Test times for central banks


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Bank of England policymakers could be forgiven for feeling a little hurt today as they await the outcome of Government plans to deregulate the City of London in a post-Brexit “big bang” and the heat of Tory candidates feel for the office of Prime Minister.

The Financial Services Bill, due to be published on Wednesday, will allow ministers to “retire” BoE decisions they don’t like, or as former Chancellor Rishi Sunak puts it: “We will finish the job, the EU system.” to end where the ultimate power lies with faceless regulators and transfer that power to our sovereign parliament.”

Meanwhile, Sunak’s rivals for the Tory crown, notably Foreign Secretary Liz Truss, have accused the BoE of not doing enough to stem rising inflation. The allegation was strongly refuted today by Michael Saunders, a member of the Bank’s Monetary Policy Committee: “The Government is clearly not setting the direction of monetary policy that is being set by the MPC. This is fundamental to the British framework. . . and it has served Britain well over the past 25 years.”

The European Central Bank also faces a landmark week as it prepares to hike rates for the first time in more than a decade on Thursday. It has the added difficulty of dealing with political instability in Italy as it implements a program to prevent higher borrowing costs from causing another euro-zone debt crisis.

The rest of the world’s central banks are busy conducting large rate hikes to counter rising inflation and the strong dollar, this FT analysis explains. Canada last week opted for the largest hike — 100 basis points — of any G7 economy since 1998.

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“We’re on a rate hike frenzy,” said one portfolio manager. “It’s the opposite of what we’ve seen over the past decade. . . The last thing anyone wants these days is a weak currency.”

In the US, investor expectations that the Federal Reserve could opt for an outsized rate hike after CPI surged to 9.1% have somewhat dispelled comments from a senior Fed official. Futures markets today reflected bets for a 75 basis point hike after the next Fed policy meeting on July 27th.

The new age of rising interest rates is already having an impact. Rating agency Moody’s today upgraded its forecast for global corporate defaults on tightening monetary policy and rising inflation.

What’s more, the speed at which change is happening is amazing, writes Robert Armstrong in today’s Unhedged newsletter (for premium subscribers). RIP the Easy Money Era: Welcome to the Great Squeeze.

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Good to know: the economy

That International Energy Agency warned that Europe must cut gas consumption immediately ahead of winter. Brussels plans to publish recommendations later this week. Germany is nervous after Russia throttled the capacity of its Nord Stream 1 pipeline and then closed it entirely for maintenance. Large companies have few alternatives and if the lockdown period is extended, Berlin will find it difficult to stock up before the heating season. Such a crisis would cause nervousness far beyond the German borders.

Latest for UK and Europe

EU chief diplomat Josep Borrell said he hopes to reach an agreement this week to unblock Ukraine Black Sea ports and allow exports of the country’s grain. BlackRock Founders Larry Fink warned that the destruction of farmland during the war would have serious global consequences, while Said Azam Ali of Crops For the Future said it was time to revive “forgotten” crops to counteract the crisis.

A stronger dollar and relaxed Covid testing rules have prompted a rebound in demand London sights by US tourists. The Asian market is recovering at a slower pace, particularly from spendy Chinese travelers deterred by the end of duty-free shopping for non-EU visitors.

American tourists may like Britain, but the same cannot be said for their shops. US companyConfidence in the UK has faltered amid concerns over Brexit, labor shortages and rising taxes.

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United Kingdom employees in the public service pay rises averaging 5 percent are being offered this week, but the sub-inflation offers could well trigger more strikes in the coming months. Here’s a powerful first-person account of what it’s like to survive through a cost-of-living crisis.

Global latest

China is struggling to contain the spread of the BA.5 Omicron subvariant of the coronavirus, with the number of cities subject to new restrictions now reaching 41, representing 264 million people, or nearly 19 percent of the population. Shanghai, the country’s financial hub, has announced mass testing in half of its districts, raising fears a new sweeping lockdown is imminent.

Sri Lankan Opposition leader Sajith Premadasa called on the IMF for “humane treatment” as the country negotiated a bailout while restructuring more than $50 billion in external debt. Here’s our Big Read on what the situation says about the risks in other emerging markets as they face rising energy and food costs and a strengthening US dollar.

Good to know: business

gains at Goldman Sachsalthough better than expected, plunged 47 percent to $2.9 million in the second quarter due to a slowdown in investment banking and falling wealth management revenues. Bank of America Profits also fell to $6.2 billion from $9.2 billion last year.

Even if the current travel break ends, the airlines in the world are likely to bear the scars of the pandemic for years to come in the form of billions in debt. “This accumulation of debt is huge. There is no quick fix for this particular problem,” said Izabela Listowska, credit analyst at S&P Global Ratings

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Deliveroo became the latest casualty of the cost-of-living crisis as the food supplier downgraded its growth forecast amid “heightened consumer headwinds”.

British insurer direct line issued a profit warning and canceled share buybacks after suffering from higher auto parts and used car prices.

Once soaring financial technology company companies listed earlier in the pandemic have lost half a trillion dollars in market value as optimism about digitization has been overtaken by worries about interest rates, lack of profits and untested business models. Shares of recently listed fintechs have fallen by more than 50 percent on average since the beginning of the year, according to FT analysis.

Britain has 40,000 independent pubs are in a fragile state due to staff shortages and rising costs. Three quarters are struggling to fill vacancies and around 15 per cent of independent pub owners said their business is no longer profitable.

It’s not just alcohol suppliers who are feeling the effects of the crisis. Starbucks is considering a potential sale of its UK business as the coffee chain faces increased competition and changing consumer habits as a result of the pandemic.

The working world

According to Microsoft, the number of business meeting is up 50 percent since the pandemic began, a trend that is likely to have a negative impact on productivity. Lynda Gratton of London Business School says we’d better spend this time making and maintaining friends at work.

business coaching has boomed as the world slowly emerges from the pandemic, particularly at the board level where expensive leadership whisperers have become indispensable, says Emma Jacobs. “Executives don’t have playbooks for hybrid work and high inflation. New and emerging managers have not weathered a recession,” explains PwC’s Bhushan Sethi.

of China zero covid Politics has a serious impact on the country’s global talent pool. China-based employees of foreign multinationals have been unable to travel, while up to half of Europe’s expats may have left the country since the pandemic began.

Covid cases and vaccinations

Total Global Cases: 554.5 million

Total doses administered: 12.2 billion

Get the latest worldwide picture with our Vaccine Tracker

And finally . . .

The pandemic has brought out the budding gardener in many of us, but gardening can also be a great comfort to the sick, dying and bereaved, writes Opinion and Analysis Editor Alice Fishburn in this moving article.

Illustration of a person in a garden with purple flowers
© Annabel Wright

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