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By GEOFFREY SMITH
with CARLO BOFFA, BEN MUNSTER, BJARKE SMITH-MEYER, PAOLA TAMMA and IZABELLA KAMINSKA
| SNEAK PEEK |
— A Bank of Italy economist managed to swindle his employer and an EU committee out of hundreds of thousands of euros.
— Confidence in the Bank of England hits an all-time low — and Mark Carney says Brexit is to blame.
— ECB officials add nuance to Christine Lagarde’s hawkish press conference.
| POLICY TICKER |
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. I hope the weekend rain was kind to your garden without otherwise spoiling your fun.
It can’t have been much of a fun weekend for Bank of England Governor Andrew Bailey, after The Times reported an Ipsos poll showing public confidence in the bank at its lowest ever on Friday. The diffusion poll showed a net balance of -13 in satisfaction with its record on inflation. Nor is this just another meaningless opinion poll: a rise of over 0.7 percent in the 10-year Gilt yield since the bank’s last meeting is the market’s way of saying the same thing.
This matters. In contrast to the ECB, whose independence is enshrined in a treaty that is effectively impossible to change, the bank’s independence is only guaranteed by the government of the day in the U.K. Its legal powers over monetary policy have been changed by legislation twice in the last 30 years. Without strong public support, it is uniquely exposed among central banks in Europe to government interference.
This risk is heightened by the increasingly desperate state of the ruling Conservative Party, which needs to find some way to repair its own standing with the public in time for a general election in May next year. The Treasury Select Committee has already forced the bank to concede to an independent review of its inflation forecasting models, where bank officials have already acknowledged failings. The findings could have far-reaching implications both on an individual and institutional level.
Perhaps the best protection that the bank has right now is the knowledge that there is no future for the U.K. electorate that doesn’t include higher mortgage costs and a tighter squeeze on living standards. Small wonder that Chancellor of the Exchequer Jeremy Hunt doesn’t feel the need to take the blame for that. In an interview with Sky News last month, Hunt conspicuously gave the bank all the cover it needs for a more aggressive approach to bringing inflation down, rightly judging that inflation, rather than unemployment, has the potential to be the bigger vote-loser next year.
The Monetary Policy Committee meets on Thursday and markets are already pricing in a small chance of a half-point hike in the Bank Rate, rather than the quarter-point consensus. Any more upside surprises when the inflation data for May is published on Wednesday will surely make that the new consensus.
| DRIVING THE DAY |
— The mysterious swindling of the EU and Bank of Italy by a rogue economist.
— “Told you so” says the architect of ‘Project Fear’
— The Bundesbank publishes its June monthly report, 12 p.m.
NON-PERFORMING BANKER: If you missed it behind the paywall on Friday, now is your chance to read Ben’s painfully well-researched story on how a Bank of Italy economist managed to defraud both his employer and a notoriously lax EU committee out of hundreds of thousands of euros — and still remains at large.
BREXIT FALLOUT? Mark Carney returned to stir the pot at the weekend, unable to resist the temptation to tell the Daily Telegraph’s readership that he had been right all along about Brexit and its negative impacts for inflation.
“We laid out in advance of Brexit that this will be a negative supply shock for a period of time and the consequence of that will be a weaker pound, higher inflation and weaker growth. And the central bank will need to lean against that,” Carney was quoted as saying. “Now that’s exactly what’s happened. It’s happened in coincidence with other factors, but it is a unique aspect of the economic adjustment that’s going on here.”
Capital Economics’ Julian Jessop, a prominent Brexit supporter, helpfully pointed out that the Bank of Canada has hiked as much as the Bank of England since the start of last year. The BoC has, however, been more effective: Canada’s CPI is down by nearly half from its peak at 4.4 percent in April.
DEINDUSTRIALIZATION WATCH: The Deutsche Bundesbank releases its monthly report at 12 p.m. CET, but has already released the main news: growth in the eurozone’s engine room will be lower than expected next year and in 2025, after some mild relief from the energy markets this year. President Joachim Nagel is also due before the Bundestag budget committee.
| INTEREST RATES |
BIG WEEK AHEAD: The big three may have had their say last week (the Bank of Japan was as expected, with Governor Kazuo Ueda still not willing to trust this year’s uptick in inflation), but there are meetings aplenty this week too.
