Switzerland’s historic rate rise rattles markets

This is an audio transcript of the FT News Briefing podcast episode: Switzerland’s historic rate rise rattles markets

Marc Filippino
Good morning from the Financial Times. Today is Friday, June 17th, and this is your FT News Briefing.

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A chorus of central banks raised interest rates this week to try and fight inflation.

Katie Martin
This is an exceptionally dicey point for the economy and by extension, therefore, for the market. Stocks do not like this one bit.

Marc Filippino
Germany is asking its citizens to conserve energy as Russia continues to shut off the taps. And Europe is dealing with a new wave of Covid hospitalisations as Omicron subvariants surge. I’m Marc Filippino and here’s the news you need to start your day.

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Interest rates are going up in the US, the UK and Europe and stocks are falling as a result. The Federal Reserve and the Bank of England raised rates this week. So did the Bank of Switzerland. But we’ll get to that more in a bit. The S&P 500 and the FTSE 100 both did not like this. They ended their trading days down more than 3 per cent on Thursday.

Katie Martin
Yes. So, you know, pretty quiet week in markets, really. Not much going on. No, I just, it has been pretty hectic out there.

Marc Filippino
The FT’s markets editor, Katie Martin, has been a pretty busy markets editor this week. Katie, dealer’s choice, which central bank do you want to touch on first?

Katie Martin
So let’s start with the biggie. Let’s start with the Fed, the US central bank, which had what I think you could politely describe as a massive sense of humour failure about the runaway pace of inflation. And it raised interest rates by 0.75 percentage points this week. That’s a lot. It’s the biggest rise in interest rates since 1994, which people insist on telling me is nearly 30 years ago, though I don’t believe it. And they’ve given some hints that they might do this. But nonetheless, this is massive and this is the Fed’s way of saying, we’ve got to do something about inflation, we’ve got to do it quickly, we’ve got to do it aggressively. It’s become a bit of a kind of competitive sport in, you know, on Wall Street to make increasingly outlandish predictions about what the Fed is going to do next. So the mood music here is it’s going to be really difficult for us to get this inflation under control without accidentally causing a hard landing on the economy. So this is an exceptionally dicey point for the economy and by extension, therefore, for the markets. Stocks do not like this one bit.

Marc Filippino
And the Bank of England yesterday raised interest rates for a fifth time in a row by a quarter of a per cent. How did the market react to this?

Katie Martin
It’s notable, actually, that, you know, so sterling has picked up a little bit on this interest rate rise, which is normally what you’d expect to see out of interest rate increases, but not that much. And it tells you that the market thinks that the UK economy is in a mess for a bunch of reasons, in addition to monetary policy. If that’s not enough fun for you, even the Swiss, the Swiss National Bank has not raised interest rates since 2007, and this week they came out with half a percentage point. Worth bearing in mind Swiss benchmark rates are still -0.25 per cent. Nonetheless, if the Swiss are in this game, then you can tell it’s really catching on around the world. Central banks are really keen to stamp some authority on markets and on the sort of global inflation profile.

Marc Filippino
So what’s the TLDR here, Katie? What’s the takeaway here?

Katie Martin
Well, this has all added up to, for markets, is this realisation that we are in a bit of a mess here. And if central banks do manage to get a grip on inflation, which is entirely in their gift, right, but, you know, they’re important players here. If they do manage to get inflation under control without breaking other stuff, you know, as much as my mother always says, you can’t make an omelette without breaking some eggs, if they can manage to do this without breaking some eggs, then that will be frankly miraculous at this point.

Marc Filippino
Katie Martin is the FT’s markets editor. Thanks, Katie.

Katie Martin
All right. No worries.

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Marc Filippino
The European energy crisis is getting even more dire. Russia has significantly cut down the supply of gas it is sending to several countries. Flows through the main pipeline Nord Stream are down 60 per cent in recent days. Russia’s state-controlled gas exporter, Gazprom, says it’s due to technical issues. But EU politicians say it’s a political move and retribution for supporting Ukraine in the war that’s going on there. Now, Germany’s deputy chancellor is pleading with residents to cut back energy usage. The FT’s Berlin bureau chief, Guy Chazan, is here to break this down. Guy, this is quite a dramatic thing for a politician to tell people to do. Why did he feel like he needed to say this?

Guy Chazan
Well, he needed to say it because there is a serious problem now. I mean, the decline in volumes being pushed through Nord Stream has really been quite dramatic. I mean, on Tuesday, Russia cut the daily volume by 40 per cent from about 167 to 100mn cubic metres. And since then, the volume has fallen to 67mn cubic metres. So it’s a really dramatic reduction. It’s come at a time when normally it takes the gas and it puts it into storage for the winter months ahead. And if it can’t get that storage up to a reasonable amount, then that is going to be a serious problem for the winter. So the deputy chancellor, Robert Habeck, said that the situation was serious and you know that companies and citizens should do what they could to save energy. Every kilowatt-hour helps in this situation, he said in a kind of direct video appeal which they put on Twitter.

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Guy Chazan
So there is already talk about landlords not heating houses and flats to the same degree that they would normally do. These are the policy responses that are now being discussed in German society. Can we actually force people to save energy if they don’t do it voluntarily?

Marc Filippino
So Guy, how are German residents feeling about all this? Are they supportive of this call to cut their energy usage?

Guy Chazan
Yes, they are at the moment, but that could change if this becomes a sort of long-term problem. The gas supply gradually dwindles and then people are being told that they can’t have hot showers and things like that. I mean, at the moment, people don’t really feel directly affected by this, but that could change quite soon. I mean, if the problem persists into winter, then we’re going to have a serious problem on our hands.

Marc Filippino
Now, Guy, how serious is this for the German economy?

Guy Chazan
Well, I think at the moment industry hasn’t been sounding the alarm yet. But if this does persist, I mean, I suppose that the crucial thing is, is this a problem with the turbines and will Siemens Energy resolve it? The company does say that it’s actually working on the problem now and hopes to be able to figure something out. I suppose then, you know, there’ll be a big sigh of relief if that happens. But there is obviously this other aspect, which is, as Habeck says, that this is just a political decision that’s coming straight out of the Kremlin, in which case this is a much more serious issue. So far, companies have been you know, the big customers of Gazprom have been fairly quiet. But the longer this persists, I think the more anxious they’re going to become.

Marc Filippino
Guy Chazan is the FT’s Berlin bureau chief. Thanks, Guy.

Guy Chazan
Thank you.

Marc Filippino
Covid is dealing another blow to Europe. This time, it’s because of subvariants of the highly infectious Omicron strain. The FT analysed data showing hospital admissions have risen in several countries, including France and England. And the BA.5 subvariant of Omicron now accounts for over three quarters of new infections in Portugal. Experts say that complacency might be playing a big role in all this. A lot of places aren’t testing for Covid as much as they had been, and that means it’s harder to spot new mutations and act fast. Plus, it could lead to further trouble down the road. Experts worry about waves later in the year that will put even more pressure on healthcare systems.

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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 Michael Lello, Peter Barber and 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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