The ECB left rates unchanged last week but warned about a coming surge in prices

International News via Reuters:

Even a “not-too-persistent” overshoot of the European Central Bank’s inflation target from the current energy shock may warrant some moderate policy tightening, ECB President Christine Lagarde said on Wednesday.  

The ECB left rates unchanged last week but warned about a coming surge in prices and policymakers are now debating under what scenario they would need to raise interest rates to combat the risk of quick price growth getting entrenched.

“If the shock gives rise to a large though not-too-persistent overshoot of our target, some measured adjustment of policy could be warranted,” Lagarde said in a speech in Frankfurt.

“To leave such an overshoot entirely unaddressed could pose a communication risk: the public may find it difficult to understand a reaction function that does not react,” she argued.

Lagarde did not explicitly equate her criteria with any of the scenarios outlined by the ECB last week. However, they are not too different from the inflation trajectory in the bank’s “adverse” scenario.

In the ECB’s most benign “baseline” case, inflation will average 2.6% this year, rising from around 2% in the past year.

In the adverse scenario inflation will peak above 4% in the second half of this year but return to target by mid-2027, while in the severe option, inflation peaks above 6% early next year and does not return to target for years to come.    

“If we expect inflation to deviate significantly and persistently from target, the response must be appropriately forceful or persistent,” Lagarde said. “Otherwise, self-reinforcing mechanisms would kick in and the risk of de-anchoring would become acute.”

SEARCHING FOR EARLY WARNING SIGNS

The ECB must now be on the lookout for early warning signs that the shock is embedding in broader inflation dynamics and it needs to identify such spillovers, including through wages or inflation expectations.

“As expected deviations from our inflation target grow larger and more persistent, the case for action becomes stronger,” she argued.    

Financial investors now expect two to three rate hikes from the ECB this year as they see inflation above target for several years. 

Part of their argument for early but smaller action is that the ECB came under fire for acting too late during the 2021-2022 inflation surge.

The bank believed the spike to be transitory and did not raise interest rates until inflation was around 8%, four times its target.

But Lagarde argued that the current situation was quite different and several factors point to a lesser pass-through.

The energy shock is so far smaller, especially in the case of natural gas, the labour market is not as tight, there is no post-pandemic pent-up demand, fiscal policies are tighter and the central bank rate is higher, she said. 

She also argued that historical evidence suggests that the risk of broad pass-through from energy prices is the exception rather than the rule.

Reporting by Balazs KoranyiEditing by Tomasz Janowski

North Korea’s leader Kim Jong Un has provided Moscow with millions of rounds of ammunition for its war in Ukraine, and sent troops to help Russia expel Ukrainian forces who invaded its western Kursk region in August 2024

International News via Reuters:

Belarusian President Alexander Lukashenko began his first visit to North Korea on Wednesday for talks that will cement ties between two close allies of Russia’s Vladimir Putin.

North Korea’s leader Kim Jong Un has provided Moscow with millions of rounds of ammunition for its war in Ukraine, and sent troops to help Russia expel Ukrainian forces who invaded its western Kursk region in August 2024. 

Belarus allowed itself to be used as a launchpad for Russia’s invasion in February 2022, and subsequently agreed to host Russian tactical nuclear missiles on its territory, which borders three NATO alliance countries.

Lukashenko flew in to a red-carpet welcome in the capital Pyongyang, where he was greeted by Kim’s foreign minister and dozens of small children waving the flags of both countries.

Lukashenko later met Kim, and the Belarusian side published a photograph of the two men embracing.

He also paid his respects at the Kumsusan Palace of the Sun, a mausoleum where the preserved bodies of former rulers Kim Il Sung and Kim Jong Il – grandfather and father of the current leader – are displayed.

North Korea and Belarus have both lived for years under international sanctions – the former mainly because of its nuclear weapons programme and the latter over its human rights record and backing for Putin in Ukraine.

But both have engaged at different times with U.S. President Donald Trump.

Trump met Kim three times in 2018 and 2019, during his first term in the White House, but their encounters failed to yield substantive results. Trump said last year he would “love another meeting”, which Kim said could happen if the U.S. dropped its “absurd obsession” with getting North Korea to give up nuclear weapons.

Trump last year re-established direct contact with Lukashenko, who had been treated as a pariah by his predecessor Joe Biden. In recent months, the U.S. has begun to ease sanctions on Belarus in return for releases of political prisoners.

Lukashenko’s trip to North Korea comes just six days after he met Trump’s envoy John Coale and announced the freeing of 250 more detainees. The U.S. side has said Lukashenko may soon visit the White House.

Reporting by Mark Trevelyan; Editing by Andrew Cawthorne

The nearly month-long U.S.-Israeli war on Iran has sparked large-scale Iranian retaliation in the form of drone and missile strikes on energy and civilian infrastructure in Gulf countries

International News via Reuters:

Gulf Arab states told the U.N. Human Rights Council on Wednesday they face an existential threat from Iran as they condemned Iranian attacks on their infrastructure, which the U.N. rights chief said might constitute war crimes. 

The nearly month-long U.S.-Israeli war on Iran has sparked large-scale Iranian retaliation in the form of drone and missile strikes on energy and civilian infrastructure in Gulf countries, killing civilians and driving up oil prices. 

“We are seeing an existential threat to international and regional security. This aggressive approach is undermining international law and sovereignty,” Kuwait’s ambassador Naser Abdullah H. M. Alhayen told the Geneva-based council. Other Gulf states also denounced Iran’s actions which they said were designed to spread terror.