PBoC goes first: People’s Bank of China is widely expected to cut its key Loan Prime Rate on Tuesday, having shaved 0.10 percent off most of its other lending rates in recent days. Chile, one of China’s biggest commodity suppliers is currently struggling with the anemic rebound in industrial demand there, and is the warm-up act later tonight. Its central bank decides at 11 p.m. CET.
CEE scared straight? In central Europe, Hungary now has an easing bias but may have been scared by the ECB’s performance last week into holding on Tuesday, while the Czech National Bank is expected to hold at 7 percent on Wednesday.
Erkan debut: The BoE, Norges Bank and Swiss National Bank all get their moment in the sun on Thursday but arguably the most momentous meeting will be in Turkey, where Hafize Gaye Erkan, at her first meeting in charge, is under pressure to deliver a sharp hike in rates to anywhere north of 20 percent to restore confidence in the lira.
| LIQUIDITY |
WHO’S AFRAID OF THE TLTRO CLIFF? Not eurozone banks, apparently. The ECB said on Friday that on top of the €476.8 billion in three-year loans that have to be repaid on June 28, banks will make early repayment of another €29.4 billion through other TLTRO operations. Over half of the voluntary repayments — €17.1 billion — are from the operation that matures in September.
| INDEPENDENCE |
ТRUSSОNOМИКА? Vladimir Putin addressed the St Petersburg International Economic Forum last Friday with a speech that stressed the importance of transforming Russia into a “supply economy” and dealing with the country’s record labor shortages by introducing high-tech productivity solutions and tax cuts, especially for SMEs. Some Western commentators described the speech as rambling. Judging by some of the shots of the dozing audience (God rest their souls) that’s probably a fair description.
Tight labor markets don’t matter. “I know that many believe that the high price of labor decreases the global competitiveness of the country and in the past this view was justified, but it’s becoming obsolete … because it does not take into account the realities of today let alone tomorrow because high tech is the future of the economy,” Putin said.
A supply economy: Putin highlighted that with the Bank of Russia predicting the inflation rate might rise to around 4-5 percent by the end of the year it would be up to the government to step up to stimulate supply. “It’s important to raise the efficiency and the profitability of government and public expenditure to assure our policy aimed at a supply economy,” he said.
Gosplan? No thanks. Bank of Russia’s Elvira Nabiullina, however, wasn’t so keen on Putin’s supply-side interventions. “This temptation to manage the restructuring of the economy can lead to us suppressing private initiative — to say nothing of the risk, in extreme cases, of bringing back the planned economy,” she had told the same forum earlier in the week. “It seems impossible, because everything is market-based in our country, but in fact the state has sufficiently concentrated the right to decide which production and which projects should be developed and where to direct financial resources instead of private initiative. In my opinion, this is a big risk.”
BUT WAS TRUSSONOMICS RIGHT? Alistair Heath at the Telegraph has been arguing that an upcoming mortgage crisis, sparked by a wave of two-year refixes into 5-percent-plus rates, will eventually vindicate the short-lived former U.K. Prime Minister and her stab at stimulating the economy by cutting taxes, borrowing more and investing her way out of trouble.
As Heath notes: “The “grown-ups” have been back in charge for eight months, armed with their orthodox, social-democratic playbook, and have only managed to mess everything up even more badly,” adding that “all of this exposes the fundamental error at the heart of Sunak’s pitch last year: the idea that it was possible to avoid higher interest rates if he and his team of ‘sensibles’ were handed the levers of power.”
Word on the ground in Westminster: There’s supposedly increasing willingness to argue that Trussonomics may not have been that mad after all. This is especially now that 1) Gilt yields have reached last September’s level, 2) the Bank of England’s forecasting capability is up for independent review and 3) the U.K.’s inflation problem remains one of the worst in Europe.
One less short in the sterling market? The only thing thing holding back a full on crisis this time around is the lack of a run on the pound. To what degree the pound’s tidy performance the past month is down to the timely neutralization of prolific sterling doomsayer and shorter Crispin Odey following an embroilment in a #Metoo scandal, however, is harder to say. But there’s no doubt Odey’s disappearance from the market will be making things easier for the sterling bulls.
All calm on the LDI front for now: There’s little sight of a renewed liability-driven investment crisis either. As Bank of England Governor Andrew Bailey told the Lords Economic Affairs Committee last week, this could be because certain market structure factors are finally better understood.
