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MNI POLICY: BOE's Focus On Energy Supply As It Swings To Hikes
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Bank of England policymakers are increasingly concerned about the risks of physical energy shortages, of natural gas in the winter and also diesel, as they gravitate towards a hike in November in what would be likely to be the start of a tightening cycle.
Monetary Policy Committee members who were seen as dovish such as Swati Dhingra, have acknowledged that tightening may be needed, while the divide between the three who backed a hike in September and the six who did not seems to be largely a question of timing.
"We need to learn about to what extent are these self-sustaining inflation dynamics going to persist and sustain themselves," Dhingra said at the London Macro Policy Forum last week, adding that that what matters is the duration and magnitude of the energy shock "because that's fundamentally what's driving this." (See MNI INTERVIEW: Oil Shock Means Europe Needs Higher Rates)
The BOE has been criticised for taking oil and gas energy futures curves as a given in its economic forecasts, and these will remain embedded in the Bank’s workhorse major macro model, but policymakers are now having to learn about the physical realities of energy markets and are deploying side models to capture them.
The divergence between physical and futures crude prices has typically been narrow absent shocks, but it is now around USD18-20 per barrel. Prices refineries are paying are typically far above what futures curves show, while the futures curves themselves have been grinding higher.
DIESEL
Physical shortages and higher refining prices raise the spectre that the inflationary effects of the Middle East conflict will be more drawn out.
Diesel prices have already hit record highs, hit by a rolling Russian export ban and refining shortages. A U.S. export ban has also been mooted, although it is unclear whether it will materialise and in what form.
Diesel prices changes tend to feed through more quickly and directly to producer input prices, with a lagged impact on the consumer gauge, whereas petrol prices go directly into the consumer price basket.
Factory gate inflation data for August showed higher input and output prices, with crude oil input prices up 26.7% and the output cost of refined products soaring by 49.1%.
The outlook for winter gas storage shortages should be clearer by the time of the MPC's November meeting. UK storage levels are low, currently at 31% compared with 58% for Germany and 71% on average in Europe, which in turn is below a five-year seasonal average of 86.8%.
MPC members not previously inclined to back tightening also have to consider whether the Bank can afford to look through another burst of high price increases after a prolonged period of inflation target overshoots.
"If you get two really large shocks, one on the back on the back of another, that is relatively problematic," Dhingra said.
2021/22 SHOCK
Former MPC member Gertjan Vlieghe, who was perceived as dovish in his time on the committee until 2021, agreed, saying at the London Macro Policy Forum that there is something to the argument that "central banks have a kind of stock of inflation credibility." Each time they say an inflation shock is temporary and it lingers they eat into that stock, he added.
The OIS swap curve at face value implies over 100 basis points of tightening by mid-2027.
Vlieghe made the point that the energy shock so far is around half of the one in 2021/22 following the Russian invasion of Ukraine, when the BOE and the European Central Bank hiked by 200 basis points in response.
This time around the Bank had gone into the crisis expecting to cut rates by 50 basis points, as Deputy Governor Dave Ramsden and others have stressed, leaving the back-of-the-envelope maths implying a potential 50bp of hikes still to come, assuming the Ukraine analogy holds.
BOE economists and policymakers have been assisted in their energy market education by constant contact with energy market participants. The current chief economist at energy giant BP, like his predecessor, was a former senior BOE official.
Sep-29 15:01
Norges Bank's upward rate path revisions, accompanying September’s 25-basis-point hike which took some analysts by surprise, reflected policymakers' concerns that the prolonged overshoot of their inflation target raised the risk that price expectations could become stuck at high levels.
The higher rate path came despite an apparent marked slowdown in wage growth, and economic growth broadly in line with expectations, an assistant director at the Norwegian central bank noted during a recent event at Bank of America’s London offices attended by MNI.
The Bank's models are based on Norges Bank's average policy responses, but Orjan Robstad said that policymakers want to respond more to underlying inflation pressure than by the average reaction function “to make sure that these expectations do not become stuck at higher levels.”
If that happened, it would “be really, really hard to get inflation all the way back to target,” he said.
Firm-based surveys conducted by the Bank had found a clear relationship between expectations and inflation, he noted.
