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Speaker 1: This is Bloomberg Daybreak Europe for this Wednesday, the twenty

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Speaker 1: second of March in London. Coming up today, Hotter than hots.

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Speaker 1: UK prices rise ten point four percent in an upside shocker.

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Speaker 1: No good choice as your own. Powell to unveil the

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Speaker 1: Fed's next move on rates after weeks of market turmoil.

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Speaker 1: Two mid size to fail. The rescue of First Republic

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Speaker 1: may need US government support plus credit. Suez pay pain

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Speaker 1: authorities freeze deferred bonuses for bankers. That's all straight ahead

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Speaker 1: on Bloomberg Daybreak Europe. The Business news you need to

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Speaker 1: start your day in just one fifteen minute podcast on Apple, Spotify,

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Speaker 1: the Bloomberg Business App, and everywhere you get your podcasts.

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Speaker 1: Good morning, I'm Stephen Carroll and I'm Lizzie Burden. Here

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Speaker 1: are the stories we're following today. Behind those markets, the

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Speaker 1: UK's rate of inflation is rising again, dealing a serious

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Speaker 1: blow to the hopes the cost of living crisis is

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Speaker 1: nearing its end. Price rises in February accelerated to ten

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Speaker 1: point four percent from ten point one percent the month before.

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Speaker 1: That's a full half a percentage point higher than where

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Speaker 1: economists had expected. Ben Funnel, Head of Investment Solutions at

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Speaker 1: CCLA told us the red hot print couldn't have come

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Speaker 1: at a worse time for the Bank of England. There

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Speaker 1: was any doubt whether the Bank's going to hike, that's

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Speaker 1: just put to bed by this number. It's a really

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Speaker 1: unfortunate number to have just the head of a meeting,

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Speaker 1: and it's a really difficult decision on the one hands,

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Speaker 1: the financial stress on the other hands, a really persistent

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Speaker 1: inflation problem. Ben Funnel says the data pose a major

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Speaker 1: headache for the Bank of England, who are forecasting a

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Speaker 1: big drop inflation this year. The eyes of the financial

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Speaker 1: world will be on Washington later, where Fed Charge your

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Speaker 1: Own Power will seek to balance the twin threat of

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Speaker 1: inflation and banking instability. Markets are currently pricing in a

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Speaker 1: quarter point interest rate hike. However, uncertainty over the path

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Speaker 1: forward is at its highest level since the pandemic. Former

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Speaker 1: World Bank Chief economist Carmen Reinhart says she expects the

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Speaker 1: FED to opt for a rate rise. I think it

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Speaker 1: is too soon to expect that the Fed will throw

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Speaker 1: in the towel, so to speak, on their inflation fighting.

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Speaker 1: I think also not a complete pause may not only

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Speaker 1: be counterproductor from the vantage point of the medium term

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Speaker 1: inflation objectives, but also could send the signal that they

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Speaker 1: know something worse that the markets are yet to learn.

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Speaker 1: Carmen Reinhart is speaking ahead of the FED decision and

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Speaker 1: its latest forecast being published at six pm UK time.

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Speaker 1: Jerome Powell will hold a press conference thirty minutes later,

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Speaker 1: which will bring to you live here in Bloomberg Radio.

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Speaker 1: Former Bank of England policymaker Danny Blancheflower says it would

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Speaker 1: be reckulous for the Federal Reserve and the Bank of

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Speaker 1: England to raise interest rates at their meetings this week.

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Speaker 1: He told us on Bloomberg Daybreak Europe, the FED is

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Speaker 1: to blame for the recent volatility in the banking sector.

