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Central bankers edge towards ‘normalisation’


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Good evening from London where we’re reflecting on one of the busiest weeks for central bankers for some time, with a significant interest rate move from Norway; policy updates from the US Federal Reserve, the Bank of England and the Bank of Japan; and rate rises in four emerging markets: Pakistan, Hungary, Paraguay and Brazil. There was even an unexpected rate cut in Turkey.

Oystein Olsen rarely makes international headlines but the Norges Bank chief was in the spotlight on Thursday as Norway became the first major western economy to raise interest rates since the pandemic began. 

“A normalising economy now suggests that it is appropriate to begin a gradual normalisation of the policy rate,” said Olsen, as he announced an increase of 0.25 percentage points from the record low of zero.

As our latest Big Read explains, central bankers in developed economies are generally pleased that the economic recovery has proved stronger than initially expected, but are starting to fret that keeping interest rates at historic lows for too long risks rising inflation and excessive borrowing.

In the US, Fed chief Jay Powell suggested the bank could start tightening policy in November with the “tapering” of its $120bn-a-month asset purchase programme and a possible end to the scheme in the middle of next year. Fed officials also suggested a rate rise could come sooner than expected.

On the other side of the Atlantic, the Bank of England’s monetary policy committee voted to keep its main rate at the historic low of 0.1 per cent but opened the possibility of a “modest tightening” of policy over the next few years, with inflation possibly hitting 4 per cent in the final quarter of 2021. Investors now expect a first rate rise by February, with an outside possibility of an increase this year.

Despite a number of potential hurdles, such as inflationary pressures failing to be as transitory as bank officials maintain — a view reiterated again this week by European Central Bank president Christine Lagarde — and economic recovery being knocked back by more dangerous variants of coronavirus, the key message from the Fed and other central banks is clear, the FT noted: “The exceptional policies of the Covid crisis . . . are starting to come to an end”.

Latest news

  • Sales of newly built homes in the US hit their highest level in four months in August in a sign that homebuilders were addressing supply chain bottlenecks

  • Rising inflation could prompt two UK interest rate increases by next May, economists at Bank of America said

  • Norway is lifting almost all its pandemic restrictions on Saturday, becoming the latest Nordic nation to return to normal

For up-to-the-minute coronavirus updates, visit our live blog

Need to know: the economy

Preliminary results from IHS Markit’s Purchasing Managers’ Index for September showed costs for eurozone manufacturers rising at their fastest rate in 20 years, fuelled by supply shortages. There was also disappointing news for the services sector where the boost from economies reopening earlier in the summer began to wane.

The PMI data for the UK painted a similar picture of a slowing recovery in the third quarter as price pressures became more intense and supply chain problems hit growth in manufacturing. Chris Williamson, chief business economist at IHS Markit, said the data would “add to worries that the UK economy is heading towards a bout of ‘stagflation’, with growth continuing to trend lower while prices surge ever higher”.

Line chart of Purchasing managers'  input price sub-index, above 50 = a majority of businesses reporting an expansion showing Eurozone input costs rise to a 2-decade high

Latest for the UK/Europe

Investors are bracing for a change of government in Germany after this Sunday’s general election, which if the polls are correct would introduce a left-leaning alliance and a new emphasis on spending rather than the focus on debt reduction under Angela Merkel. The Financial Times’s preference is for a modernising administration with a “hefty” increase in public investment and more fiscal incentives for the private sector. Here’s our Big Read on the end of an era.

Global latest

US president Joe Biden’s proposed tax changes to raise funds for his $3.5tn social spending proposals are going through the horse-trading process in Congress known as “reconciliation”. Take our 10-question quiz to learn more about the plans.

Foreign investors warned Vietnam that strict lockdowns in the Ho Chi Minh City area, one of Asia’s leading manufacturing hubs, could force them to move production to other areas. Suppliers or operations that have been disrupted include Intel, Toyota, Ikea, Nike and Adidas.

Need to know: business

The supply chain crisis shows little sign of easing. In the UK, gaps on supermarket shelves are growing and fuel shortages are spreading at petrol stations because of a lack of tanker drivers. Stung by a string of bad headlines, prime minister Boris Johnson today ordered a rapid fix to the haulier shortage, including the option of issuing temporary visas to foreign lorry drivers. 

In the US, retailers have brought forward holiday orders to try to beat supply bottlenecks, not just for toys and seasonal goods but “anything you can get your hands on”. Faced with container and shipping costs at up to six times normal, Costco has chartered three ships to ease the load. US officials meanwhile are pressing semiconductor companies for “more transparency” about their supply chains as the global chip crisis continues.

Hotels in holiday destinations across Europe may have enjoyed a surge in summer bookings, but for city sites, particularly those that normally attract business travellers, it could be a hard winter. Developers however remain optimistic and 2021 and 2022 could yet be record-breaking years for new openings.

Chart showing the UK is leading the way in hotel projects

Science round-up

Vaccines: BioNTech/Pfizer said their vaccine — the first to be authorised in the US for adolescents over the age of 12 — was safe and triggered “robust” immune responses in children aged five to 11, as it announced plans to submit trial data to regulators. Although not yet approved by US or European regulators, Novavax is seeking WHO approval for emergency use of its vaccine, which would enable it to be used in the Covax programme to supply jabs to developing countries. AstraZeneca, in partnership with VaxEquity, is to use the RNA technology that first proved itself with coronavirus vaccines to create a new range of therapeutic drugs.

Boosters: The UK began administering booster shots this week, starting with those living and working in care homes. In the US however there has been a string of setbacks for the president with booster plans scaled back by health officials and regulators at the FDA and the CDC. In Europe, the main regulator expects to decide in early October on the possible use of a booster dose of the BioNTech/Pfizer shot, according to Reuters. Johnson & Johnson said a booster on top of its one-shot vaccine increased protection against symptomatic Covid-19 to 94 per cent.

Treatments: Gilead said its Remdesivir drug reduced the risk of hospitalisation from Covid-19. Although the World Health Organization has been dismissive of the drug’s efficacy, it remains, under the brand name Veklury, the only antiviral drug approved for Covid-19 by US regulators.

Pandemic control: The lead scientist behind the UK’s Zoe Covid study said the UK had more cases than most of Europe because of the lack of masks and social distancing, coupled with the fact “we’re ignorant of the symptoms”. The government recognises a cough, fever and loss of smell as the key Covid symptoms, but the Zoe researchers argue for a broader range of symptoms including a sore throat, runny nose and sneezing. Covid cases among schoolchildren in England have hit a record high, with a parallel increase in infection among people aged 30-49 — their parents’ generation.

Chart showing that cases among school-age children in England have surged to a record high, and there are signs that this is feeding through to their parents’ age group

Well I never: UK greenhouse gas emissions fell 13 per cent last year as commuting dried up, according to official statistics, suggesting more hybrid forms of work could be permanently beneficial to the environment.

Covid cases and vaccinations

Total global cases: 230.6m

Get the latest worldwide picture with our vaccine tracker

And finally …

Which of us hasn’t at some point longed for a bowler hat that could decapitate a villain at 50 paces and a nifty ejector seat in the back of an Aston Martin? With No Time to Die, the 25th 007 film, at long last reaching cinemas next week, Peter Aspden looks back at a life-long bond with Bond.

Scene from ‘Goldfinger’ film from 1964
Sean Connery — surely everyone’s premium Bond — demonstrates the golden touch © Alamy

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