ECB to raise interest rates for first time since 2011

This is an audio transcript of the FT News Briefing podcast episode: ECB to raise interest rates for first time since 2011

Marc Filippino
Good morning from the Financial Times. Today is Friday, June 10th, and this is your FT News Briefing.

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Europe’s central bankers are already planning to raise rates and play catch-up with other central banks. They’ve sent some new signals as well. Meanwhile, US inflation looks set to rise even faster. We’ll preview May’s numbers that are due out later today. And older folks in China are scared of getting the country’s Covid vaccine so Beijing is trying something new to encourage more people to get the jab. I’m Marc Filippino, and here’s the news you need to start your day.

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US stocks fell sharply yesterday. The S&P 500 was down nearly 2.5 per cent. Investors are bracing for new data on inflation. That’s due out this morning. The expectation is that the US Consumer Price Index will show a jump of nearly three quarters of a per cent in May. That’s according to Bloomberg. That would be faster than the April increase. To find out more, I’m joined by the FT’s Colby Smith. Hey, Colby.

Colby Smith
Hi, Marc.

Marc Filippino
So, Colby, this comes after two interest rate hikes from the Federal Reserve already this year. Why is the inflation rate still climbing?

Colby Smith
So monetary policy works with long and variable lags. That’s kind of, you know, what any Fed official or economists will tell you. So I don’t think there was kind of an expectation that we’d already see some immediate impact on inflation. But we also have a lot of other factors that are just, you know, keeping inflation higher than I think people anticipated it would have been at prior to just a couple of months ago, really. So with the war in Ukraine, that’s added considerable pressure to commodity prices. And at the same time, you know, we’ve seen this kind of worrisome development where services-related inflation, things tied to, let’s say, travel or rents and other kind of shelter-related costs, and, you know, month after month, we’re seeing pretty significant increases. And until those price pressures start to dissipate, I think that kind of rolling over and inflation will be postponed.

Marc Filippino
So with this report coming out just less than a week before the Fed’s next meeting, does this impact the way the Fed goes about its tightening cycle.

Colby Smith
Ahead of the next meeting, Fed officials have been pretty explicit about what market participants can expect. We know a half-point rate rise is coming in June. At the same time, they’ve already signalled the path forward, at least for the July meeting. So the expectation is we’ll have yet another half-point rate rise. The big open question is whether that pace will be maintained when the Fed, you know, would next meet in September. Market pricing kind of points to that reality. The fact that inflation is probably going to stay at these very elevated levels for the next couple of months. The expectation is that, you know, they’re going to be sticking with a pretty aggressive pace for the foreseeable future.

Marc Filippino
Coby Smith is the FT’s US economics editor. Thanks, Colby.

Colby Smith
Thank you.

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Marc Filippino
Meanwhile, the European Central Bank plans to start raising rates next month. It’ll be a quarter of a point rise and its first rate hike in more than a decade. But here’s the bigger news, the ECB is also signalled that if eurozone inflation doesn’t cool off soon, the bank could possibly maybe raise rates even more aggressively in September by even a half a point.

Tommy Stubbington
And that’s the part that maybe was it was a bit of a surprise to markets.

Marc Filippino
That’s the FT’s Tommy Stubbington.

Tommy Stubbington
Not only is the ECB tightening, you know, having had negative interest rates, let’s remember, since 2014, but it could be doing it faster than markets are expecting.

Marc Filippino
You know also, I mean, a surprising thing to me is how far in advance the ECB is starting to telegraph things. I mean, we don’t know if the September rise is going to happen, but there’s been a lot of wait and see at the ECB, and the fact that they’re starting to lay out plans a few months in advance, that that’s a change.

