Banking crisis blurs central bank focus on inflation

Today’s top stories

• The International Criminal Court issued an arrest warrant for Russian president Vladimir Putin over the deportation of children from Ukraine. Chinese leader Xi Jinping will visit Putin in Russia next week in an affirmation of Beijing’s strong ties with Moscow.

• The OECD upgraded its outlook for global growth this year from 2.2 per cent to 2.6 per cent, while inflation was projected to hit 4 per cent in 2023 and 2.5 per cent in 2024. The UK was singled out as the most fragile advanced economy apart from Russia.

• A breakthrough in talks between the UK government and health unions could end a series of strikes. Hopes have also been raised of an agreement with education workers.

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Good evening.

It’s been a rollercoaster week.

Markets have been roiled by banking crises on both sides of the Atlantic, prompting speculation that central banks might have to rethink their plans for interest rate rises, only to be urged by the OECD today to hold their nerve.

US banking stocks were hit with a renewed sell-off today as investors shrugged off a $30bn rescue package for First Republic Bank from major Wall Street institutions. Sector concerns were first sparked by the collapse a week ago of Silicon Valley Bank — the second-largest bank failure in US history — and Signature Bank. The parent company of SVB filed today for bankruptcy protection.

US lenders have flocked to the Fed for support over the past week, but Treasury secretary Janet Yellen maintains that the banking system remains “sound” despite the failures.

Over in Europe, turmoil at Credit Suisse, which has been having difficulties for some time, has added to investors’ jitters. The bank is limping on thanks to a $54bn lifeline from the Swiss central bank but its shares fell again today, dragging the wider sector down with it.

Although some fear that the continuation of aggressive policy tightening could make the banking crisis worse, the OECD today urged central banks to “stay the course” and continue raising rates to beat inflation.

The European Central Bank appears to be on board, yesterday announcing a rise of 50 basis points to 3 per cent. It did however ditch its previous commitment to keep “raising interest rates significantly at a steady pace” in a sign of uncertainty about how much further it can go.

New eurozone data today showed labour costs rose at a record rate of 5.7 per cent in the final quarter of 2022, underlining the scale of the challenge still ahead.

All eyes are now on the Fed, which announces its decision next Wednesday, followed a day later by the Bank of England.

Activist investor Carl Icahn is one of those urging the Fed to stick to its guns, telling the FT there was no alternative to stamping out “the disease of inflation”. New survey data today — mainly covering the period before the banking crisis hit — showed consumer sentiment deteriorating for the first time in four months, highlighting concerns that inflation might become entrenched.

In the UK, new information showed public expectations of inflation had eased to a 16-month low, adding to the view that the BoE might leave rates unchanged at 4 per cent. Markets are currently evenly split between no change and a rise of 25 basis points.

Need to know: UK and Europe economy

Reaction to Wednesday’s UK Budget continued. Chancellor Jeremy Hunt was accused yesterday of gaming his fiscal rules to make the public finances look better, while the opposition Labour party vowed to reverse the pension tax break for the rich. The FT editorial board said the plans for growth were a step in the right direction.

Economics editor Chris Giles assesses the performance of Bank of England chief Andrew Bailey after three years in the job, highlighting plaudits for crisis management but criticism over inflation and communication.

French president Emmanuel Macron said he would ram through his unpopular plan to raise the retirement age without a parliamentary vote. He now likely faces a no-confidence motion next week and another nationwide protest from unions on Thursday.

The EU’s climate agenda could be at risk after Germany blocked a ban on new combustion engines. Other member states want to weaken limits on pollution from heavy trucks and industrial-scale farms.

Need to know: Global economy

Ajay Banga, the US nominee for president of the World Bank, said the institution had to work with the private sector and adapt to tackle challenges its founders could not imagine, such as climate change, pandemics and forced migration.

The rising use of deepfakes and AI in spreading government-aligned misinformation in Venezuela has raised concerns about their potential influence on a population that has little access to trustworthy news sources.

Need to know: business

The UK banned the use of Chinese-owned social media app TikTok on government devices. The US has threatened a ban if its owners do not sell their stake.

Shares in tech business Baidu fell after the disappointing debut of its chatbot Ernie, China’s answer to ChatGPT. The launch, featuring pre-recorded video, prompted online comments of “Is that it?” US west coast editor Richard Waters looks at how Big Tech is racing to adapt to AI.

UK retail bellwether John Lewis waived its staff bonus and warned of more job cuts after its full-year loss widened. “Inflation has hit us like a hurricane,” said chair Dame Sharon White, adding that the cost of living crisis had pushed some of its customers towards discount supermarkets.

British American Tobacco is the latest company facing pressure to move its primary listing to New York after a top shareholder said it “makes no sense” for the cigarette maker to remain on the UK stock market.

Visitor numbers at the UK’s most popular attractions such as the British Museum and Tate Modern, have failed to rebound as the cost of living crisis and the lack of Chinese travellers hobbled demand.

Science round-up

Computing and life sciences in the UK should benefit from financial and regulatory measures announced in the Budget aimed at making the UK “the best place in Europe” for tech companies to invest and grow. Plans were also confirmed for a £2.5bn investment in a 10-year quantum computing programme.

Business groups have urged prime minister Rishi Sunak to rejoin the EU’s Horizon research scheme “as swiftly as possible” as fears increase over scientists’ access to projects. Britain’s science sector has some way to go before it can be described as world-leading, writes commentator Anjana Ahuja.

A new study on mice showed high doses of sucralose have an unexpected calming effect on the immune system, meaning the most widely used artificial sweetener could be used to treat some inflammatory diseases.

A US clinic is offering ketamine alongside psychotherapy to people with alcoholism as the fast-growing psychedelics industry moves into the treatment of addiction. The drug has been licensed from UK biotech Awakn Life Sciences, which is developing psychedelic-assisted therapies for depression, anxiety and other mental illness.

Japan’s decade-long effort to join the top league of space competition fizzled out after the failure of its newest rocket. The H3 was seen as Tokyo’s competitor to Elon Musk’s SpaceX Falcon 9 in the potentially lucrative commercial satellite launch market.

A new study of global air quality showed 90 per cent of the world’s population was still breathing air that poses a risk to health, with the gap widening between richer and poorer countries. Our Big Read tackles the question: is 1.5C still realistic as a global climate target.

Some good news

University of Birmingham sustainable engineering experts and local company Suscon have developed a new type of emergency relief shelter for refugees fleeing disaster zones. The four-person shelter is delivered as a flat-pack, can quickly be erected by unskilled labour and has a minimum lifespan of 10 years.