Sep 8 • 6M

Dawn Chorus: Europe's jumbo rate hike

European Central Bank hikes key deposit rate by 75 basis points to 0.75% and pledges more; Powell hopes to avoid too much jobs pain, although research suggests much more needed

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TLDR: The world’s second most important central bank hiked its official interest rates by slightly more than expected overnight as continental Europe grapples with consumer price inflation headed for 10% and producer price inflation of over 30%.

Meanwhile, Britain unveiled a £150b bailout for consumers and businesses, whereby it will pay energy companies to freeze their power bills for two years. The British Government and the Bank of England are also offering £40b in cheap loans to electricity companies unable to cope with spiking power prices.

Elsewhere in the news this morning: the Queen died1, Ukrainian tanks broke through Russian lines near Kherson and EY plans to split into separate audit and advisory divisions.

A big week for a new PM: As the long-planned tributes to the Queen roll out across the UK, the country also grapples with high inflation, soaring energy bills and continuing Brexit fallout. Photo: Getty Images

Paying subscribers can see more analysis and detail below the paywall fold and in the podcast above. They’re also welcome to join our weekly ‘hoon’ webinar with co-host Peter Bale and myself for an hour at 5pm today on this link. I’ll also be sending an invite to paying subscribers for my weekly Ask Me Anything chat session for an hour from midday today.

In geo-politics, the global economy, business and markets

‘Jumbo’ hike - The European Central Bank announced a 75 basis point hike in its official interest rates overnight, including a rise to 0.75% for its main deposit rate. That was slightly larger than most expected and the biggest single rise in the rate since the inception of the euro zone nearly 24 years ago. ECB President Christine Lagarde said the central bank would probably need to hike rates another two to five times to drag down inflation, which was currently “far too high” at 9.1% across the euro zone. The key two-year German ‘bund’ yield rose 28 basis points to an 11-year high of 1.37%. European stocks fell around 0.6%. Reuters

Another bailout - New British PM Liz Truss confirmed overnight that the Government would borrow another £150b to pay electricity and gas companies the difference between annual household energy bills at an average of £2,500 from October and spiking wholesale prices. Britain’s Treasury and the Bank of England also plan to offer £40b in discounted loans to those energy companies unable to handle the spike in electricity and gas prices since Russia’s invasion of Ukraine and its decision to cut off its gas supplies to Europe completely.

‘Drill baby drill’ - Truss also promised to immediately start fracking for gas in Britain and removed a green levy from power bills designed to encourage a shift to net zero emissions by 2050. She also launched a review of the target to see whether it was economically appropriate.

Just briefly

Scotland announces rent freeze BBC

Quote of the day

Talking the talk before walking the walk again

“We need to act now, forthrightly, strongly, as we have been doing and we need to keep at it until the job is done.” Fed Chair Jerome Powell speaking in an interview at a Cato Institute conference overnight (from 5 mins on in the video below), which was seen as confirming the Fed would hike its key rate another 75 basis points to a range of 3.0% to 3.25% at its next policy meeting on September 21.

Number of the day

‘The scariest economics paper of 2022’

7.5% - A new paper titled Understanding U.S. Inflation During the COVID Era was presented at a conference overnight that forecast the Fed might have to hike interest rates and crunch the US economy to the point where US unemployment rate might rose to 6.5% from 3.7% now in order to get inflation there back down to 2.5% by the end of next year. Currently, the Federal Reserve is forecasting it will only have to push unemployment up to 4.1%. The conference draft paper from two IMF economists and a John Hopkins professor was described by former Obama-era White House official Jason Furman in this WSJ2 column as the "scariest economics paper of 2022."

However, Powell said in the interview above he was hopeful still-anchored low inflation expectations would help avoid that level of pain.

“We think we can avoid the kind of very high social costs that Paul Volcker and the Fed had to bring into play.” Jerome Powell, referring to Volcker’s eventual hiking of US interest rates into the high double digits and the rise in unemployment to 10.8% by late 1982.

Chart of the day

Happy days for oil pumpers, gas drillers and shipping lines

Longer read of the day

Scoop of the day

A fun thing (H/T Lynn)

Ka kite ano


PS: See you all at midday for the Ask Me Anything and 5pm for the weekly hoon.


I know this is huge (if not unexpected) news, but you’ve no doubt seen it everywhere else already and I don’t have much useful to add. We’ll probably talk about it on this afternoon’s hoon. One thing of note: the Bank of England had to announce that British cash was still legal tender, even though it still had the Queen’s head on it.


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