MNI INTERVIEW: EU Needs 'Credible Threat' Against China

Europe must present a “credible threat” that it will introduce compensatory tariffs in response to Chinese industrial subsidies, but Chinese investment in Europe should be welcomed, an advisor to German Economy Minister Katharina Reiche told MNI.

It is important to give Beijing due warning before acting, said Stefan Kolev, a member of the Federal Ministry for the Economy and Energy’s Scientific Advisory Board for Economic Policy since last September, adding that Europe’s market remains important to China and that global trade flows need to be sustained.

“The alternative - just introducing tariffs without consulting China - would almost certainly lead to retaliatory measures and further spirals. Better to choose the least painful option for both parties,” Kolev said, speaking as Europe considers taking action against a flood of cheap Chinese imports.

The head of Berlin’s Ludwig Erhard Forum for Economics was upbeat at the prospect of Chinese firms taking greater stakes in German and European companies, particularly where this provides opportunities for technological transfer.

“It ultimately doesn’t help with the imbalances in what some describe as China’s trade war, which is what we are talking about,” he said. “At the same time, we need to preserve open markets globally. Open economies such as Germany’s - but also much poorer ones - would have gigantic difficulties if the disintegration we’ve already seen continues to advance.”

PENSION REFORM

Germany’s own economic reforms face significant barriers, Kolev said. Plans put forward this week by a special commission to reform the pension system should have a “meaningful” impact, though it will take “courage” for the CDU-SPD government of Chancellor Friedrich Merz to see them through. (See MNI INTERVIEW: ECB Rates Already Too High - Bofinger)

Kolev was optimistic about proposed changes to the healthcare system, but questions remain about the timing of a planned cut in corporation tax, and the extent to which energy subsidies will be reduced.

“If the aim is to achieve higher growth over the next years, then it’s clear that the focus has to be on increasing private investment. Whether that means foreign companies, big companies, small companies, doesn’t matter to me - we just need to create the framework conditions that will incentivise them to invest, and not just for one or two years, but over the long term,” Kolev said, calling for Germany to learn from progress made by central and eastern European economies.

The prospects for an increase in growth from funds to boost defence and infrastructure and climate-neutral projects have improved, Kolev said, despite evidence that a significant proportion of the money has so far been spent on regular budgetary items.

“I’m still suspicious, but my hope is that there is now a real chance that things will get better from now on; that medium-term investments - not even long-term - will finally be prioritised over consumption,” he said.

INFLATION RISK

“That’s also important if we want to bring people back to the political centre. We've had two huge budgets, 2025 and 2026, and public debt is running for the next years at about 200 billion euro per year, but I don’t see much either on the asset or the growth side produced by that huge debt; at least not to the degree which would convince me that the fiscal burden the debt entails for the future is justified.”

The worry is that markets could demand a higher coupon on sovereign debt, while adding to inflation risks, he said. (See MNI INTERVIEW: Germany Heads For Debt Downgrade-Watchdog Chief)

“My concern is that experiments in Berlin could have serious spillover effects for other eurozone countries,” he said. “I am worried about inflation, because the fiscal situation of so many countries is impairing the ECB’s ability to react to higher inflation - despite last week’s courageous hike.”

MNI INTERVIEW: Ex-Trump Economist Says Fed Will Hike In 2026

The Federal Reserve will likely need to raise interest rates later in the year even if the Iran war is successfully brought to a close because the resurgence in inflation is rightly making policymakers nervous about price pressures becoming embedded, Joseph Lavorgna, former Counselor to the U.S. Treasury Secretary, told MNI.

“The inflation news is not moving in the direction the Fed wants. I've never found a period in history where you can get inflation down as much as it needs to fall without the Fed doing something. And it's going to be more than one or two rate hikes,” Lavorgna, now back in his role as chief economist at SMBC Nikko Securities America, said in an interview. 

He said a tentative peace deal that has brought down oil prices will help prevent a further inflation surge, but still expects core PCE to end the year above 3%. (See MNI INTERVIEW: Fed’s Next Rate Move Most Likely Upward-Kohn)

GOING THE WRONG WAY 

“Inflation is going to moderate relative to USD100 oil, but, depending on what metric you're looking at, inflation was arguably trending up a little bit. It certainly wasn't trending down before we went into Iran,” he said.  “And we’ve got this residual commodity pressure supply disruption that's going to persist against an economy that actually now looks pretty firm with a better labor market.”