Tommy Stubbington
Right, and that’s partly because they feel like they need to tread very carefully. This gets to that perhaps slightly troubling for the ECB market reaction that we saw yesterday. The fundamental problem for the ECB is unlike, for example, the Federal Reserve, which is setting interest rates for one country, the ECB is doing it for 19 different countries. And part of the reason that they have to tread carefully is that, you know, the bond markets of some of the more vulnerable members of the eurozone, and I’m thinking countries with very high debt levels like Italy or like Greece, those bond markets have basically been kept in check by the ECB purchasing massive amounts of bonds under its quantitative easing programme. That’s also something that’s going to end next month. And also by the, you know, the very low negative interest rates they’ve had. As they start to exit those policies, people are starting to get worried that borrowing costs for the Italian government or for the Greek government could rise and, you know, we’re not there yet, but could eventually rise to unsustainable levels.

Marc Filippino
Yeah. And actually going into this week’s meeting, there was some chatter about creating a new bond-buying programme. Did we see any progress on that front yesterday?

Tommy Stubbington
We didn’t really. And that’s part of the reason that the market reacted in the way it did. The reason this is difficult for them, though, is, you know, in order to lay out a new programme, they need to be talking about buying bonds at exactly the moment that they’re ending their current bond purchase programme in order to combat inflation. It feels like quite a contradictory aim and that’s partly why, you know, they feel like they need to tread pretty carefully with this. If they’re too explicit, if they say, you know, we’re going to announce a new programme that will focus perhaps on Italian or Greek debt or that of other kind of more, more economically fragile countries, that could provoke a bit of a backlash in northern Europe, where the public and where governments do kind of don’t want to be seen to, you know, don’t want the ECB to be financing the weaker governments by the back door.

Marc Filippino
Tommy Stubbington is the FT’s capital markets correspondent.

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In China, authorities are struggling to get more people vaccinated against Covid, especially the elderly. By last month, less than two-thirds of Chinese citizens 60 years old or older, had received a booster shot. That’s far less than what the World Health Organization says a country needs for herd immunity. The big problem for Beijing is that people don’t trust the jab, and they worry about side effects. So now the government’s offering Covid insurance. It pays out if people get sick because of the vaccine or if they prove a loved one died because of it. Here’s our China economics reporter Sun Yu.

Sun Yu
The Chinese vaccine industry has a history of failing expectations, of delivering poor quality products. That’s a major issue. And secondly, China has a very poor record in disclosing the so-called adverse effects of locally made vaccines. To give you an example, so for this Sinovac Covid vaccine, the only time China disclosed the so-called adverse effects, I think it was in April last year. At the time, China has only given 265mn jabs in total. Between then and now, China had given about 3.1bn jabs. And there’s no information at all on the so-called adverse effects. So how do expect people to trust you when you did not disclose any useful information about side effects of the vaccine?

Marc Filippino
I see. So this insurance effort is really just a way to try and build trust with the general public.

Sun Yu
Yes, exactly.

Marc Filippino
Is there any evidence the insurance is working? Is it encouraging more people to get vaccinated?

Sun Yu
Well some people in Beijing feel that it’s better to have an insurance than not at all. At the very least, if they don’t feel comfortable, if they don’t feel well, they might get $1,000 or $2,000 in compensation. However, one thing they’re really, really worried about is in order to get the compensation you need to prove that your disease is caused by the vaccination, which actually is something like Mission: Impossible because doctors in general are quite reluctant to provide medical proof of this for fear that it might actually cause people to become even less trustful of the local vaccines.

Marc Filippino
So the government is rolling out the safety net, but they don’t actually expect anyone to really be able to cash in on it. Is that it?

Sun Yu
Yes, that’s the issue. That’s the issue as well.

Marc Filippino
Wow. So let’s back up a bit. Why is China so focused on getting its vaccination rate higher in the first place?

Sun Yu
Low vaccination rate means that China’s elderly population might be more exposed to serious disease, to serious consequences of getting infected. And China’s, despite the fact that China’s big cities has pretty well-established healthcare system, the interior part of China were far less developed. In the eyes of the policymakers, there might be a major health crisis in the event of a major outbreak of the virus without a adequately high rate of vaccination.

Marc Filippino
Sun Yu is the FT’s China economics reporter. Thanks Sun Yu.

Sun Yu
Sure.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from Peter Barber, Michael Lello, Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.

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