Having raised the policy rate from 4.25% to 4.50%, both analysts and market pricing now anticipate that Norges Bank is likely to leave it there for a prolonged period, though with the door ajar to a further hike. The Bank's own published rate path puts around a 40% chance on another hike. (See MNI NORGES WATCH: Hikes, 'Prepared' To Hike Further)
HIGHER RATE EXPECTATIONS
Rate expectations have risen across the board in advanced economies including Norway but those higher rates should be sustainable, according to Robstad.
"When it comes to the contractionary effects of the increase in the long rates, for at least most Norwegian households, this is not that big of an issue since they have floating-rate mortgages, typically," he said.
In June, Norges Bank raised its assessment of the neutral rate, R-star, to a range of 0.25% to 1.75% in real terms, or 2.25% to 3.75% in nominal terms, despite soft economic growth. In September it upped its market-rate-based neutral estimate, R-bar, to 3.2% from 3.0%.
"These assessments of R-bar ... or R-star is not really that important for the decision now, but ... it gets more and more important [along the forecast horizon]," Robstad said.
Norway’s output gap now appears less negative than Norges Bank had assumed, which reflects labour market developments at a time when economic growth has been stable in line with expectations but a bit below potential at around 1%, he said. While wage growth is slowing, from near 5% to an estimated 4.4% for next year, even this looks likely to be above inflation-target-compatible levels, which may be around 3%.
"We have revised down trend potential … productivity growth hasn't been great. So that's also why the current level of wages are pulling up inflation, because we don't have high enough productivity growth to dampen that," Robstad said, noting that manufacturing wage growth was previously exceptionally high though is now cooling.
"Profitability in the manufacturing sector is normalising, making us more comfortable that wage growth will continue to moderate.”
Norwegian krone outperformance, in line with higher oil prices, is also exerting a moderating influence on inflation, he said.
Sep-29 13:43
Italy is likely to grow below the European average by between 0.5% and 0.6% in 2027, which is set to be “a complicated year” as higher interest rates and energy costs coincide with the end of stimulus provided under the EU’s NGEU plan, the head of research at Italian business lobby Confindustria told MNI.
“This year [2026] has been better than expected and we will reach 0.9%, maybe 1%, but these last months won’t be good and will weigh on next year,” Confindustria’s Alessandro Fontana said in an interview, adding that the picture will become more complicated with each month the Iran crisis continues.
About half a percentage point of 2026’s growth has come from NGEU stimulus, which has boosted Italian investment in recent years but mostly ended in August, other than for a smaller portion which Italy will be allowed to spend beyond the programme’s conclusion, Fontana said. Higher rates will also hit business investment, which is also affected by uncertainty over the energy prices, he said.
So far the Italian and global economies have coped better than feared with the Middle East conflict, thanks to a sharp decrease in oil demand in China and Japan, but the margin for natural gas and diesel has now been exhausted, Fontana said.
The diesel price is becoming more of a key energy indicator for Italy’s economy than the oil price, Fontana said, as the government attempts to mitigate the impact of dearer fuel with measures including cuts in excise duties.
DEAL WITH CHINA
While Italy’s exports are performing well, imports are growing at a much faster pace due to surging purchases from China, putting sectors of traditional Italian strength such as fashion, leatherwork and cars at risk, Fontana said. (See MNI: Germany, France To Moot Tougher Trade Options Vs China)
Confindustria wants the EU and China to strike a deal under which Beijing would accept quotas on Chinese products and establish joint-venture factories in Europe, said Fontana, saying that this would be a similar arrangement as that which China imposed on western countries two decades ago.
“We can’t be tough on China, because our dependency is huge in strategic sectors such as pharma and such an arrangement could still be convenient for both parties,” he said, noting that Beijing faces weak internal demand unable to absorb its industrial over-capacity, while Europe would benefit from technology exchanges in areas such as AI.
“They have an internal demand problem. And we can still be useful for them for five to 10 years. But if we don’t make a deal now, they won’t have the need for a deal. Five years ago, the deal would have been easier and better for us”, he said.
Some of Confindustria’s members are pushing for tariffs and trade barriers, but Fontana said this would be counter-productive, given the relative economic strength of China and the EU.
Sep-29 10:18
You are invited to listen to a Livestreamed MNI Connect Video Conference with ECB Executive Board Member, Piero Cipollone.
Details below:
- Speaker: ECB Executive Board Member,Piero Cipollone.