Countries at the 47-member council will vote on a motion condemning Iran’s strikes, asking Iran for reparation and asking the U.N. rights chief to monitor the situation.

Iran defended its actions, saying more than 1,500 civilians had been killed in the U.S.-Israeli strikes so far. “We fight on behalf of all of you against an enemy that, if not restrained today, will be beyond containment tomorrow,” said Iran’s ambassador to the U.N. in Geneva Ali Bahreini, referring to Israel.

Iran has called for its own emergency session on a fatal strike on a primary school which will take place on Friday. 

The United Nations’ top rights official Volker Turk on Wednesday urged states to end the Iran conflict, describing the situation as extremely dangerous and unpredictable. 

“This conflict has an unprecedented power to ensnare countries across borders and around the world,” he said.

“Attacks on civilians and civilian infrastructure must end. If they are deliberate, such attacks may constitute war crimes.”

Reporting by Emma Farge, Editing by Miranda Murray, William Maclean

Asia is at the frontline of the fuel crisis, buying more than 80% of the crude that transits the Strait of Hormuz, which has been almost totally blocked by Iran since the war broke out on February 28

International News via Reuters:

Countries across Asia are weighing up work-from-home policies and stimulus measures enforced during the COVID pandemic, as they scramble to respond to global fuel shortages triggered by the Iran war. 

Asia is at the frontline of the fuel crisis, buying more than 80% of the crude that transits the Strait of Hormuz, which has been almost totally blocked by Iran since the war broke out on February 28. 

No country in the region has enforced work-from-home measures yet, but some have said they are on the table.

“I think it is a good idea,” South Korean Energy Minister Kim Sung-whan said on Tuesday when asked about an International Energy Agency recommendation for people to work from home. 

The IEA, which agreed a record release of around 400 million barrels of oil from strategic stockpiles to deal with the crisis, has outlined proposals to ease oil price pressures such as working from home and avoiding air travel.

IEA Executive Director Fatih Birol repeated those calls at a conference in Sydney this week. 

“There were real-life tests, such as after the Russian invasion of Ukraine, European countries adopted these measures, and it was announced by the European governments. It helped them a lot to go through these difficult times without Russian energy … but keeping the lights on,” Birol said.

Industrial powerhouse South Korea on Tuesday launched a public campaign asking people to cut shower time, charge phones during the day and run vacuums on weekends.

“We will consult with relevant ministries and actively consider measures for work-from-home,” Energy Minister Kim told a briefing. 

The Philippines, which relies heavily on Middle Eastern oil for its energy needs, shortened the work week in some government offices earlier this month. President Ferdinand Marcos declared a state of national energy emergency saying the conflict poses an “imminent danger” to the country’s energy supply.

Pakistan closed schools for two weeks and said office workers would work more from home. The island nation of Sri Lanka declared a public holiday every Wednesday to help make its fuel supplies go further.

Singapore, an Asian financial hub, urged people and businesses to switch to energy-efficient appliances, use electric vehicles and set the temperature higher on their air conditioners.

Thai Prime Minister Anutin Charnvirakul ordered bureaucrats to suspend overseas trips, set air conditioning temperatures above 25 degrees Celsius (77 degrees Fahrenheit), avoid suits and ties, use stairs instead of elevators, and work from home. 

COST-OF-LIVING RELIEF

Some countries have turned to stimulus measures as rising fuel costs bite into household budgets. 

The Japanese government said on Tuesday it plans to tap 800 billion yen ($5 billion) in reserve funds to finance subsidies aimed at keeping gasoline prices at about 170 yen per litre on average. The measure would cost as much as 300 billion yen per month.

New Zealand said on Tuesday that it would provide temporary financial support of NZ$50 ($29.30) every week from April for low-income families.

“We know these families will be hit particularly hard by the global fuel-price shock. We are delivering them timely relief,” New Zealand Finance Minister Nicola Willis said.

In neighbouring Australia hundreds of petrol stations are running dry from panic buying and shortages, which are acutely hitting the remote regional areas of the vast continent.

The centre-left government introduced legislation in the parliament to double penalties for fuel price gouging. 

Several Asian countries have also released petrol and diesel from domestic reserves and temporarily loosened gasoline and diesel quality standards to increase supply.

POLICY DILEMMA

The glaring contrast with the pandemic, however, is that central banks are not rushing to cut interest rates. In fact, they are considering hikes.

During the pandemic, demand collapsed as many economies were essentially shuttered for health reasons, so policymakers responded with massive stimulus.

Now, the Reserve Bank of Australia has already hiked rates twice this year. It cited energy risks as a material risk to inflation and a reason for raising rates to a 10-month high last week. 

Investors expect Japan, Britain and Europe will all raise rates in coming months, and pressure on Asian economies may be even more acute as their currencies slip against the dollar.

“Central banks face a classic policy dilemma when oil prices surge – inflation rises but growth might weaken,” Jennifer McKeown, chief global economist at Capital Economics, said in a note last week.

“The right response depends crucially on why oil prices are rising, how persistent the shock is, and whether inflation expectations are at risk,” she added.         

Reporting by Alasdair Pal and Wayne Cole in Sydney, Jack Kim in Seoul, Xinghui Kok and Tom Westbrook in Singapore, Lucy Craymer in Wellington, Makiko Yamazaki in Tokyo, Karen Lema in Philippines, Chayut Setboonsarng in Bangkok and Tanvi Mehta in New Delhi; writing by Praveen Menon; Editing by Stephen Coates