Lavorgna said some investors had become overly convinced that Warsh would embrace some of the dovish rhetoric he delivered during the nomination process, ignoring the shift in the outlook that has taken place since. 

“The market has underestimated the fact that Kevin Warsh is going to let the data dictate the talking.  He's going to react, and do what he believes is best,” he said. 

“Yes, he may believe there is a productivity boom that will be disinflationary, but in the short term, inflation has moved further away from target, the economy is healthy. Do you really want to run the risk of overheating the economy to have to do a whole lot more down the line and risk a recession? I don't believe Kevin wants to do that, and he's going to be pragmatic enough. If he believes the committee's view that the balance is shifting toward tightening, I think that's where we'll go.”

WORTHY GOALS

Lavorgna said he found Warsh’s effort to pull back on forward guidance and be more circumspect, including a much shorter policy statement, to be refreshing. The shift could raise uncertainty in the markets but that is not necessarily a bad thing, he added. 

“At some point, I think we do need to get the Fed reaction function, whatever that is. However, to the extent that meetings will be less preplanned, less rehearsed discussions around what the statement's going to look like, if that’s ending that’s great. That means the meetings are going to be live,” he said. 

“It also may mean that if the Fed is going to hike this year, they may not do what they would have done in the past, which is okay, here we are in June, they're going to do a tightening bias in July, and then we're going to like warn the markets, ‘oh we’re going to hike.’ Maybe we don’t have that,” added Lavorgna. 

“I think that also means you get less potential misallocation of capital and the Fed is going to be less stuck to policies that make it harder for them to pivot, because if they change the communication based on what they've been saying, then you've got credibility issues. So I think that the general direction of where he wants to go with monetary policy is the right direction, and I think it's going to be fun watching it evolve.”

MNI CHINA MONEY MARKET INDEX: PBOC Curbs Over-Loose Liquidity

Chinese money market expectations for rate cuts hit a fresh low in June as the People's Bank of China scaled back its injections to tighten excessively loose liquidity, MNI’s China Money Market Index indicated.

The sub-index covering current liquidity conditions jumped to 65.4 from 20.6 (the higher it reads, the tighter liquidity), the highest reading since February 2025, with only 5.8% of participants seeing looser liquidity than last month, compared with 62.7% in May, and 36.5%% reporting tightness, also the highest since February last year.

With the PBOC continuing to roll over fewer outright reverse repos, weighted average DR001 and DR007 rates have risen by more than 11 and 10 basis points so far this month, respectively, both hitting year‑to‑date highs, a Jiangsu trader said. DR007 has stayed above the 1.40% benchmark seven-day OMO rate, showing liquidity has moved away from the first quarter’s ultra‑loose environment, a Shanxi trader said.

The China liquidity-outlook sub-index edged down to 51.0 from May’s 52.0, with 82.7% of traders expecting easing next month as liquidity has now returned to normal, but 9.6% of participants still saw further deterioration, the highest this year.(See MNI: PBOC To Reduce OMOs Further, Drain Bond Liquidity)

A Zhejiang trader said the Bank is striking a balance between preventing funds from lying idle in the financial system and maintaining reasonably ample liquidity, as excessively low funding rates could undermine the role of the policy rate and amplify leveraged trading, while factors such as tax payments and month-end cash demand could trigger volatility if not hedged in time.

The sub-index covering current PBOC OMOs dropped to 44.2, the lowest since September 2025, with 11.5% of participants assessing OMOs as being “too little,” the highest since last September and compared to zero over the past five months. The sub-index for the PBOC OMO outlook rose to 48.1 from 43.0, with 23.1% of traders seeing “net injection” next month, the lowest since last September, and 19.2% seeing a “net drain.”

The outright-reverse-repo-coming-month-outlook sub-index rose to 44.2 from 41.2, with 21.2% of traders expecting the PBOC to increase operations, the lowest since October 2024.

A special question this month showed 63.5% of traders think it is still too early to say the Bank has shifted its liquidity stance to marginal tightness, and 23.1% of respondents believe the recent volatility was not a sign of a complete policy shift.

The next-six-month-policy-outlook sub-index showed 63.5% of traders said the Bank would retain its current bias, though 36.5% of trader saw additional easing moves, compared with 41.2% last month. The current-policy-bias sub-index printed at 40.4 from 39.2, with 19.2% seeing an easier stance compared with 21.6% last month.

A Tianjin trader said the overall policy stance remains accommodative, with no tightening trend, and the Bank are still draining medium‑ and long‑term liquidity while flexibly hedging short‑term liquidity.

