Testing time for central banks

Good evening

Bank of England policymakers could be forgiven for feeling a little bruised today as they await the outcome of the Government’s plans to deregulate the City of London in a post-Brexit ‘Big Bang’ as well as ‘to feel the heat of the Conservative candidates for Prime Minister.

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

Meanwhile, Sunak’s rivals for the Tory crown, particularly Foreign Secretary Liz Truss, have accused the BoE of not doing enough to stop soaring inflation. The accusation was strongly refuted today by Michael Saunders, a member of the Bank’s Monetary Policy Committee: “The government is very clearly not setting the direction of monetary policy, that being set by the MPC. This is fundamental to the UK framework. . . and he has served the UK well for the past 25 years.

The European Central Bank also faces a historic week as it prepares to raise interest rates for the first time in more than a decade on Thursday. He has the added difficulty of dealing with political instability in Italy as he launches a program to prevent higher borrowing costs from causing another eurozone debt crisis.

The rest of the world’s central banks are busy implementing big rate hikes to counter soaring inflation and the strong dollar, as this FT analysis explains. Last week, Canada opted for the largest increase – 100 basis points – of any G7 economy since 1998.

“We are seeing a rate hike that is fueling the frenzy,” said one portfolio manager. “It’s the reverse of what we’ve seen in the last decade. . . These days, the last thing you want is a weak currency.

In the U.S., investor expectations that the Federal Reserve may opt for an oversized rate hike after CPI jumped to 9.1% and comments from a senior Fed official have dissipated somewhat . Futures markets today reflected bets for a 75 basis point rise after the Fed’s next policy meeting on July 27.

The new era of rising interest rates is already having an impact. Ratings agency Moody’s today raised its forecast for global corporate defaults on the back of policy tightening and soaring inflation.

Plus, the speed at which change is happening is amazing, writes Robert Armstrong in today’s Unhedged newsletter (for Premium subscribers). RIP the era of easy money: welcome to the Great Squeeze.

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Need to know: the economy

The International Energy Agency warned that Europe must immediately reduce its gas consumption before winter. Brussels plans to issue recommendations later this week. Germany is on edge after Russia cut capacity on its Nord Stream 1 pipeline and then shut it down completely for maintenance. Large companies have few alternatives and if the blackout is prolonged, Berlin will struggle to get supplies ahead of the heating season. Such a crisis would send chills far beyond Germany’s borders.

Latest for UK and Europe

EU chief diplomat Josep Borrell said he hoped for a deal this week to unblock Ukraine. Black Sea Ports and enable the country’s grain exports. Founder of BlackRock Larry Finck warned that the destruction of arable land during war had serious global consequences, while Sayed Azam-Ali of Crops For the Future said it was time to resurrect “forgotten” crops to counter the crisis.

A stronger dollar and relaxed Covid testing rules led to a rebound in demand at London Attractions American tourists. The Asian market is recovering more slowly, particularly among spendthrift Chinese travelers discouraged by the end of duty-free shopping for non-European visitors.

American tourists may love the UK, but the same cannot be said for their businesses. American companiesConfidence in the UK slipped on concerns over Brexit, labor shortages and rising taxes.

UK public sector workers are due to be offered pay rises averaging 5% this week, but the below-inflation deals could well spark more strikes in the coming months. Here’s a powerful first-person account of what it’s like to survive a cost of living crisis.

Latest World

China is struggling to contain the spread of the BA.5 Omicron subvariant of the coronavirus, with the number of cities under new restrictions now reaching 41, covering 264 million people, or nearly 19% of the population. Shanghai, the country’s financial hub, has announced mass testing in half of its districts, raising fears that another extensive lockdown is on the way.

Sri Lankan Opposition leader Sajith Premadasa has called on the IMF for “humane treatment” as the country faces negotiations over a bailout while restructuring more than $50 billion in external debt. Here’s our big read on what the picture says about risk in other emerging markets as they grapple with soaring energy and food costs and a rising US dollar.

Need to know: company

Benefits to Goldman Sachsthough better than expected, plunged 47% to $2.9 million in the second quarter, helped by a slowdown in investment banking and lower asset management revenue. Bank of America profits also fell to $6.2 billion from $9.2 billion a year earlier.

Even when the current travel disruptions end, the airlines of the world are likely to bear the scars of the pandemic for years to come in the form of a billion dollar mountain of debt. “This accumulation of debt is enormous. There is no silver bullet to this particular problem,” said Izabela Listowska, credit analyst at S&P Global Ratings.

Deliveroo became the latest company to fall victim to the cost of living crisis as the food delivery company lowered its growth forecast due to ‘increasing consumer headwinds’.

British insurer Direct line issued a profit warning and canceled share buybacks after suffering from rising prices for auto parts and used vehicles.

Once high flying fintech companies those listed earlier in the pandemic have lost half a trillion dollars in market value as optimism over digitalization has been overtaken by worries about interest rates, lack of profits and untested business models. Shares of recently listed fintechs have fallen on average more than 50% since the start of the year, according to analysis by the FT.

UK’s 40,000 independent pubs are in a fragile state after being hit by staff shortages and rising costs. Three-quarters are struggling to fill vacancies and some 15% of independent pub operators said their business was no longer viable.

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

The world of work

According to Microsoft, the number of business talks increased by 50% since the start of the pandemic, a trend that should have a negative effect on productivity. Lynda Gratton of London Business School says we’d better spend that time making and nurturing friends in the workplace.

Business support exploded as the world slowly emerged from the pandemic, especially at the chief executive level, where expensive leadership “whisperers” became indispensable, says Emma Jacobs. “Leaders don’t have manuals for hybrid work and high inflation. New and emerging managers have not gone through a recession,” says Bhushan Sethi of PwC.

China zero-Covid policy has had a serious impact on the country’s global talent pool. China-based staff at foreign multinationals have been unable to travel when up to half of European expats may have left the country since the start of the pandemic.

Get the latest global picture with our vaccine tracker

And finally . . .

The pandemic has brought out the budding horticulturalist in us, but gardening can also be a great comfort to the sick, the dying and those left behind, writes opinion and analysis editor Alice Fishburn, in this moving article.