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Speaker 1: The best I suspect we can hope for is that

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Speaker 1: they potentially will will pause, but the reality is that

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Speaker 1: they should be cutting. That any move upwards would be

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Speaker 1: an enormous error, and what you'll end up seeing is

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Speaker 1: screeching u NS and I just have to look at

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Speaker 1: what markets are pricing in. Markets today in the United

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Speaker 1: States are pricing in by the end of the year

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Speaker 1: three rate cuts. So if they're pricing in three rate cuts,

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Speaker 1: suggest that the rate rises today would be foolishness at

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Speaker 1: best and disastrous at worst. We'll have more of our

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Speaker 1: interview with Dartmouth University professor Danny Bluntflower a little later

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Speaker 1: in the program. All Street leaders and US officials are

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Speaker 1: looking at the possibility of government support and a deal

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Speaker 1: to rescue First Republic Bank. Bloomberg understands this could include

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Speaker 1: lifting assets out of First Republic that have eroded its

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Speaker 1: balance sheet. The news comes as Treasury Secretary Janet Yellen

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Speaker 1: said the government's preparing to repeat the drastic actions it

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Speaker 1: took recently to protect bank depositors. Our intervention was necessary

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Speaker 1: to protect the broader US banking system, and similar actions

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Speaker 1: could be warranted if smaller institutions suffered deposit runs that

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Speaker 1: pose the risk of contagion. Johnny Ellen. They're speaking at

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Speaker 1: the American Bankers Association summit in Washington. After Silicon Valley

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Speaker 1: Bank and Signature Bank failed, regulators took the unusual step

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Speaker 1: of covering uninsured deposits. Here. In the UK, Chancellor of

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Speaker 1: the Exchequer Jereby Hunt was asked if he was concerned

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Speaker 1: about growing financial risks and the government does recognize that

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Speaker 1: there is some volatility in the market but we believe

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Speaker 1: the UK financial system is fundamentally strong and UK banks

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Speaker 1: are well capitalized. They now have core capital ratios that

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Speaker 1: the three times higher than before the two thousand and

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Speaker 1: eight global financial crisis, but we continue to monitor the

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Speaker 1: situation carefully. When asked where they had issues with the

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Speaker 1: Swiss authorities changing their rules to allow Credit Speceis takeover

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Speaker 1: by UBS Group, he wholly supported the decision. UBS is

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Speaker 1: offering to buy back your undenominated bonds at issue just

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Speaker 1: days before it agreed to take over of troubled rival

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Speaker 1: Credit Suie. The Swiss lender. It says it's inviting holders

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Speaker 1: of the senior unsecured bailin notes due in March twenty

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Speaker 1: twenty eight and twenty thirty two to exchange the securities

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Speaker 1: for cash at their Reaffer price, and deferred bonuses for

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Speaker 1: Credit Swie bankers have been frozen by the Swiss government.

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Speaker 1: The news piles more pain on awards that were already

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Speaker 1: decimated when the lender's share price plunged after the UBS takeover.

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Speaker 1: Authorities have the power to implement the measure when a

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Speaker 1: systemically important banks receive state aid. Bloomberg understands that the

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Speaker 1: bank can still pay cash bonuses for last year as planned. Okay,

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Speaker 1: so those are our top stories on the program this morning,

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Speaker 1: and Lizzie, amid all the drama about UKCPI and we

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Speaker 1: will get back to that in the second I do

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Speaker 1: want to draw your attention to a great piece from

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Speaker 1: Andrea Felstead from Bloomberg Opinion this morning as well, talking

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Speaker 1: about how financial shocks and banking crisis are a bad

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Speaker 1: look for and this was a new term on me,

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Speaker 1: big bling. Yeah, if you're Louis Vaton, don't worry about

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Speaker 1: the cost of living crisis, but do worry when there's

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Speaker 1: a chaos there's chaos in the banking sector, or perhaps

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Speaker 1: more worry for the likes of Hugo Bass that caters

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Speaker 1: more to people like those who work in the tech

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Speaker 1: sector that might be laid off and hitting you're hitting

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Speaker 1: your earnings as well. So Andrea says the things to

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Speaker 1: watch include the price of rolexes on the resale market

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Speaker 1: as an indicator of where luxury demand is going. Lizzie,

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Speaker 1: I'm sure you're furiously checking the price of rolexes as

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Speaker 1: we speak. I don't have a watch on my risk, Steven,

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Speaker 1: but I know that the length of skirts changes when

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Speaker 1: a recession's coming. Anyway, speaking of the economy, we've bought that.