- Topic of discussion: ‘Money in the Digital Age: Digital Euro, Tokenisation and the Role of Central Banks’
- Date: Tuesday 6 October from 1400-15.30 London/0900-10.30 ET/15:00-16:30 CET
- 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
Germany and France will present a joint paper setting out new options for retaliation against Chinese competition, including a proposal to ease and speed up approval procedures for the EU's Anti-Coercion Instrument and for WTO-approved safeguarding actions to protect industry from sudden and large import surges, officials told MNI.
German Chancellor Friederich Merz and French President Emmanuel Macron have yet to sign off on the paper, but it is likely to set the agenda for a planned discussion on EU-China trade at the Oct 15 summit in Brussels, the officials said.
Under current rules safeguarding actions must be voted for by 15 out of 27 member states with at least 65% of the EU population. The paper also calls for faster implementation of the Anti-Coercion Instrument, which has yet to be deployed.
301-STYLE
The paper also discusses the option of something similar to a U.S.-style Section 301, which permits action against any foreign trade practices or policies which harm industry.
While Merz had promised such a paper on new trade defence tools following his retreat with other politicians and officials at the end of August, the addition of France as a signatory adds significant weight to the proposals, potentially even pre-empting those that the European Commission was due to make in the run-up to the summit in early October.
The publication of the paper - which has been promised for later this week - would mark a tough new approach on China on the part of Germany, moving it closer to France’s position. (See MNI: Germany Wants Tougher Made In Europe Provisions)
The summit discussion will take place alongside a review by leaders of the results of the current EU-China trade talks which are due to culminate with a visit by EU Trade Commissioner Maros Sefcovic to Beijing on Oct 8. EC Chief Ursula von der Leyen and Sefcovic have threatened a tough trade response if the talks with China do not yield concrete results.
France and Germany are likely to ask the Commission to work out the details of their proposal, which in any case could only come into force sometime next year given the usual lags in the EU legislative process.
Sep-29 08:27
The Bank of Japan will probably wait until December before it raises its policy interest rate to 1.5% from 1.25%, but two further hikes are likely next year before it pauses to take stock of the economy and to weigh potential political resistance and possible financial system strains, former BOJ board member Makoto Sakurai told MNI.
“December is the main scenario. After December it will hike in March and June 2027. The BOJ’s policy stance has shifted to fight stronger price upside risk and to anchor underlying CPI inflation at around 2%,” Sakurai said, though he added “The October Outlook Report is very crucial. A higher inflation view will provide justification for the BOJ to raise the rate in October.”
The Bank will be conscious however that a back-to-back hike in October coming after September’s rate increase would risk being interpreted over-hawkishly by the market, which might consider that officials are worried that they fallen behind the curve in containing inflation, the former board member said.
Sakurai expects headline consumer price inflation to rise above 3% at the end of this year or at the end of the fiscal year in March, on the back of higher import prices for crude oil and corporate price pass-through. Crude import prices have jumped about 80% from a year earlier as Japan has been forced to source from different suppliers, Sakurai noted, referring to government data.
AI-related demand and exports have also been stronger than expected, so the jump in inflation will be fed by both cost and demand factors, he said. (See MNI BOJ WATCH: Ueda Signals More Hikes, But Timing Unclear)
POLITICS
The BOJ is willing to to raise the policy rate at least 2%, after which it will take stock of the impact of its tightening on the economy and inflation before deciding on any additional moves, Sakurai said. Prime Minister Sanae Takaichi is unlikely to want the rate to go any higher, though U.S. pressure for a weaker yen may make it difficult for her to oppose further hikes, he said.
The public’s reaction to monetary tightening could also be negative, while higher rates could put strain on parts of Japan’s financial system, particularly to smaller financial firms which have made big loans to real estate companies.
“One possibility is that there won’t be much of a public backlash to the rate at 2%, despite the impact of higher borrowing costs,” Sakurai said.
The yen may strengthen from its current 157 to the dollar, but not beyond about 140, despite FX intervention and the open U.S. pressure to force appreciation, Sakurai said, noting that the currency is under pressure from fiscal expansion, including a consumption tax cut, as well as from a Federal Reserve under Chairman Kevin Warsh which is now more hawkish than the BOJ under Governor Kazuo Ueda.
YEN
Takaichi’s economic policy has also been assisted from an inflationary boost to tax revenues as well as by a weak yen, Sakurai noted.