The other special question indicated 30.8%% of participants thought the PBOC would remain cautious on rate cuts in the second half of the year, while 17.3% saw more chances of further easing via other tools should economic headwinds strengthen. (See MNI PBOC WATCH: June LPR To Hold Despite Economic Slowdown)

An interest rate cut would squeeze banks’ profitability and weaken their willingness to lend, a Shanghai trader said. If the China–U.S. spread widens further, a rate cut would intensify downward pressure on the yuan and exacerbate capital outflows, so the Bank may prefer structural moves, such as lowering its relending rate, rather than an across‑the‑board reduction in policy rates, he added.

The PBOC’s seven-day reverse repo rate outlook sub-index edged down to 51.9 from last month’s 52.9, falling for a fourth consecutive month, with 96.2% of participants expecting a steady policy rate in the coming month, and 3.8% considering the PBOC could cut, the lowest since September 2024.

As a result, 13.5% of traders saw the seven-day repo rate for deposit-taking institutions (DR007) rising next month, the highest since November,  with the sub-index falling to 46.2 from 48.0 in May. DR007 is benchmarked by the PBOC’s seven-day reverse repo rate.

The MNI China Money Market Index (MMI) survey was conducted from June 8 to June 18, with participation of 52 traders from both state-owned and joint-venture banks. 

The full press release is avaiable here. Please contact sales@marketnews.com for full time series data.

MNI China Liquidity Index June Presser 2026.pdf

MNI: Digital Euro On Track For Approval By End Of The Year

The European Union’s incoming Irish presidency aims to schedule trilogue talks on the digital euro for as soon as July 16, which could see its first phase approved by the end of the year after a final decision on how much of the currency can be held in a digital wallet, sources close to the matter told MNI.

A quick start to the talks between the parliament, European Commission and European Council should allow the digital euro to be approved by the 25th anniversary of the launch of the common currency in January 2027, as targeted by European Central Bank executive board member Piero Cipollone.

The most difficult discussions will focus on the maximum amount of the currency that can be held. The European Central Bank’s initial proposal last year is for a EUR3,000 limit, in order to limit the drain of funds from the banking system, but critics including former Bank of Spain Governor Miguel Angel Fernandez Ordonez have said that this is too low. (See MNI INTERVIEW: Digital Euro Risks Failure-Ex Bank Of Spain Gov)

The digital euro is key to the ECB’s plans to keep central bank money at the heart of the financial framework, even as alternatives appear such as stablecoins.

The European Parliament’s ECON committee is now due to hold a double vote on amendments to the digital euro legislation and on entering the Trilogue negotiations, with a vote on mandate following a plenary session on July 6, sources said. Starting the Trilogues before the summer break should allow a second round of talks in the autumn before approval, the sources said.

MNI INTERVIEW: Ex-BOJ's Momma Sees Strong Oct Hike Chance

A move in dollar-yen toward JPY165 or JPY170, driven by Federal Reserve policy decisions, would materially increase the likelihood of a Bank of Japan rate hike in October, former BOJ Executive Director and Chief Economist Kazuo Momma told MNI, arguing the Bank would risk falling behind the curve if it waited for underlying inflation to overshoot 2%.

“An October rate hike is my base case. If the Fed clearly shifts its policy direction, it will exert downward pressure on the yen,” which would increase pressure on the BOJ to raise rates, said Momma, now executive economist of the Research Department at Mizuho Research Institute, an internal organisation of Mizuho Bank.

Markets see little chance of a change at the July 31 meeting following this month's 25-basis-point rate hike to 1%, but have priced in a 25% probability of a September hike and a 37.4% chance of an increase in October. (See MNI BOJ WATCH: Uchida Flags More Hikes; No Timing Hint)

Momma added dollar-yen movements and developments in overseas economies and inflation "are key factors" in determining the timing of the next BOJ hike, noting the yen has largely traded in a relatively stable JPY160-JPY161 range as speculative activity has remained limited, giving Japanese authorities little reason to intervene. However, he said authorities would likely intervene if the dollar climbed toward JPY165 or JPY170 to counter excessive volatility.

The dollar traded around JPY161.60 on Tuesday in Tokyo after reaching JPY161.81 in New York, its highest level since July 2024, as expectations of higher U.S. interest rates boosted demand for the currency.

UNDERLYING INFLATION

Momma said policymakers must stand ready to raise rates, noting the BOJ would fall behind the curve if it waited for underlying inflation to overshoot 2%.

