up front.
Poking in the ashes: The SNB said the bank’s failure showed there must be a review of the international framework intended to stop banks being too big to fail. The central bank said Credit Suisse had not been forced to take “sufficient corrective action” itself earlier on because it continued to meet regulatory minimums for capital and liquidity. Plus, the SNB argued additional Tier 1 (AT1) bonds which are supposed to serve as loss absorbers, and were controversially written down before shareholders by the Swiss government in Credit Suisse’s death spiral, did not serve their purpose before the crisis got out of hand. Despite meeting liquidity metrics, the SNB said the bank did not have enough cash to deal with higher cash demands and lenders in future “should be required to prepare a minimum amount of assets that can be pledged at central banks.”
IT’S AN (INTERNAL) MODEL AND IT’S NOT LOOKING GOOD: The European Central Bank on Thursday opened a review of its guide for when banks use their own internal models to calculate their capital requirements. The banking supervisor said revisions included clarifying “how banks should go about including material climate-related and environmental risks in their models,” a common definition of default, and how to measure default risk in trading book positions. A consultation runs until September 15.
— “Compliance with capital requirements does not provide absolute protection against a loss of confidence. Credit Suisse was always fully compliant with all regulatory capital requirements, even at the peak of the crisis,” said SNB vice chairman Martin Schlegel, at Thursday’s press conference.
— “We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later,” Bank of England Governor Andrew Bailey, after raising the Bank Rate on Thursday.
— “China’s foreign exchange market has taken on new features in recent years: the market has become more resilient, as the market players are more mature and their trading behaviors are more rational. Exchange rate risk hedging instruments have been widely used, and the large increase in the cross-border use of RMB has also greatly reduced China’s exchange rate risk exposure,” said Pan Gongsheng, Deputy Governor of the People’s Bank of China, at a conference in Shanghai on June 8.
— FDIC Chairman Martin J. Gruenberg on the Basel III Endgame (Peterson)
— Higher interest rates hit home prices again (WSJ)
— Ocado shares surge over Amazon bid speculation (FT)
(Editor’s note: this is intended as a selective list, giving precedence to European events)
UK GfK consumer confidence, 1:01 a.m.
Bank of Japan interest rate decisions, 5 a.m.
UK May retail sales, 8 a.m.
Bank of Japan press conference, 8:30 a.m.
Bundesbank’s Nagel speaks, 9 a.m.
Eurozone flash PMIs, 10 a.m.
UK flash PMIs, 10:30 a.m.
Eurozone May final CPI, 11 a.m.
Fed’s Bullard speaks, 11:15 a.m.
Fed’s Bostic speaks, 2 p.m.
ECB VP de Guindos attends ECOFIN meeting in Luxembourg, 12:40 p.m.
All times CET.