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Speaker 1: It's true. It's true. We're about to speak to Jamie

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Speaker 1: Rush the economies. He's going to tell you I'm right.

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Speaker 1: But before we get onto the economics of the CPI point,

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Speaker 1: I have to say it's really a nightmare for Rishie Sunak.

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Speaker 1: He's got a big day ahead, he's got Prime ministers questions,

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Speaker 1: he's got the testamy from Boris Johnson in Parliament, he's

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Speaker 1: got the debate on the Windsor framework to have his

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Speaker 1: number one priority, cutting inflation, come in still in double day.

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Speaker 1: It really is a blow. Yeah, it certainly is, and

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Speaker 1: it's something that's going to be very difficult for them

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Speaker 1: to charge. Exactly where to go next, Let's bring in

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Speaker 1: our chief europe economist, Jamie Rush to talk about this.

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Speaker 1: Looks let's again too, first of all, the details of

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Speaker 1: this ten point four percent at what caused this for February.

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Speaker 1: I mean, it's kind of the worst possible news really

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Speaker 1: because it's kind of its services price inflation. So it's

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Speaker 1: the stuff that is most related to the domestic economy,

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Speaker 1: the thing that is stickiest in the inflation measure and

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Speaker 1: so the bank won't like it at all. So I think,

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Speaker 1: really that just just changes the balance firm in favor behind.

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Speaker 1: But it's always difficult to forecast in February, right, I

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Speaker 1: read your preview, Jamie. Is this a statistical issue? Does it?

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Speaker 1: Or does it actually show that inflation is worryingly sticky

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Speaker 1: as Catherine Man, for example, has been telling us the

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Speaker 1: Hawk of the Committee, Well, I mean, people like us

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Speaker 1: do worry about weight and the statistical impact on inflation,

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Speaker 1: but when it comes to communicating to the market, the

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Speaker 1: Bank AMNG is probably just going to be focused on

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Speaker 1: the head core number. I mean, we can we can

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Speaker 1: look at it in terms of the durability of this

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Speaker 1: changing core inflation, and that's affected by the weight changes.

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Speaker 1: But for the immediate politic decision, core inflation where it is,

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Speaker 1: it's just too high. Jamie, I'm going to quote your

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Speaker 1: own words back at you. You told us a couple

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Speaker 1: of weeks ago that you could put a cuckling pig

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Speaker 1: in charge of the economy and the inflation would still

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Speaker 1: follow by half by the end of the year, which

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Speaker 1: is of course the one of the main palis priorities

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Speaker 1: of this government. Does that still stand yeah, I think so.

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Speaker 1: I mean, we'll see how the cycling pig gets on

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Speaker 1: do good job so far, fair enough. But I mean, Lizzie,

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Speaker 1: this is something that you've been thinking about as well

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Speaker 1: as is how this kind of factors into the political

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Speaker 1: side of things too. I mean, how does the Chancellor

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Speaker 1: spin this as something that's in line with their goals?

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Speaker 1: All right? Well, I think he's going to say that

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Speaker 1: it's the Bank of England needs to prioritize fighting inflation.

