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MNI: Italy To Win Partial Inflation Concession From EU-Sources
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Tightening eligibility for the UK’s Personal Independence Payment, widely seen as a prime target for potential welfare cuts, would likely save less than GBP4.4 billion by 2029-30, a fraction of the roughly GBP20 billion rise in spending on the disability payment forecast by 2030-31, and cuts would be slow to implement in full, economists told MNI.
Chancellor of the Exchequer John Healey has signalled that he is looking at overhauling the UK’s welfare system, and the government has commissioned reviews into PIP, which is due to report this autumn, and into young people not in education, employment or training, for which a final report is due in November. Major welfare reform is not expected until after the Oct 28 budget.
Finding savings from PIP will not be easy, said Louise Murphy, senior economist at the Resolution Foundation think tank, which has links to the governing Labour Party.
The Resolution Foundation has estimated that tightening PIP eligibility so it is no longer paid to claimants whose disabilities cause them higher costs could save up to GBP4.4 billion by 2029-30. Murphy described this as an upper limit given administrative challenges. "In reality, it might be difficult to do all of those things in a couple of years, so it might be less than that," she said, adding that she doubted "there's anything that they could announce that immediately makes big savings." (See MNI INTERVIEW: UK Needs BOE Hike, Fiscal Squeeze Now - Chadha)
RISKS TO FORECASTS
She dismissed any suggestion that better targeting of payments or reductions in fraud could make savings of GBP10 billion or GBP20 billion.
"I think the evidence doesn't really support that," she said.
While this budget is not expected to include changes to welfare policy, welfare and PIP remain outsized risks to the fiscal forecasts. (See MNI BRIEF: Markets Underprice UK Welfare Reform - Ex-PM Advisor)
"The expectation would be the reviews come out this autumn, winter, and then in the next fiscal event in the spring next year ... it would be fleshed out into plans for government policy, with information about timelines and potential savings," Murphy said.
Murphy expects the review by former minister Alan Milburn into younger people not in employment to recommend some welfare cuts, but noted that he is also proposing quite large increases in spending in areas such as employment support and apprenticeships. It has already been reported that the costs of the "back to work" scheme for young people will exceed its savings through the end of the decade.
"It's just not necessarily clear that it's a net saving, at least in the first few years of the forecast," Murphy said. (See MNI INTERVIEW: UK Gov't Likely To Avoid Big Tax Hikes - IfG)
SLOW TO IMPLEMENT
Eduin Latimer, senior research economist at the Institute for Fiscal Studies, noted that it is not guaranteed that any reform would reduce government spending.
"The introduction of PIP was intended to save money, and ... later evaluation suggested that if anything, it costs more," he said in an interview.
The IFS noted that spending on incapacity and disability benefits (excluding Scotland) rose from 1.3% of GDP in 2019-20 to 1.9% in 2024-25, and that the OBR's March 2026 forecast has it reaching 2.2% by 2029-30. Separately, the OBR forecasts spending on disability benefits, across all ages, of around GBP65.5 billion in 2030-31, up from about GBP45.4 billion in 2025-26.
Latimer said the shift from Disability Living Allowance to PIP began in 2013 and some adults still claim it, so reform is "likely to take multiple years."
"Even with no policy change, it could well end up spending considerably more than current projections say ... I would definitely not consider an upper bound," he said. (See MNI INTERVIEW: UK's OBR Likely To Use Market Curve)
Oct-22 15:49
The European Commission looks set to only partially concede an Italian call for additional margin for spending under the European Union’s fiscal rules to account for higher rates of inflation due to the Iran war, European and Italian sources told MNI.
Rome is seeking an additional 0.6% of GDP in spending headroom, but Italian sources told MNI it was very unlikely to get anything close to that number and the concession would realistically be closer to 0.3%. Officials in Brussels would only say that the Commission would be likely to use to the maximum the flexibility already provided for in the 2023 revision of the bloc's economic governance framework.
In the spring, the Commission acceded to Italy’s earlier request to allow exceptional spending permitted under the National Escape Clause to include investment on energy, and not just defence. Rome also said that the Commission would allow it to use this margin for its 2027 budget despite its 2025 deficit being above the maximum allowed 3% of GDP, in return for promising a sub-3% budget in 2026, in another concession touted by Prime Minister Giorgia Meloni’s government as a victory.
The Commission is due to assess the country's progress in implementing its medium-term fiscal structural plan next month, with Italy arguing that this was calculated using an “outdated” structural inflation projection of just 1.8% while the country’s actual inflation has surged to 4.1%.