“The timing of achieving the 2% target may come earlier. But if underlying inflation remains anchored around 2%, that is not a problem. The problem is if underlying inflation rises above 2%. That is a very important policy judgement.”

Momma noted in April that the BOJ could act swiftly if risks stemming from the Iran conflict eased, citing Board concerns about upside risks to prices. (See MNI INTERVIEW: BOJ April Rate Hike Difficult - Ex-Chief Econ)

The BOJ believes underlying CPI will reach a level broadly consistent with its 2% price-stability target between the second half of fiscal 2026 and fiscal 2027, but has warned inflation could deviate upward and exceed the target.

Momma said the Board does not need to raise rates at every meeting because the economy is not overheating and inflation is not being driven by excessive demand, adding that a hike roughly every six months, or slightly more frequently, remains likely even without additional currency pressure. However, the pass-through of higher costs in business-to-business transactions has been progressing relatively quickly, he warned, noting those increases have not fully filtered through to consumer prices. 

While it remains unclear whether CPI will accelerate at a similar pace, the impact should become clearer from the summer, with price increases likely to continue this year before peaking in 2027, he argued. Momma said the BOJ should focus on assessing the degree of underlying inflationary pressure in the economy, arguing that whether wage growth accelerates in 2027 will be central to future policy decisions.

WAGE GROWTH

While wages are rising by 5.02% in the current fiscal year, marking a third consecutive year of gains above 5%, the BOJ believes the current relationship between wages and inflation is consistent with achieving its 2% target, Momma said.

Policymakers are closely monitoring the risk that inflation and wages could become entrenched above 2%, which would push underlying inflation beyond target, he noted. “It is too early to worry about wage growth accelerating toward 6%. If the economy weakens, there is a risk that wage increases will fall below the levels seen over the past three years. The BOJ therefore does not need to rush to raise rates.”

With upside risks to inflation increasing, attention should focus on whether corporate inflation expectations for three and five years ahead rise in the June Tankan survey due July 1, Momma said. Even a 0.1 percentage-point increase from previous projections — for example, to 2.5% for both three-year and five-year expectations — would heighten the BOJ's concern about upside inflation risks, he warned.

MNI INTERVIEW: Hormuz Traffic To Take Months To Normalise

Disruption to the Strait of Hormuz will take months to renormalise, with the number of ships crossing the waterway below usual capacity and shipping rates to and from the Middle East elevated, the co-founder of a programme providing port data to governments told MNI.

"Shipping rates from and to the Middle East, will probably stay high … So that's partly because of this still reduced capacity ... and on top of that, these war premiums will probably be fed into prices as well indirectly," Jasper Verschuur, an assistant professor at TU Delft and co-founder of the PortWatch initiative, said in an interview.

Disruption should continue for "weeks and potentially months rather than days" after the strait is reopened.

The risk of mines could reduce transit through the strait, whose daily capacity is probably around 120-140 ships, below Portwatch’s estimated long-run average of 100, according to the programme created by economists at the IMF, Oxford Economics and TU Delft to aggregate UN Automatic Information Systems data on maritime routes.

Once past the Strait, more ships may be tempted to take the shorter route to Europe via the Red Sea and the Suez Canal, rather than the longer trip around the Cape of Good Hope, Verschuur said. Passage through the Red Sea and Suez is about half of what it was before Houthi rebels began attacking ships in late 2023.

VALUE LEVEL, VOLUME DOWN

Global shipping volumes have also fallen slightly since the start of the crisis in the Persian Gulf, though their value has remained steady due to higher energy prices, according to Verschuur.

"We saw this little dip in the last two months or so, in terms of the global volume that's being shipped, that was compensated in value terms by the increase in prices." (See MNI INTERVIEW: Iran War Risks Broadly Higher Shipping Costs)

LITTLE USEFUL PRECEDENT

Although the PortWatch dashboard provides data on several recent disruptions to maritime shipping, Verschuur said these experiences do not provide a good model for how the current situation might renormalise.

"The situation now with this reopening is in no way comparable to anything we have experience [of]," such as the six-day closure of the Suez Canal in 2021 or the drought in the Panama Canal in the past year, he said.

The war between Russia and Ukraine has only minimally impacted trade volumes, so it is also a poor guide for how the resumption of crossings could play out, he added.

"Despite the fact that the war [in Ukraine] is horrible, the Black Sea shipments ... to a large extent, kept going."