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Speaker 1: It's exactly what he said at the Lord's Economic Affairs

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Speaker 1: Committee yesterday. And he has been very careful not to

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Speaker 1: promise tax cuts yet, even though many of his MP's

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Speaker 1: were hoping that that would come when inflation falls supposedly

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Speaker 1: later in the year. So he's been very careful not

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Speaker 1: to overpromise so that he can over deliver, as is

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Speaker 1: the typical rashisunac style. Jamie, Okay, this obviously is to

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Speaker 1: say some answer the move that bank aving is going

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Speaker 1: to make tomorrow. But what happens further down the line

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Speaker 1: in this Do we think this is a kind of

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Speaker 1: a temporary blip and normal service will be able to

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Speaker 1: resume as time goes on. Well, I think so. What's

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Speaker 1: going to happen, I think, is we'll get one last

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Speaker 1: hike now in the cycle that the bank aving has

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Speaker 1: already pretty clear they want to stop hiking. They think

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Speaker 1: they're getting towards the end of the process. Inflation is

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Speaker 1: going to drop. We're certainly going to see the energy

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Speaker 1: contributions drop out over the coming few months, and then

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Speaker 1: it's going to keep fallowing through the year. So I

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Speaker 1: think we are going for a pause. If you look

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Speaker 1: at the tisling financial conditions in the economy since the

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Speaker 1: banking term will began, that's another reason that you just

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Speaker 1: you don't want to go any further. So I think

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Speaker 1: for a reasonably confident the bank will hold now. And

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Speaker 1: what's the story with qt quantity of tightening. There hasn't

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Speaker 1: been any evidence yet that we've seen any dislocations in

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Speaker 1: the guilt market, so I think they're free to progress

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Speaker 1: with that as they please. Obviously, if we do see

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Speaker 1: a run on treasuries and they're going to have to rethink,

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Speaker 1: is there anything in the detail of well exactly you know,

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Speaker 1: led to the move and this print that we should

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Speaker 1: be paying particular attent and too, we were commenting earlier

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Speaker 1: on the contribution of spending in restaurants and cafes on alcohol,

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Speaker 1: contributing to at Lizzie Burtons hurtles because people are coming

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Speaker 1: after I January and spending more in February. Could be

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Speaker 1: the train strikes factor engage as well, people were able

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Speaker 1: to go out when they weren't before. But you know

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Speaker 1: within that detail those specular of things that should be

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Speaker 1: looking at as a nameless in this reading. Yeah, I

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Speaker 1: think so. If you take out some of the most

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Speaker 1: volatile bits, so education package, holidays, airfares, all this sort

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Speaker 1: of stuff which normally bounces it around, if you take

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Speaker 1: all that out, you still get a rebound to six

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Speaker 1: point seven percent from six percent in January. So the

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Speaker 1: clearest measures that we think we are looking at still

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Speaker 1: points broad based pressure in the economy and where the

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Speaker 1: Bank of England and the Chancellor have been really at

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Speaker 1: pains to reassure us of their confidence in the stability

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Speaker 1: of the banking sector. Do you agree with that, Well,

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Speaker 1: I think it's true that all the banks are well

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Speaker 1: capitalized and there's no sort of we don't I don't

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Speaker 1: see any evidence there's a big idiosyncratic risk in the

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Speaker 1: in the financial sector. That said, deposit flight is difficult

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Speaker 1: to deal with, whatever the circumstances, whatever your capital base,

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Speaker 1: and as interest rates are going up, that's creating more

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Speaker 1: insensive for people to move them money out of bank

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Speaker 1: accounts and into other things. You cannot predict that you can.

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Speaker 1: You can never say with one hundred percent certainty that

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Speaker 1: problem won't won't wear its only head. And crucially, am

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Speaker 1: I right that skirt lengths change in a recession. I've been.

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Speaker 1: I shall be adding it to our NowCast model way

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Speaker 1: to something leading the way. Thanks Jamid Chief Europe for

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Speaker 1: kind of as Jamie rush on the latest UK inflation figures.

