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By GEOFFREY SMITH
with JOHANNA TREECK, BEN MUNSTER, ANJULI DAVIES and IZABELLA KAMINSKA
— Stubborn inflation to force the BoE into its most unpopular rate hike yet.
— UK government pushes banks to dust off their forbearance plans.
— Policy meetings … in Switzerland, Norway, Mexico and Turkey.
ECB 3.50% ⇡ — BOE 4.5% ⇡ — FED 5.25% ⇡— SNB 1.5% ⇡— BOJ -0.10% ⇣— RBA 4.10% ⇡— PBOC 3.65%⇣— CBR 7.5% ⇣ — BOC 4.75 ⇡— SARB 8.25% ⇡
Good morning everyone. There’s a unique sense of drama around developments in the U.K. Not just because inflation is higher than in any of the countries the U.K. likes to compare itself to, although that’s certainly a part of it, but because the political impact of its decisions is transmitted to a single government, rather than diffused among 20 member states. That makes the tension between Governor and Prime Minister almost gladiatorial, even if not intentional.
We’ve written a lot about the pressure that Andrew Bailey and his team are under, but less about the pressure that the Bank is exerting on the government. Today’s interest rate hike, the 13th in as many meetings since the end of 2021, could well be the final nail in the coffin of the current Conservative Party government, because it’s the first one where its impact on mortgage costs will be front and center. The energy price spike and food inflation have dominated the debate for the last year, and British mortgage holders — historically an aspirational bunch sympathetic to the Conservatives — are consequently only now waking up to the reality that they are the proverbial frog, and that the water has become uncomfortably hot.
The bank has no alternative. May’s inflation data showed far too much evidence of excess demand, with goods prices again rising strongly as well as core services. The only question is whether it is a quarter or a half-point increase. See below for more on that discussion.
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— Bank of England set to raise by 0.25 percent to new 15-year high.
— Turkey set to change course with dramatic rate hike.
— Fed to publish weekly balance sheet as market copes easily with Treasury deluge.
The Bank of England’s Monetary Policy Committee will surely raise its key Bank Rate for a 13th straight meeting later today, after another frustratingly high inflation reading for May on Wednesday.
Elsewhere, quarter-point hikes are also expected from policy meetings in Switzerland and Norway, with the risk of a half-point hike by the former. Mexico is expected to hold, as Brazil did on Wednesday. But the spotlight will be on Hafize Gaye Erkan in her first meeting as Turkish central bank governor. She’s expected to signal a radical departure from Erdonomics and reset the bank’s key interest north of 20 percent.
In the U.S., the Federal Reserve will release its weekly balance sheet, which will show how much money drained out of its reverse repo facility during last week’s barrage of Treasury bill and bond auctions. The bottom line? there’s no imminent risk to banks’ balance sheets, because there’s still more than enough liquidity in money-market funds and other investment funds to meet the Treasury’s borrowing needs, according to Oxford Economics’ John Canavan. Fed chair Jerome Powell completes a second day of Congressional testimony, meanwhile, after an uneventful outing on Wednesday.
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PANIC AT THE BoE? What will the BoE make of Wednesday’s surprise headline inflation rate for May of 8.7 percent, which failed to fall to 8.4 percent as expected, plus an ongoing rise in core inflation to 6.5 percent ahead of today’s meeting? Expectations so far are still mostly for a 0.25 percent move higher, but as Barclays’ Abbas Khan wrote in a note to clients on Wednesday “the core CPI beat increases the likelihood of greater dissent for 50 basis points.”
Terminal change. Morgan Stanley’s team went one further noting the risks were now skewed to a 50 percentage move in August, while upping their “terminal rate” forecast from 5 percent to 5.25 percent. “Given the scale of the overshoot and stickiness of services prices, we push the first cut into mid-2024, from February 2024 before. We now see the end-2024 rate at 4.0 percent, from 3.5 percent before,” Bruna Skarica’s team noted. Goldman’s team, meanwhile, raised their terminal rate to 5.5 percent.
Market pricing: Current forward rates imply a 50 percent chance of a half-point hike in Bank Rate today, and a terminal rate of about 6 percent.
