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Testing times for central banks

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Bank of England policymakers could be forgiven for feeling a little bruised today as they await the outcome of government plans to deregulate the City of London in a post-Brexit “Big Bang” as well as feeling the heat from Tory contenders for prime minister.

The financial services bill, to be published on Wednesday, will enable ministers to “call in” BoE decisions they do not like, or as former chancellor Rishi Sunak terms it: “We will finish the job of ending the EU system where ultimate power lies with faceless regulators and vest that power in our sovereign parliament.”

Meanwhile, Sunak’s rivals for the Tory crown, in particular foreign secretary Liz Truss, have accused the BoE of not doing enough to halt the surge in inflation. The charge was firmly rebutted today by Michael Saunders, a member of the Bank’s monetary policy committee: “The government very clearly does not set the direction of travel for monetary policy, that is set by the MPC. That is fundamental to the UK framework . . . and it has served the UK well for the past 25 years.”

The European Central Bank also faces a landmark week as it prepares to raise interest 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 launches a scheme to prevent higher borrowing costs causing another eurozone debt crisis.

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

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“We’re seeing a rate hike feeding frenzy,” said one portfolio manager. “It’s the reverse of what we saw in the last decade . . . Nowadays the last thing anyone wants is a weak currency.”

In the US, investor expectations that the Federal Reserve could opt for a supersized rate rise after a jump in CPI to 9.1 per cent and comments from a senior Fed official, have dissipated somewhat. Futures markets today were reflecting bets of a 75 basis point increase after the Fed’s next policy meeting on July 27.

The new age of rising interest rates is already creating repercussions. Moody’s credit rating agency today raised its forecasts for global corporate defaults because of the tightening in policy and the surge in inflation.

Moreover, the speed at which the change is taking place is astonishing, 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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Need to know: the economy

The International Energy Agency warned that Europe must immediately cut gas consumption ahead of the winter. Brussels is planning to publish recommendations later this week. Germany is on edge after Russia cut capacity from its Nord Stream 1 pipeline and then closed it completely for maintenance. Big companies have few alternatives and if the cut-off is extended, Berlin will find it difficult to stock up ahead of the heating season. Such a crisis would cause jitters far beyond German borders.

Latest for the UK and Europe

EU chief diplomat Josep Borrell said he hoped for a deal this week to unblock Ukraine’s Black Sea ports and allow exports of the country’s grain. BlackRock founder Larry Fink warned that the destruction of arable land during the 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 have led to a rebound in demand at London attractions from US tourists. The Asian market is recovering more slowly, particularly from free-spending Chinese travellers, put off by the end of duty-free shopping for non-EU visitors.

American tourists might be fond of the UK, but the same can’t be said for their businesses. US companies’ confidence in the UK has slipped over concerns about Brexit, labour shortages and rising taxes.

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

Global latest

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

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

Need to know: business

Profits at Goldman Sachs, although better than expected, plunged 47 per cent to $2.9mn in the second quarter, thanks to the slowdown in investment banking and falling revenues in asset management. Bank of America profits also dipped to $6.2bn from $9.2bn a year earlier.

Even when the current travel disruption ends, the world’s airlines are likely to carry scars from the pandemic for years to come in the form of a billion dollar debt mountain. “This accumulation of debt is huge. There is no quick fix to this particular problem,” said Izabela Listowska, a credit analyst at S&P Global Ratings

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Deliveroo became the latest corporate victim of the cost of living crisis as the food delivery company downgraded its growth forecast because of “increased consumer headwinds”.

UK insurer Direct Line issued a profit warning and cancelled share buybacks after suffering from higher prices for car parts and used vehicles.

Once high-flying financial technology companies that listed earlier in the pandemic have lost half a trillion dollars in market value, as optimism over digitalisation was overtaken by concerns about interest rates, lack of profits and untested business models. Shares in recently listed fintechs have fallen an average of more than 50 per cent since the start of the year, according to FT analysis.

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

It’s not just purveyors of alcohol that are feeling the pinch. Starbucks is considering a possible sale of its UK business as the coffee chain experiences greater competition and changing consumer habits as a result of the pandemic.

The World of Work

According to Microsoft, the number of business meetings has risen by 50 per cent since the start of the pandemic, a trend that is likely to have a negative effect on productivity. Lynda Gratton of London Business School says we’re better off spending that time making and sustaining workplace friends.

Business coaching has boomed as the world inches out of the pandemic, especially at chief executive level, where expensive leadership “whisperers” have become indispensable, says Emma Jacobs. “Leaders don’t have playbooks for hybrid work and high inflation. New and emerging managers haven’t worked through a recession,” explains Bhushan Sethi at PwC.

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

Covid cases and vaccinations

Total global cases: 554.5mn

Total doses given: 12.2bn

Get the latest worldwide picture with our vaccine tracker

And finally . . .

The pandemic brought out the budding horticulturalist in many of us, but gardening can also be a great solace to the ill, the dying and those who are left behind, writes opinion and analysis editor Alice Fishburn, in this moving article.

illustration of a person in a garden by purple flowers
© Annabel Wright

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