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Speaker 1: Let's get a different point of view now though, on

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Speaker 1: where the Bank of England and the Federal Reserve go

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Speaker 1: next from here. Yeah. Former Bank of England policymaker Danny

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Speaker 1: blunch Flower says it would beat madness for central banks

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Speaker 1: to raise rates now after the volatility we've seen in

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Speaker 1: the banking sector. Blunch Flower is now a professor of

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Speaker 1: economics at Dartmouth University. He told us that raising rates

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Speaker 1: further would beat reckless. The volatility and the activities around

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Speaker 1: the globe have essentially resulted in about probably two hundred

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Speaker 1: basis points equivalent of tightening. So this volatility has done

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Speaker 1: the FIDS work for it. And I actually think if

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Speaker 1: you have to think of one place, one organization that's

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Speaker 1: responsible for this volatility, that essentially is the cause of

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Speaker 1: this volatility, it's the fitting Wrongly raised rates, didn't really

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Speaker 1: think of the implications, thought everything would be just fine,

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Speaker 1: and tried to tell everybody, including themselves, that there was

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Speaker 1: going to be a soft landing based upon absolutely no

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Speaker 1: evidence whatsoever, and now we see the consequences. Was the

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Speaker 1: goal of fighting inflation not necessary that they would try

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Speaker 1: raising rates to bring down inflation. There was a lot

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Speaker 1: of evidence that actually that the inflation was essentially transitory

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Speaker 1: in one sense that there was a supply shock from

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Speaker 1: COVID and then a second supply shock from the Ukraine War.

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Speaker 1: So the idea that you want to be like VOLCA

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Speaker 1: because of exploding wages and because of rising demand was

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Speaker 1: really for the birds. And the group think amongst these

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Speaker 1: central bankers was pretty interesting. Essentially no really no descents

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Speaker 1: on the FED, only in the last meeting or two

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Speaker 1: some descents on the MPC. So this was really about

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Speaker 1: we think we're going to fight inflation. Inflation sort of

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Speaker 1: inevitably was going to fall away as all the prices

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Speaker 1: fell and things came back to normal, But the whole,

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Speaker 1: in a sense, this was I called it gaessonomy. This

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Speaker 1: was essentially a wing and a prayer without really thinking

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Speaker 1: about what the potential consequences on the real economy were.

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Speaker 1: Let's think about what the driver was of the Silicon

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Speaker 1: Valley Bank. It was the tech companies that have been

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Speaker 1: used to relatively low interest rates were suddenly faced with

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Speaker 1: higher interests, as was the Silicon Valley Bank that had

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Speaker 1: bought long bonds. So the idea not only that you

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Speaker 1: raise rates, but you write raise rates in a dizzying

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Speaker 1: way and convince yourself that it was all absolutely wonderful

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Speaker 1: and the banking system was absolutely fine, given that we

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Speaker 1: had history of that. In two thousand and seven and

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Speaker 1: two thousand and eight, Professor Blanchflower, I was speaking to

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Speaker 1: Lord Adair Turner, who was head of the FCA, the

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Speaker 1: UK regulator at the time, just a few days after

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Speaker 1: the demon collapse, and I asked him this question, are

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Speaker 1: we returning to two thousand and eight or is this

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Speaker 1: an extension of the two thousand and eight global financial crisis?

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Speaker 1: In some ways revisited saying that it is he disagreed

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Speaker 1: with that entirely. Bless a dear. Well maybe maybe I

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Speaker 1: mean I mean I have I can remember Northern Rock,

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Speaker 1: and Northern Rock failed in a particular week. The website

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Speaker 1: crashed because people pulling money out, and essentially the government

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Speaker 1: had to decide what to do on the Monday morning

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Speaker 1: whether they would guarantee all deposits, and they had to,

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Speaker 1: and that was exactly a precursor to what happened with

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Speaker 1: Silicon Valley. Janet Yellen sat over the weekend and thought

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Speaker 1: to herself, what can I do? Can I allow this

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Speaker 1: run on the banks to occur? So the answer was, well,

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Speaker 1: they did exactly the same as they did at Northern Rock.