Finance Minister Satsuki Katayama said on Friday that U.S. President Donald Trump had expressed concern about yen weakness to Takaichi during talks in New York last week.
U.S. pressure may make it more difficult for the prime minister to go ahead with her desire to appoint reflationists to BOJ board positions which will become vacant in July 2027, when two hawkish members are due to step down, Sakurai said. At least one member will be nominated from a mega commercial bank, in order to replace Naoki Tamura, a former Sumitomo Mitsui Banking Corp. executive, he noted.
Whilst historical precedent might suggest that Tamura’s replacement would be likely to come from Mizuo Bank Ltd, people familiar with the matter told MNI that the appointment instead is likely to come from MUFG Bank, Ltd.
Sep-29 08:21
The Reserve Bank of Australia Board unanimously raised the cash rate 25 basis points to 4.6% on Tuesday, with Governor Michele Bullock warning it would hike further if inflation failed to respond to tighter monetary policy.
The Board’s fourth 25bp increase this cycle, which was widely anticipated, lifted the cash rate to its highest level since 2011. (See MNI RBA WATCH: Board To Hike On Supply-Driven Inflation Fears)
“We have been outside of our target now for six years. We came in briefly in 2025, and then we've popped back out again. We are aiming to get it back [to the 2.5% midpoint target],” she told reporters, noting the 4.6% unemployment rate was still too tight.
"We are trying to bring employment to a level which is consistent with low and stable inflation, and we are doing that by raising interest rates.”
Markets reacted swiftly to the Board’s statement and Bullock’s subsequent press conference, with the probability of a further hike in November falling to about 40% from a previous 55%. Markets are still priced for the rate to peak at around 5% later in 2027.
SUPPLY SHOCKS
Bullock said the RBA’s gradual strategy had appeared to work late last year as inflation declined, but a series of supply shocks, particularly the Middle East conflict, had complicated its efforts.
“The Middle East conflict has been a big shock, and it's made us all poorer. That means fuel prices, fertilizer prices, transport prices-all these things now are permanently higher."
The persistence of higher costs could also encourage businesses to pass them through to consumers, particularly in industries facing excess demand, she said, making it harder to keep inflation expectations contained.
The Board had considered holding rates but judged the upside risks to inflation were too significant to ignore, she added, noting higher petrol prices would not necessarily reduce demand enough to offset inflationary pressure.
She declined to predict how much further rates might rise, saying inflation needed to return to quarterly increases of around 0.6% for annual inflation to settle around the 2.5% target.
PRODUCTIVITY
Bullock said weak productivity was limiting the economy’s ability to accommodate demand without generating inflation, although the tight labour market had not triggered a stronger wage-price spiral.
“At the moment, we think we have excess demand, so that means demand has to grow more slowly than supply for a period," she said.
Monetary policy could not directly improve productivity, but maintaining low and stable inflation would allow businesses and households to spend and invest with greater certainty, Bullock argued.
NEUTRAL RATE
While the current cash rate appeared restrictive due to its impact on mortgage payments and the recent downturn in the housing market, Bullock noted the degree of restriction remained uncertain.
Neutral rates had risen somewhat in Australia and globally, but the RBA believed the current rate was near the top of its estimated neutral range, she added. The RBA would continue to tighten policy in a measured way rather than risk unnecessarily damaging the economy, she continued.
"We haven't met our target in terms of inflation at the moment, we're not overshooting our employment target. We're undershooting it in some sense. So those two things have to come together by a slowing in the economy."
Sep-29 07:28
Canada's finance minister was asked in a staff memo to bring up inflation and and supply shocks during a meeting with the central bank chief to open discussion about renewing its monetary remit later this year, without the same level of mention about a secondary goal included last time of boosting employment.
"Extended speaking points" for a meeting scheduled for June 17 set out headline topics "Cost of inflation," "Managing supply shocks" and "Next steps for the renewal" according to the document MNI obtained through a freedom of information request. Large parts of the 24 pages are redacted including another talking points section so it's unclear if the jobs goal added last time by Francois-Philippe Champagne's predecessor Chrystia Freeland is mentioned in another section with similar prominence.