“There were two sorts of LDI funds … segregated funds and pooled funds,” Bailey said, explaining that some 85 percent of the LDI world was the segregated type, and the remaining 15 percent the pooled type. “It was the pooled system, that essentially was the problem. Because you had a quite complicated legal entity structure. And those funds were not able to, in a sense, call down the liquidity from the many parent funds in the way that the segregated ones can.”
If this is now truly better understood, it might make an awfully big difference.
| DIGITAL CURRENCY |
ROSALIND DELIVERS … APIs: The Bank for International Settlements said its pilot project on using central bank digital currencies in retail payments had met its primary objectives, marrying security with ease of use. “Project Rosalind”, as it’s known, showed that CBDCs can be rolled out for public use with relative ease and are adaptable to the application programming interfaces (APIs) used in the payments sector, apparently. The view from the tech space was a little more dismissive. “The BIS seems to have invented the API,” noted one veteran blockchain and fintech programmer to Morning Central Banker.
Francesca Hopwood Road, the head of the BIS Innovation Hub in London, said in a statement that the experiment “has advanced central bank innovation in two key areas: by exploring how an API layer could support a retail CBDC system and how it could facilitate safe and secure CBDC payments through a range of different use cases.”
Innovation theater? But some well known skeptics, such as fintech consultant Martin Walker from the Centre for Evidence Based Management, weren’t impressed. “If innovation labs had been around in the 16th century we would never have heard of Copernicus or Galileo because the Vatican Innovation labs would have generated so much noise about all their pilots of technologies based on the Earth being the center of the universe or building bridges to the Firmament that no one would have noticed them,” he told Morning Central Banker.
| FISCAL |
DEADLOCKED, AGAIN: France and Germany are deadlocked over an EU reform of national spending rules — meaning that a hoped-for deal by the end of the year looks less and less likely.
Credibility without realism: The European Commission’s overhaul of the Stability and Growth Pact — moving away from blunt, standardized debt-reduction requirements toward country-specific, medium-term targets giving countries greater time and flexibility — has run into opposition from a large Berlin-led group of governments.
Fiscal stimulus: The ECB is likely to be unamused by the standoff, given its long-standing support for clear rules with credible enforcement, and given its current assessment that fiscal policy is still mildly stimulative, at a time when it is trying to restrain the economy with higher interest rates.
| GREEDFLATION |
IT’LL COME DOWN WHEN WE SAY IT COMES DOWN: Tesco, the U.K.’s largest supermarket, managed to put out a 930-word quarterly trading statement on Friday that didn’t mention the word ‘margin’ once, but which hinted at the start of a turn in food price inflation.
Bargain-hunting: Like-for-like food sales rose by 9.4 percent in the first three months of the fiscal year. Sales of its ‘Tesco Finest’ range, which is pitched at those trading down from the premium supermarkets, rose by a stronger 14.9 percent, while the company was also forced to extend its ‘Aldi price match’ range further in order to defend its 27 percent market share.
Not us, Guv: CEO Ken Murphy was quoted — not all that surprisingly — as saying it was unfair for BoE Governor Andrew Bailey to blame supermarkets for stubbornly high food inflation.
GERMAN HINTS: Aldi, for its part, last week made headlines with some big price cuts to popular dairy items in its home market in Germany, in another tentative sign that food inflation pressures are starting to ease.
| QUOTED |
“[Companies] are realizing that they cannot retain workers, let alone recruit new hires, unless they raise wages … This is a very important development, but there is a high degree of uncertainty as to how durable the trend is,” Bank of Japan Governor Kazuo Ueda, told a press conference following the BoJ policy meeting on Friday.
“Powerful forces are pushing for greater diversification within the international monetary system. The euro must now play its full international role, in order to assert itself as a complementary anchor towards the “creative frontier” that a truly multilateral international monetary system would one day represent,” said Bank of France Governor François Villeroy de Galhau, at a conference in Paris on Friday.
“We obviously covered most of the ground, and we are clearly in restrictive territory on all maturities: the key issue now is the transmission of our past monetary decisions, which is proceeding forcefully to financial conditions but could take up to two years for its full economic effects. Hence, the duration matters more than the level; persistence matters more than the peak,” Bank of France Governor François Villeroy de Galhau, in the same speech.