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Speaker 1: So there's an analogy already. And remember then on October

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Speaker 1: the eighth, two thousand and eight, the world's central banks

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Speaker 1: acted together as they did this week. So the Canadian

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Speaker 1: Central Bank, the Japanese Central Bank, the Swiss Central Back,

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Speaker 1: the ECB, and the Bank of England acted together to

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Speaker 1: try and calm down markets. So a dare can say

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Speaker 1: there's no analogy, but we can think of analogies all

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Speaker 1: over the place. Then you see more concerning air is

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Speaker 1: more shoes to drop, if you will, But more bank contagion,

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Speaker 1: more problems in other parts of the US, European UK economies,

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Speaker 1: then well that's the worry. I think think of the

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Speaker 1: right strategy. The right strategy is to say I have

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Speaker 1: concerns about the potential contagion and I have to do

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Speaker 1: everything I can to prevent that contagion. The right tactic

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Speaker 1: is to prepare for the worst and hope for the best. Now,

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Speaker 1: what we're seeing regulators doing, though, is that what they're

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Speaker 1: doing in this moment what to some degree we are

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Speaker 1: And obviously that the responsive yelling is an appropriate one.

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Speaker 1: We need to make sure that the system is backstop.

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Speaker 1: But what have we what have we actually not learned?

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Speaker 1: We learned with credits Sweeten the rescue there that first

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Speaker 1: bondholders we're going to got wiped out, so that's raised

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Speaker 1: the risk premiere around the world. But also that UBS

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Speaker 1: demanded nine billion dollar fun Swiss Bank fund to basically

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Speaker 1: deal with the surprises that we're in the credit suis books.

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Speaker 1: And I think we have to look back in the

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Speaker 1: UK and say, well, what happened after trusts and nomics,

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Speaker 1: trust and watering, introduce a budget on the Friday and

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Speaker 1: on Monday the UK pension industry collapsed. Them on Tuesday

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Speaker 1: the mortgage markets closed. So not only is the worry

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Speaker 1: that there is contagion, the difficulty is that this contagion

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Speaker 1: and the consequences of it spread very fast. And in

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Speaker 1: a sense, the great football analogy is appropriate. You get

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Speaker 1: your retaliation in first. Here you prepare for this and

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Speaker 1: try and prevent it. Prevent it. The idea that central

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Speaker 1: banks would raise rates this week is well, I think

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Speaker 1: it would generate a disaster. I would say that's the danger.

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Speaker 1: Do you think that that is what the FED and

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Speaker 1: the Bank of England and a host of other central

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Speaker 1: banks who make decisions this week are actually going to do. Though,

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Speaker 1: Do you think that they are going to continue raising

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Speaker 1: rates as we've discussed to try to control inflation. Well,

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Speaker 1: there is obviously considerable probability that they will do that,

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Speaker 1: and markets are still pricing that in. But there are

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Speaker 1: considerable voices now being raised. I mean Richard Murphy and

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Speaker 1: I wrote a response to the Treasury Select Committee arguing

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Speaker 1: that basically that they should be cutting by probably one

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Speaker 1: fifty at this meeting to try and get retaliation in early.

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Speaker 1: So the issue is if they're going to raise. The

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Speaker 1: best I suspect we can hope for is that they

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Speaker 1: potentially will will pause, And I think pausing is probably

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Speaker 1: the best you can hope for. But the reality is

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Speaker 1: that they should be cutting, that any move upwards would

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Speaker 1: be an enormous error, and what you'll end up seeing

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Speaker 1: is screeching U turns. And I just have to look

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Speaker 1: at what markets are pricing in. Markets today in the

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Speaker 1: United States are pricing in by the end of the

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Speaker 1: year three rate cuts. So if they're pricing in three

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Speaker 1: rate cuts, suggest that the rate rises today would be

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Speaker 1: foolishness at best and disastrous at worst. This is Bloomberg

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Speaker 1: Daybreak Europe. You're morning brief on the stories making news

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