Italy says an adjustment is necessary to absorb the compounding effects of fiscal drag, a phenomenon where inflation artificially inflates nominal tax revenues — particularly through higher VAT receipts — while pushing citizens into higher tax brackets without any real increase in purchasing power. Without net expenditure flexibility, European rules would legally mandate that this inflation-driven revenue windfall be allocated exclusively to debt reduction. (See MNI: Meloni Tax Cuts Depend On EU Flexibility -Sources )
EUROPEAN FISCAL BOARD
The European Fiscal Board earlier criticised the National Escape Clause decision, arguing that frequent changes to the rules undermine the credibility of the framework as a whole. EFB member Eckhard Janeba told MNI that Meloni's new request should not be accommodated for the same reason.
"I am sceptical. Higher inflation pushes up certain expenditures that are indexed. At the same time, tax revenues tend to increase as well due to fiscal drag,” he said.
On Oct 8, EU Economic Affairs Commissioner Valdis Dombrovskis told the Eurogroup meeting on Oct 8 that now was not the time to abandon Europe's hard-won fiscal credibility, with markets continuing to pressure European government bond yields higher. High-debt states particularly should stick to the multi-year spending commitments contained in their fiscal-structural plans approved by the Commission in 2024, he said. See MNI INTERVIEW: ECB Should Halt QT - Bini Smaghi)
But another Brussels source noted that Italy would be unlikely to be rebuffed entirely by the Commission.
"Experience teaches that they normally win some - if not a full concession - that they can sell as a political victory at home."
The EU's economic governance regulation allows the EU and Commission wide leeway when it comes to assessing a state's fiscal performance.
Mitigating and relevant factors can be taken into account when assessing whether a state already in an Excessive Deficit Procedure — as is the case with Italy — has taken "effective action" to bring its deficit down and to put its debt on a sustainable path.
Oct-22 12:50
You are invited to listen to a livestreamed MNI Connect Video Conference with the Congressional Budget Office, Phillip Swagel.
Details below:
- Speaker: Phillip Swagel, Director of the Congressional Budget Office.
- Topic of discussion: ‘The U.S. Budget and Economic Outlook’
- Date: Thursday, 22nd October 2026, 10 am to 11:30 am ET / 3 pm to 4:30 pm London time.
- This event will be run as a Zoom Webinar and is a public, on-the-record event.
To register please go to: MNI Webcast Registration
Core inflation remains too high and will prompt the Reserve Bank of New Zealand’s monetary policy committee to raise the 2.75% official cash rate by a further 25 basis points when it meets next Wednesday, former Assistant Governor John McDermott told MNI.
“The headline is a touch below what people might have expected, but certainly the core inflation numbers look worrying, and over the medium term, that's really what matters because it means inflation will continue to be a persistent problem,” said McDermott, now executive director at Motu Economic and Public Policy Research.
Headline inflation was 0.7% q/q in Q3, 10bp below market expectations, while non-tradable inflation was 1.0%, 20bp below forecasts. However, measures of underlying inflation remained elevated.
CPI inflation excluding fuel was 3.0% y/y, up from 2.9% previously, while CPI excluding fuel and food increased to 3.2% from 2.9%. The 30%-trimmed mean rose to 3.0% from 2.6%, while the weighted median increased to 3.1% from 2.7%.
McDermott expects the RBNZ to continue tightening after its 25bp hike in September, noting the OCR remains below the Bank’s own estimate of neutral. (See chart) (See MNI RBNZ WATCH: Breman Takes Cautious Stance On Further Hikes)
“Core inflation is above the top of the [1-3%] target band, and even though the headline number was lower than expected, it's still 3.7%. That's outside the band and the prospect of coming in line without any external help seems pretty remote.”
The gap between the OCR and Australia's 4.6% cash rate was also too wide, he added. "It's a reasonably straightforward policy prescription.”
OCR PEAK
Markets slightly increased their expectations for a hike next week following the inflation data, pricing in an 85% chance of a 25bp increase. The probability of a further 25bp hike in December also rose by about 5 percentage points to 70%.
McDermott has consistently called for a higher OCR this year and noted the RBNZ needed to raise the rate towards 4% or higher, to bring underlying inflation under control. (See MNI INTERVIEW: RBNZ At Neutral Midpoint By December)
Markets currently see the OCR peaking near 4% by August.