The culture wars have an inflation problem: Among the factors unexpectedly pushing rates higher in the U.K. in May were air travel, recreational and cultural goods and services as well as second-hand cars, the ONS said. The rise comes despite an overall fall in energy prices, which has allowed headline inflation rates to fall in other parts of the continent. Check out Anjuli’s story here for more on why Brits just want to have fun no matter the cost.
NOT JUST ABOUT INFLATION: Former Pimco boss Mohamed El Erian drew attention to the other bit of unsettling news from Britain: Net public borrowing figures. “With a doubling to ₤20 billion in May for public sector net borrowing, the country’s net government debt-to-GDP ratio rose to 100 percent of GDP for the first time since 1961,” he noted.
Gilt yields up: The yield on two-year gilts headed comfortably above 5 percent. “This will be reflected in a more disrupted set of mortgage products, and at rate levels not seen for decades,” El-Erian added.
GERMAN CONTRACTION: The Ifo institute cut its growth forecast for the German economy, leaving it way behind its key trading partners and adding to concerns that the eurozone’s growth engine needs a massive overhaul.
Ifo projects the economy to contract by 0.4 percent this year, after forecasting a more moderate 0.1 percent contraction in March. The economic institute also trimmed the 2024 growth forecast to 1.5 percent from the 1.7 percent it previously expected. “The German economy is only very slowly working its way out of the recession,” Ifo’s head of economic forecasts, Timo Wollmershaeuser, said.
For the broader eurozone, Ifo forecasts growth of 0.6 percent this year and for the U.S., growth of 0.9 percent.
Ifo’s inflation forecasts showed inflation in Germany nearing the ECB’s 2 percent target in 2024.
MOAARRRR MORTGAGE PAIN: Followers of U.K. personal finance guru Martin Lewis will have clocked he was invited to Chancellor Jeremy Hunt’s office on Wednesday to discuss consumer concerns about the impact of ongoing rate hikes on fixed mortgage deals that are about to reset. He tweeted after the meeting that “I can’t detail the discussion, but rest assured all the points I’ve been making about the need for banks not to ramp margins & proper forbearance were made.”
Political pressure: The mortgage situation puts PM Rishi Sunak, the man who flooded the system with cash during Covid and enacted a stamp duty holiday all the better to prop up the housing market, in an awkward position. Many of Lewis’s 2.2 million followers will have delayed cutting into their fixes at a cost in the belief that Sunak would deliver on his January promise to slash inflation in half.
Rock and a hard place: “There are huge numbers of 2-year mortgages taken out at the height of the rush to buy ahead of the initial June 2021 deadline for abolition of stamp duty holiday,” SocGen’s perma bear global strategist Albert Edwards told Morning Central Banker. “These people will be crushed by the HUGE rise in rates.”
The problem is, Edwards added, that any government move to force bank forbearance will only weigh on inflation.
THE POLISH PRECEDENT: If Sunak is looking for inspiration on how to handle things, a trip to Warsaw might be due. The ruling Law and Justice government in Poland took extreme steps last year in the face of 6.75 percent rates, forcing banks — through an act of Parliament — to initiate a series of mortgage holidays, which are yet to expire.
“We estimate the government offset everything the National Bank of Poland did — you can do that, but you would end up like in Poland with higher inflation,” Piotr Popalwski, senior Poland economist at ING bank, told Morning Central Banker, adding the move was largely populist and broadly supported.
MULTIPOLAR EURO: Anyone looking for evidence of the euro taking advantage of the dollar’s fraying hegemony will have been disappointed by the ECB’s annual report on the international role of the single currency.
Popularity contest: The ECB noted only marginal changes in its popularity as a reserve asset and a conduit for cross-border trade and investment. Even the war in Ukraine failed to disrupt the inertia: an initial precautionary surge in demand for cash ebbed quickly in the second half of last year as interest rates rose, increasing the opportunity cost of holding cash.
Ambitions rekindled? In past years, this wouldn’t have bothered Frankfurt. HQ made its peace a long time ago with the idea that the euro couldn’t challenge the dollar’s global status as long as the eurozone’s capital market remained fragmented along national lines. However, the start of large-scale debt issuance by the European Union during the pandemic has rekindled a flame in many breasts, at least privately, that the euro may aspire to an exorbitant privilege of its own.
