POLITICO Pro Central Banker: Fed holds — ECB poised — BoE pressured

Our one-stop source for central banking & monetary policy news.

By GEOFFREY SMITH

with CARLO BOFFA, JOHANNA TREECK, BEN MUNSTER, BJARKE SMITH-MEYER and IZABELLA KAMINSKA

— The ECB is expected to raise interest rates by 0.25 percent, 2:15 p.m.

— The Federal Reserve suspended its cycle of rate hikes but warned that more would be needed later this year.

— Beyoncé’s Stockholm concert drives inflation higher in Sweden.

ECB 3.75% ⇡ — BOE 4.5% ⇡ — FED 5.35% ⇡— SNB 1.5% ⇡— BOJ -0.10% ⇣— RBA 4.10% ⇡— PBOC 3.65%⇣— CBR 7.5% ⇣ — BOC 4.75 ⇡— SARB 8.25% ⇡

Good morning and welcome to part two of the G3 central bank trifecta. The Federal Reserve held off hiking interest rates for the first time in 15 months, as expected, but chair Jerome Powell warned that “nearly all” policy-makers thought that further increases (sic) would be necessary by year end, the first of them coming as soon as July. Powell’s signalling — which was surprisingly clear in view of the increasing signs of an economic slowdown in the U.S. — raised questions as to why they had bothered pausing at all, given that they were so certain that more would be needed. Not for the first time, Powell struggled to answer those questions convincingly. Read our U.S. colleague Victoria Guida’s account of the day here.

Today, it’s the turn of the European Central Bank after the Federal Reserve decided to hold off from raising rates for the first time in 15 months. The Bank of Japan will round off the proceedings on Friday (if you’ve got a rate change on your betting slip for that one, you can probably throw it in the bin right now).

And as you will see below, Christine Lagarde may be the headline act, but she’ll be ably challenged by our very own Izabella Kaminska later in the day. Whether either of them can aspire to the macroeconomic impact of Beyoncé remains in doubt, as you’ll see below.

PROGRAMING NOTE: Our senior finance editor, Izabella Kaminska, will be interviewing the Bank of England’s Jon Cunliffe today as part of POLITICO’S Global Tech Day. She’ll be asking him if he still thinks there’s a seven out of 10 chance that the U.K. will adopt a digital pound but also, if she has time, if he thinks the push to tokenize assets and deposits might undermine the fungibility of sterling. You can sign up to view the livestream here.

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— ECB rate decisions, 2:15 p.m., and press conference, 2:45 p.m.

— US jobless claims, 2:30 p.m.

— China May industrial production, retail sales and fixed asset investment, 4 a.m.

The European Central Bank loves to show how it’s not bound to follow the Fed, so President Christine Lagarde may announce a 0.25 point rate hike later with some relish — at least until someone reminds her that the eurozone is already in recession. While the hike is all-but nailed on — along with another one in July — there’s substantial uncertainty over what guidance she will give as regards the bank’s policy after the summer. “Data dependence” is likely to be the watchword.

Before that, China has the chance to show that its reopening boom hasn’t completely stalled, with data on industrial production and retail sales, while U.S. jobless claims are due at 2:30 p.m.

Meanwhile, the pressure on the Bank of England is mounting: lawmakers have forced it to concede to an independent review into the shortcomings of its inflation forecasting.

MERGER SPLURGE: Two big merger announcements in as many days have given a more concrete shape to fears that corporate price gouging is driving inflation. 

From four to three: On Tuesday, Vodafone and CK Hutchison’s Three Mobile announced plans to merge their U.K. mobile phone networks, a move that will reduce the number of major players in the British market from four to three. Historically, that degree of concentration has been too much for antitrust regulators, but the U.K.’s Competition and Markets Authority softened its stance some months ago. The timing is clever: whether the CMA has the stomach for another fight so soon after the grief it has had for blocking the Microsoft-Activision deal must be questionable. 

Squeezing oilseeds: A day earlier, Bunge had agreed to buy Viterra from Glencore in a deal that will concentrate a large part of the world’s trade in oilseeds and grains in fewer hands. In both cases, the companies are arguing that the more profitable entities that arise from these deals will be more able to invest more in guaranteeing better service or more reliable food supplies. However, it’s hard to see how either deal leads to more competition and lower final prices for consumers in the near term.

CRAZY IN … FLATION: Pop goddess Beyoncé was partly responsible for higher-than-expected inflation numbers in Sweden last month, according to Danske Bank’s number crunchers. The FT quoted analyst Michael Grahn as saying that the concert in Stockholm that kicked off her world tour added 0.2 percent to the overall CPI in May, resulting in a surprisingly small drop of 0.2 percent.  Statistics Sweden estimated that, overall, restaurants and hotels added 0.3 points to May’s figure, and recreation and culture 0.2 points.

Experience-driven consumption: The numbers suggest that there is still plenty of energy left in the post-pandemic bounce in experience-driven consumption, whether that’s for vacations or for other kinds of stuff-that-makes-life-worth-living. There’ll be plenty of opportunity to test Grahn’s thesis over the next month as Bruce Springsteen tours Europe.

UK GDP shrunk by 0.3 in April, driven by an equivalent contraction in manufacturing, according to official data. The figures were worse than expected, but not as much of a shock as Monday’s labor market data, which triggered a sharp selloff in Gilts. 