Higher diesel prices could weigh on economic growth, but rising energy costs were currently adding to inflationary pressures, McDermott argued. “The world's awash with huge amounts of uncertainty and risk. So, things can change. But the immediate issue with energy prices is they're adding to inflation right now.”
Oct-22 07:04
Signals from the Bank of Canada about hiking interest rates as soon as Wednesday overplay evidence inflation is heating up with the rise in energy prices this year leveling off, former central bank and finance economist Charles St-Arnaud told MNI.
Inflation from the Iran conflict could ease as soon as March and there's no sign energy prices will push further beyond the jump earlier this year, he said in an interview. Canada's economy also faces weakness in coming months as the latest round of U.S. tariffs take hold, he added.
“Why the emergency of hiking now?” said St-Arnaud, chief economist at Servus Credit Union.
“Fuel prices are higher, but they're not climbing higher,” he said. “If we stabilize here, inflation is going to go down mathematically. It's going to be just a level shock, unless obviously you start to see just a second round effect.” Gasoline prices in Ottawa jumped to around CAD1.80 a liter from CAD1.20 before the Iran war but have rarely moved much higher in recent months.
Governor Tiff Macklem's said Saturday officials are debating whether to lift the 2.25% policy rate to keep inflation on track ahead of the Oct. 28 decision. Macklem referenced global concern about ongoing conflicts and said oil holding around USD100 a barrel was well above his July forecast and will push inflation above 3%. Several of Canada's biggest commercial banks switched their calls for next week's decision from a hold to a quarter-point hike.
NO BIG RUSH
Investors sustained bets on a hike after a report Monday showing inflation quickened a tenth of a point to 3.1% in September. Inflation has been at or above Bank's 1% to 3% target band for the fourth time in five months. (See: MNI INTERVIEW: BOC Ready To Hike This Month If Needed- Stillo)
The Bank's quarterly consumer survey Monday focused on a rise in long-term household price expectations, something St-Arnaud also downplayed. Risks remain of inflation broadening beyond energy and for consumer price expectations to climb, he said, but hiking after October would still be able to handle those outcomes.
“I have a hard time seeing what would be the urgency to increase rates now, considering also we still face a big headwind to our economy in the next few months," he said. "We haven't seen any of the impact of the increased tariffs from the U.S. and the labor market is not doing that great.”
LINGERING INFLATION TRAUMA
Macklem has said growth could slow to a 1% annualized pace in the fourth quarter after a rebound to 3.3% growth in the second quarter. The economy has surprised many economists by avoiding a slump after Donald Trump put tariffs of up to 50% on steel, aluminum and autos. Macklem has also noted firms appear to be adapting to tariffs.
Officials may be looking less at economic data than concerns about another round of public anger like the one seen after the burst of inflation as Covid shutdowns ended, St-Arnaud said. Macklem has noted there is no risk-free answer around timing of the next rate move. (See: MNI INTERVIEW: Macklem-BOC Faces Tough Calls Ahead On Rates)
“How much does the Bank of Canada have PTSD from 2022-2023 and (think) like, we want to be ahead of the curve and hike now? But do you do more damage by being ahead of the curve?"
FAILED REFERENDUM
Speaking from Alberta after a failed referendum to begin talks on the province leaving Canada, St-Arnaud noted that, as with Quebec separatists, the oil-rich western province has economic issues that will slow any path to further clashes with the federal government.
Quebec's recent election, similar to the Alberta vote, shows little political will to break up the country, he said. The Parti Quebecois replaced the governing CAQ that had been hurt by dissatisfaction over economic development and managing public programs, and only after watering down a pledge for a referendum.
“I don't think people voted for the PQ because they wanted a referendum. They voted for the PQ because they didn't want the CAQ," St-Arnaud said. "Also, being elected as a government with 28% of the vote, that's not a really strong mandate.”
Oct-21 18:38
Brazil is about to take another step towards its first issuance of Panda bonds, with Chinese credit rating agency Lianhe expected to publish the country's rating in the coming days, paving the way for the yuan-denominated debt to be sold before the end of the year, MNI understands.
While several administrative requirements still remain to be completed for the Pandas, the issuance does not require Senate approval of a proposed higher limit on external borrowing, as it fits within the current ceiling.
At the end of July, the Treasury asked the Federal Senate to increase the limit for Brazilian external debt issuance to USD35 billion per calendar year, replacing the current cumulative cap on total issuance of USD100 billion.