Some investors criticized adding the jobs language in the 2021 mandate renewal saying it watered down the Bank of Canada's inflation credentials around a time when the pandemic rebound was driving CPI from about 5% to 8%. Governor Tiff Macklem and Freeland defended the shift at the time telling reporters the inflation goal came first. (See: MNI INTERVIEW: Strip Job Language From BOC Mandate- Ex Fellow)
Officials also argued at the time Bank always had scope to boost the labor market when the 2% inflation target was being met and the agreement at that time said "the Bank will continue to use the flexibility of the 1 to 3 percent control range to actively seek the maximum sustainable level of employment when conditions warrant."
The Bank had no comment on the memo. The finance department sent a statement saying discussions are ongoing ahead of this year's renewal.
Macklem more recently has discussed the idea a world more prone to supply shocks makes inflation less predictable. He's also called the post Covid rebound the biggest test of inflation targeting in three decades of its use, offering little chance to test higher employment. (See: MNI: Canadians Doubt BOC Wins Inflation Fight-Internal Polls) Prime Minister Mark Carney, a former BOC chief, has also said he has a relentless focus on a lower cost of living.
The document notes as background the inflation target has been in place for three decades and the job language was added in the last renewal. Parts of those background sentences are redacted under clauses including ministerial advice. The renewal is due this fall.
Excerpt of report:
Sep-28 15:34
You are invited to listen to a livestreamed MNI Connect Video Conference with the Congressional Budget Office's, 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
China is taking measures to expand imports and increase the access of foreign firms to its service sector as its massive export surplus prompts international concern, a Chinese trade official told MNI, noting that achieving balanced trade is a key priority under the country’s 15th Five-Year Plan.
China is striving to expand domestic demand, and to grow from being a "manufacturing giant" into a "consumer powerhouse,” said Zhou Jinzhu, vice president of the Academy of the China Council for the Promotion of International Trade, claiming that the country has not purposely pursued a surplus and that this results from differing industrial structures and foreign demand.
China’s trade surplus has jumped from about USD500 billion to nearly USD1.2 trillion over the past five years, prompting widespread global concern. U.S. Treasury Secretary Scott Bessent stated at the G20 Summit that the surplus is an "obstacle to global economic growth" and "unsustainable", calling Beijing to adjust its export-dependent economic structure. (See MNI INTERVIEW: EU Still Undecided On Tough Action Over China)
But Zhou said that the authorities are looking at further opening up their economy to trade in services. Though dwarfed by its surplus in goods, China runs a persistent deficit in services trade, which in the first half of 2026 stood at CNY770.35 billion.
Most of this deficit stems from tourism and transport services, which together registered deficits of almost CNY800 billion in the first half of the year, and a shortfall of CNY116 billion in intellectual property royalties.
OPENING UP
To further boost services trade, China aims to open up additional sectors, expanding pilot programs in telecommunications, biotechnology, and wholly foreign-owned hospitals, while opening up the digital domain and shortening the negative list for cross-border trade in services, Zhou said.
Her organisation is also taking advantage of the opportunity presented by changing rules and standards for global services trade, putting forward China's proposals in areas such as digital transformation and financial services, she said. (See MNI INTERVIEW2: Yuan To Rise Against Euro Amid Forex Tensions)
Established in 1952, the China Council for the Promotion of International Trade is China’s top national foreign trade and investment promotion agency under the State Council, and Zhou said it will leverage multilateral mechanisms such as APEC, G20, BRICS, and the SCO in order to make sure China’s business community voice is heard.
From January to June of 2026, China's total import and export volume surpassed CNY25 trillion for the first time in the first six months of a year, with 140 million Chinese consumers making purchases via cross-border e-commerce. Zhou noted that it was important to promote international industrial and supply chain cooperation at a time of increasing global trade restrictions.
CCPIT’s Global Economic and Trade Friction Index reached a level of 102 in June 2026, rising 2.4% year on year and 11.8% month on month. Electronics, chemicals and pharmaceuticals, and mechanical equipment were the primary focal points of conflict, according to Zhou.
In addition to boosting services, in line with the Five-Year-Plan’s objective of balancing its trade, China is also introducing policies to encouraging more physical imports, Zhou said, noting that in the first seven months of 2026, China's goods imports increased by 22% year-on-year, outstripping the export growth rate by eight percentage points.
The country’s overall tariff level has dropped to 7.3%, below the 9.8% level it committed to in its WTO accession, Zhou said. China has also granted 100% tariff-free treatment to 43 of the least developed countries, and implemented 100% tariff-free treatment for 53 African nations with diplomatic relations starting May 1, 2026, she added.
Sep-28 10:09About
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