Some pulling power: There was a distinct, albeit by no means game-changing, rise in the euro’s international share of cross-border loans and deposits, but again that seems hard to put down to anything more than the cycle: euro loan costs didn’t reset as quickly as dollar loan costs did last year, after all, and the increase in deposits looks like a mean reversion as the era of negative euro interest rates ended.
Diplomacy in mind: The ECB was careful to leave out any hint of criticism of the European Commission’s plan to use Russia’s foreign reserves to rebuild Ukraine, a plan that’s slowly taking concrete shape. However, one policymaker told Morning Central Banker that most Governing Council members share concerns that plans to divert payments on bonds owned by the Russian central bank to fund Ukraine could undermine trust in the currency region, and by extension harm the euro as a global currency.
THE TOWER OF BASEL, aka, the Bank for International Settlements, would like us to clarify that using “one ledger to rule them all” as a subhead in Wednesday’s Morning Central inaccurately described their unified ledger proposal, in their opinion. Rather, they claim a unified ledger will bring together “multiple ledgers — each with a specific use case — to coexist” (and definitely not in the darkness bind them).
CASH IS A HUMAN RIGHT! That may be one reason why all the CBDC talk is making certain Eastern European nations so jittery. Just last week, Slovak lawmakers passed a constitutional amendment enshrining the right to pay with cash. Right-wing lawmaker Miloš Svrček, who helped write the amendment, dramatically cited the need to “defend ourselves in the future against any orders from the outside.”
PRESIDENT REHN? Bank of Finland Governor Olli Rehn confirmed that he’ll run for President of the Republic in next year’s elections, the first round of which takes place in January. He’ll now take leave of absence from the bank and his place on the ECB’s governing council will be taken for the rest of this year by an alternate.
“If core inflation continues to be stubborn, I think it’s logical that voices that want another increase in September will prevail.” Slovakian central bank Governor Peter Kazimir at a press conference in Bratislava on Wednesday.
“The labor market is so incredibly strong. The vacancy-to-unemployed people ratio is at a historical high, which of course raises the bargaining power of workers … If productivity growth remains negative, or at least does not recover as assumed in the [new ECB] projections, then I think that this could turn into a wage-price spiral.” ECB board member Isabel Schnabel at a roundtable of the German Council of Economic Advisers on Wednesday.
“If your neighbor has the army, maybe you want to have the army … We must have a digital means of payment.” — ECB board member Fabio Panetta on Wednesday about the need for a digital euro.
— More digital, more productive? Evidence from European firms (ECB Blog)
— Fed’s Powell says interest-rate pause is expected to be temporary (Wall Street Journal)
— UK inheritance tax set for record receipts (FT)
— Switzerland’s Pandemic President resigns (The Swiss Times)
— What people believe about monetary finance and what we can(’t) do about it: evidence from a large-scale, multi-country survey experiment (Bank of Canada)
(Editor’s note: this is intended as a selective list, giving precedence to European events)
THURSDAY, 22 June
INSEE French business confidence survey, 8:45 a.m.
Swiss National Bank policy decisions, 9:30 a.m., press conference 10 a.m.
Bank of Indonesia policy decisions, 10 a.m.
Federal Reserve Governor Chris Waller speaks, 10 a.m.
Norges Bank policy decisions, 10 a.m.
ECB Board member Fabio Panetta speaks at Bundesbank/ECB/Chicago Fed conference on CCP Risk Management, 11:15 a.m.
Bank of England MPC decisions, 1 p.m.
Central Bank of Turkey policy decisions, 1 p.m.
BoE Inflation letter, 2 p.m.
Bundesbank President Joachim Nagel speaks, n.a.
Federal Reserve Governor Michelle Bowman speaks, 3:55 p.m.
Federal Reserve Chair Jerome Powell testifies, 4 p.m.
ECB VP Luis de Guindos participates in roundtable discussion in Madrid, 4:30 p.m.
Central Bank of Egypt policy decisions, 7:30 p.m.
Banco de Mexico policy decisions, 9 p.m.
Richmond Fed President Tom Barkin speaks, 10:30 p.m.
U.S. bank balances with Federal Reserve, 10:30 p.m.
All times CET, unless otherwise stated.