From 2004 through April 2026, Brazil issued USD 97.4 billion in sovereign bonds in international markets, leaving room for only another USD 2.6 billion in issuance until the Senate approves the new limit. The new framework should allow Brazil to maintain a continuous presence in international markets. (See MNI: Higher External Debt Limit Poses No Risk -Brazil Treasury)
TIGHT LIMIT
Historically, Brazil's sovereign bond issuances in foreign currencies have typically ranged from USD500 million to USD1 billion, a benchmark that would also apply to the planned Panda bond issuance.
In addition to entering the Chinese bond market, the government might also expand its presence in European markets.
The Treasury aims to increase the share of external debt in Brazil's total public debt from 5% to 7% over the next five years.
Oct-21 13:08You are invited to listen to a livestreamed MNI Connect Video Conference with the Congressional Budget Office, Phillip Swagel.
Details below:
- Speaker: Phillip Swagel, Director of the Congressional Budget Office.
- Topic of discussion: ‘The U.S. Budget and Economic Outlook’
- Date: Thursday, 22nd October 2026, 10 am to 11:30 am ET / 3 pm to 4:30 pm London time.
- This event will be run as a Zoom Webinar and is a public, on-the-record event.
To register please go to: MNI Webcast Registration
Central banks are still underplaying substantial upside risks to energy prices by relying too much on futures curves, which currently show prices reverting to pre-Iran crisis levels, University of Notre Dame Professor Christiane Baumeister, who has acted as a consultant to the IMF, the Chicago Fed and other institutions, told MNI.
The Iran war shock has seen oil transportation costs skyrocket, while the gap between the price paid by refineries and spot futures widened, eased, then jumped sharply again. These dislocations have led central banks to try to incorporate physical prices into their satellite models but they still have a way to go to reflect inflation risks, said Baumeister, who argues that monetary policy needs to be tighter in response to the energy shock.
"Futures prices are detached from physical reality. So the logical conclusion is they should distance themselves from that. So they shouldn't really use the path implied by the futures curve to assess, for example, the inflationary impact of fuel prices,” she said. (See MNI POLICY: Fed In No Hurry But Committed To Taming Inflation)
Central banks are using physical price data "as additional information, but they're still more leaning toward the futures curve ... they are having a hard time to move away from that, or to at least put them on equal footing.”
The upward effect on oil prices of the Iran shock was cushioned by the release of reserves, she noted.
BACKWARDATION
"Economic reasoning tells you that something is off in the futures curve, right? ... This strong backwardation, that we're basically back to pre-war levels two years down the road, doesn't make sense," Baumeister said.
"We just drained all of our inventories, right? So we're running at historic lows, which means they need to be refilled, and that means there will be, by construction, sustained demand in the future for oil, and that should drive prices up," she added.
A scenario Baumeister presented at the National Association for Business Economics’ recent annual meeting in Cleveland incorporated the rebuilding of inventories and refining margins and predicted USD150 per barrel for dated Brent at the end of the year, reflecting "substantial tail risks for prices on the upside which is something that policymakers should factor into their risk assessments."
Dated Brent is currently around USD118 a barrel.
Some policymakers are already sceptical about the use of the futures curves in their central projections. Bank of England Monetary Policy Committee member Catherine Mann, speaking at the NABE event, said the curves reflect very strong future supply and demand responses and, given refining strains and high shipping costs, "do we actually believe that those are large enough to get us back to where we were pre-crisis?"
SURGING TRANSPORTATION COSTS
Oil flow through the Strait of Hormuz has rebounded to close to its pre-war level but transportation costs have soared, with security fears prompting the increasing use of ship-to-ship transfers.
"That's in the end highly inefficient and thus costly. Plus, you have still the continued threat of Iranian attacks," Baumeister said. "We see it reflected right now ... in these stellar tanker rates that are now in excess of a million dollars per day, which is unheard of."
Going forward these costs will play a more important role in energy forecasting, she said.
STILL HAWKISH
Monetary policy needs to be tightened in response to the energy shock, according to Baumeister. (See MNI SOURCES: ECB Likely To Wait Till December Before Next Hike)
"At some point the physical reality is coming to bite you," she said.
In the U.S., headline inflation is nearing the 4% threshold, while UK inflation is expected to rise sharply in coming months, which in turn will push up on inflation expectations.
"It's almost an upward spiral. So you already have the expectation formed based on ... gasoline prices that you observe frequently, but then you also hear reports about actual inflation being higher," she said. "I'm still definitely on the hawkish side ... Central banks have started, but I hope they keep doing what they have started to do to contain inflation or bring it back to target.”