“We still have more ground to cover … We may need to keep raising rates after the summer break,” said Bundesbank President Joachim Nagel, presenting new economic forecasts for Germany on Friday.
“If core keeps at around 5 percent on a yearly basis in the coming months, then we will increase beyond September,” Belgian National Bank Governor Pierre Wunsch, to journalists in Brussels.
“Anticipating the results of the meetings is not a good exercise … all statements about the future of interest rates must respect the rule of silence and be based on facts,” said Bank of Portugal Governor Mario Centeno, at a press conference in Lisbon.
| WHAT WE’RE READING |
— ECB warns Brussels against windfall levy on frozen Russian assets (FT)
— Lots of Hiring, but Not So Much Working (WSJ)
— Central banking against a full-scale war (Central Banking)
| WHAT’S ON |
(Editor’s note: this is intended as a selective list, giving precedence to European events)
MONDAY, 19 June
Bank of Spain presents new quarterly economic projections, n.a.
ECB survey of monetary analysts, 10 a.m.
Bundesbank June monthly report, 12 p.m.
Bundesbank President Nagel to testify before Bundestag budget committee, n.a.
ECB board member Isabel Schnabel chairs a conference session in Luxembourg, 1:40 p.m.
ECB VP Luis de Guindos participates in a prizegiving ceremony for journalists in Madrid, 8 p.m.
Central Bank of Chile policy decisions, 11 p.m.
TUESDAY, 20 June
People’s Bank of China, loan prime rate decision, 3:15 a.m.
Japan April industrial production, capacity utilization, 6:30 a.m.
Germany May PPI, 8 a.m.
ECB Supervisory Board head Andrea Enria speaks at Frankfurt conference, 10 a.m.
Bank of Finland Governor Rehn presents on economic outlook, 10 a.m.
Eurozone May balance of payments 10 a.m.
Eurozone May investment fund statistics, 10 a.m.
Eurozone April construction output 11 a.m.
Central Bank of Hungary policy decisions, 2 p.m.
St. Louis Fed President James Bullard speaks, 12:30 p.m.
U.S. May housing starts, building permits, 2:30 p.m.
ECB weekly financial statements and APP/PEPP updates, 3 p.m.
ECB Supervisory Board member Elizabeth McCaul gives keynote speech on “The future of globalization: politics, business, lifestyle, brands” at U.S.-Italian event
NY Fed President John Williams speaks, 5:45 p.m.
Bank of Spain Governor de Cos, ECB VP de Guindos participate at the German Bernacer prize ceremony in Madrid, 7:10 p.m.
WEDNESDAY, 21 June
Bank of Japan, monetary policy meeting minutes, 1:50 a.m.
U.K. May CPI, PPI, PSBR data, 8 a.m.
ECB publishes annual report on the international role of the euro, 12 p.m.
Czech National Bank, monetary policy decisions, 2:30 p.m.
ECB Board member Isabel Schnabel speaks in Berlin, 3:45 p.m.
Bundesbank President Joachim Nagel speaks in Berlin, 3:45 p.m.
Federal Reserve Chair Jerome Powell testifies, 4 p.m.
Senate confirmation hearing for Adrian Kugler as Federal Reserve Governor, n.a.
Bank of Canada Summary of Deliberations, 7:30 p.m.
Cleveland Fed President Loretta Mester speaks, 10 p.m.
Banco Central do Brasil monetary policy decisions, 11 p.m.
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.
FRIDAY, 23 June
Bank of Spain Governor de Cos speaks in Santandar, 12 p.m.
Atlanta Fed President Raphael Bostic speaks, 2 p.m.
ECB board member Fabio Panetta speaks on crypto at 22nd BIS annual conference, 2:45 p.m
Swiss Q1 balance of payments and Switzerland’s international investment position
ECB board member Frank Elderson speaks on climate issues in Frankfurt, 6 p.m.
SATURDAY, 24 June
ECB board member Isabel Schnabel participates in panel discussion in Koenigswinter at Petersberger Sommer-Dialog 2023
U.K. April GDP, industrial production, trade balance, 8 a.m.
ECB May long-term interest rates, 10 a.m.
Eurozone April industrial production, 11 a.m.
U.S. May PPI, 2:30 p.m.
Federal Reserve interest rate decisions, 8 p.m.
Fed press conference 8:30 p.m.