Ugly, but with a twist. The April data marks the first clear downturn in manufacturing since August 2022, although survey responses in recent months have consistently pointed to contraction in the sector. 

On the other hand … Industrial production in the eurozone beat expectations with a 0.7 percent increase, following March’s 3.8 percent decline. But sans Ireland — where production rose an explosive 21.5 percent — eurozone IP actually dipped by 0.8 percent, dashing hopes that lower energy prices would fuel a recovery.

BOE FORECASTS, WHAT ARE THEY GOOD FOR? Score one for the people’s representatives. Under pressure from the Treasury Select Committee of the House of Commons, the Bank of England has commissioned a review into its forecasting practices, after sleepwalking into the worst bout of inflation since the 1970s. 

It’s a fair cop: Bank officials had already admitted to the TSC that their forecasting models had serious shortcomings, in as much as they only really worked when the economy was functioning normally and not subjected to shocks. Those shortcomings have become apparent as the U.K. economy has stumbled from one shock to another since 2016, leaving the country with the highest inflation rate of the G7.

No marking your own homework: David Roberts, who chairs the Bank’s Court, told TSC chair Harriet Baldwin that the Bank had “decided to commission a broad review into the Bank’s forecasting and related processes during times of significant uncertainty.” Importantly, the review will be led by someone from outside the Bank, “supported by the Independent Evaluation Office”, Roberts said. 

Quite coincidentally: Nick MacPherson, former chief secretary to the Treasury penned a rare thread on Twitter highlighting the risks to the ruling Conservative Party at the next election from the Bank’s tardiness. The lagged effects of monetary policy mean that the full, belated force of those BoE rate hikes will be felt just as it’s time to vote.

WHO CAN HOLD DIGITAL EURO? Everyone, is the short answer. But under certain conditions. Our financial services colleagues got their hands on the latest draft bill for the digital euro, which will effectively force eurozone banks to offer people basic access to digital euros — free of charge. See the details on that here or read the full document here.

At a basic level, everyone living in the euroclub can get their hands on the virtual extension of euro banknotes and coins, which can settle payments within seconds across the 20 countries. Same goes for those who once lived in the eurozone and opened an account but have since left.

EU citizens outside of the eurozone can also get access to digital euros, as long as their national central bank abides “by any rules, guidelines, instructions or requests issued” by the ECB. These EU citizens might have to pay their banks a fee for getting them access though. Same goes for people living outside the EU and tourists, although the European Central Bank “may restrict access” to these groups, if it sees fit.

Everyone will get to hold as many digital euros as eurozone citizens will, although the bill doesn’t give specific thresholds. That is for the ECB to figure out, although the number €3,000 has been thrown around a lot. Interestingly, “The holding limit for offline digital euro shall not exceed half of the overall limit determined by the European Central Bank.” I suppose that’d be €1,500.

QUANTUM FINANCIAL LEAP: Houston, we may have our first quantum financial transaction. Morning Central Banker can exclusively reveal that an international consortium of banker types and government-funded crypto expert tech types has apparently completed the world’s first quantum-secure cross-border electronic trade document transaction. 

Quantum-proofing the financial system. The pilot was run on behalf of the U.K. government by International Chamber of Commerce UK and the Centre for Digital Trade and Innovation and supported by the Singapore government. It involved the sending of building products from the U.K. to Singapore using an electronic bill of lading and a digital promissory note, which was wrapped in a quantum-secure “seal” utilizing symmetric key encryption provided by Arqit. 

But is it really secure? The pilot comes after the Bank for International Settlements warned the financial industry last week that it must upgrade its systems for the quantum age. U.K.-based Arqit — which was founded by former military and intelligence boffins — says it believes its system is the only known method to create quantum-safe encryption at any end point from cloud systems. Since we’re not hackers ourselves, however, we will have to take their word for it. 

“Looking ahead, nearly all Committee participants viewed as likely that some further rate increases will be appropriate this year to bring inflation down to 2 percent over time.” Federal Reserve Chair Jerome Powell, at his press conference after the Federal Open Markets Committee meeting on Wednesday.

“At this meeting, considering how far and how fast we’ve moved, we judged it prudent to hold the target range steady, to allow the Committee to assess additional information and its implications for monetary policy.” Powell again, f

“God willing, neither our finance minister nor our central bank governor will embarrass us and I think we will hopefully obtain positive results.” Turkish President Recep Tayyip Erdoğan to reporters on Tuesday. (For more, see here.)

“My logic is that if you add up all these kinds of ideas together, annually, you’re looking … in the tens of billions, not in the hundreds of billions,” World Bank President Ajay Banga to Reuters on Wednesday, pledging to “push the balance sheet” as far as possible without sacrificing the bank’s AAA rating.

China May retail sales, industrial production, fixed asset investment, unemployment 4 a.m.

Bundesbank’s Nagel to speak on cash provision, 9 a.m.

Turkey May budget data, 10 a.m.

ECB governing council decisions 2:15 p.m.

ECB press conference, 2.45 p.m.

U.S. May retail sales, Philadelphia Fed and Empire State manufacturing indices, weekly jobless claims, 2:30 p.m.

U.S. May industrial production, 3:15 p.m.

U.S. auctions 4-week, 8-week bills, 5:30 p.m.

BoE’s Cunliffe speaks, 5:35 p.m.