Oct-20 12:35
The People’s Bank of China left its Loan Prime Rates unchanged for a 17th consecutive month on Tuesday, after better-than-expected third-quarter economic data and as the PBOC embarks on a transition to shift its primary policy rate to the overnight reverse repo.
The LPR, last cut in May 2025, was held at 3.0% for the one-year maturity and 3.5% for the five-year tenor and over.
A steady LPR in October indicates that the central bank will seek to lower financing costs through diversification of pricing benchmarks rather than through LPR cuts, said Dong Ximiao, chief economist at Merchants Union Consumer Finance, who expects the Bank’s policy stance to increasingly be indicated by the overnight reverse repo, or DR001, and by the scale of issuance of DR001-linked loans.
PBOC Governor Pan Gongsheng noted on Monday that the central bank is waiting for the appropriate moment to shift its main open market operation tenor to overnight, establishing the overnight reverse repo rate as its primary policy interest rate. The Bank is pushing to diversify loan pricing benchmarks beyond the LPR as big corporates are switching to DR001, he noted.
LPR will continue to serve a reduced role as the loan benchmark for small companies and retail lending, but DR001 and government bond yields have already begun to take on part of the loan pricing function for bigger companies, said Dong, noting that newly-issued loans linked to DR001 more sensitively reflect market funding prices.
GROWTH HOLDS UP
The need for an immediate rate cut has also eased as growth holds up, with GDP expanding by 4.5% year on year in the third quarter, up 0.2 percentage points from Q2 and exceeding expectations, he added. (See MNI INTERVIEW2: China Needs Monetary Easing To Boost Growth）
LPR, based on the seven-day reverse repo rate, became the loan benchmark in August 2019, but the PBOC has repeatedly stated since the beginning of this year that DR001 better reflects money market conditions, and that regulating a shorter-term market policy benchmark would be easier and more effective.
The central bank's shift of policy focus to the overnight rate is driven by the fact that overnight fund transactions now account for more than 80% of interbank market turnover, said Sheng Songcheng, former head of the PBOC’s statistics department. (See MNI INTERVIEW2: PBOC Short-Term Rates Focus To Cap)
The shift will help reduce funding volatility caused by government bond issuance and trading, which have become key variables affecting interbank liquidity, he noted.
Sources told MNI in July that the overnight rate was set at 1.25%. Looking ahead, the central level of DR001 is expected to remain from 1.2% to 1.3%, touching the lower end of the range during periods of ample liquidity, they said. (See: MNI: PBOC’s New Overnight Tool To Lower Rates Over Time)
Oct-20 10:06
The Bank of Japan is considering whether to tone down its warnings of upside risks to prices in its next Outlook Report, as officials debate whether they need to raise rates another three times or only twice more in this cycle, MNI understands.
A move away from the upside risks warning in October’s report, towards emphasising that underlying CPI is nearly at the 2% target, would mean the BOJ is more likely to make its next rate increase in January rather than at its December meeting, as is currently widely expected. It would be a strong indication that the BOJ will not hike rates on a regular three-monthly basis, following the 25-basis-point increase in its overnight rate to 1.25% at its September meeting.
The Bank has already made a subtle shift away from its emphasis on upside price risks, which it cited as the main reason for June’s hike, while in September it noted that both the economy and prices were moving in line with its baseline view.
MARKET PRICING
Overnight index swaps price in another 70 basis points of tightening by next July, implying up to three hikes by then, but BOJ executives worry that taking the policy rate to 2% might raise downside risks, prompting inflation to eventually fall below target. They would welcome a reduction in market pricing for future hikes, MNI understands. (See MNI POLICY: BOJ Nearing Target To Forgo Victory Declaration)
Market pricing shifted higher after Governor Kazuo Ueda signalled that the BOJ’s focus has shifted from raising underlying CPI inflation to the 2% target to keeping it stable at that level while upside risks to prices increase.
Bank officials are finding it challenging to calculate the impact of hikes on activity and inflation, given the changes in the economy since previous tightening rounds.
Another problem for the BOJ is that if it holds rates in December while the Federal Reserve hikes again, the yen could weaken, potentially breaking 160 to the dollar again. Officials consider that dampening speculation of a hike in December now might take some of the yen selling pressure away if the meeting results in a hold, though a weaker currency would then help build the case for a hike a month later in January.
Oct-20 06:55About
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