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[Quick Facts]

1. Panetta says monetary policy should adapt to the inflation outlook.

2. Saudi Arabia announces extension of voluntary oil cuts to end-September.

3. The BoE raises rates by 25 bps in a split vote.

4. Fed's Barkin says the economy will slow further.

5. Russia may consider reducing grain export tariffs to boost exports.

[News Details]

Panetta says monetary policy should adapt to the inflation outlook

The factors that initially drove the European Central Bank to raise interest rates have weakened, said Fabio Panetta, Member of the ECB Executive Board in a speech in Milan on Thursday. First, the process of disinflation has been set in motion, pushing inflation expectations down.

Second, as supply shocks recede, pipeline price pressures are diminishing, and the risks to inflation are becoming balanced. Although core inflation is still elevated and is projected to remain around current levels throughout the summer, empirical evidence suggests that it is a lagging – not a leading – indicator of inflation.

Third, as the economic outlook deteriorates, the risks to economic activity are tilted to the downside. If downside risks to growth persist and materialize, high wage growth is less likely to be sustained.

Panetta said that with policy rates now firmly in restrictive territory, setting and communicating the direction of monetary policy has become more complex. In order to successfully complete the disinflation of the European economy, we need to flexibly adapt our policy to the evolving inflation outlook. In the current context where policy rates are around the level necessary to deliver medium-term price stability, I will argue that monetary policy may operate not just by increasing rates but also by keeping the prevailing level of policy rates for longer. In other words, persistence matters as much as level. This is particularly true given that risks to the inflation outlook have become more balanced, while risks to the economic outlook have shifted to the downside.

Saudi Arabia announces extension of voluntary oil cuts to end-September

Saudi Arabia will extend the voluntary oil production cuts by 1 million barrels per day (bpd) that began in July until the end of September, and may extend them again and increase the cuts, the Saudi Press Agency reported on March 3, citing the Saudi Energy Ministry. After extending the production cuts, Saudi Arabia's oil production in September will be around 9 million bpd.

These voluntary production cuts are additional to the cuts announced by Saudi Arabia in April and are intended to support the "preventive efforts" made by OPEC+countries, including OPEC member countries and non-OPEC oil-producing countries, to maintain the stability and balance of the international oil market.

On April 2, Saudi Arabia announced that it would cut oil production by 500,000 bpd from May until the end of the year. On June 4, Saudi Arabia announced again after the 35th OPEC+ ministerial meeting that it would cut production by 1 million bpd for one month in July. On July 3, it announced that the 1 million bpd cut would be extended to the end of August.

The BoE raises rates by 25 bps in a split vote

On Thursday, local time, the Bank of England (BoE) raised interest rates by 25 basis points as expected to 5.25%, the highest level since April 2008. It is worth noting that in the vote on this interest rate decision, six votes were in favor and three against, compared with seven votes in favor and two against last time.

Two Monetary Policy Committee (MPC) members - Catherine Mann and Jonathan Haskel - voted for a 50 basis point increase this month, while Swati Dhingra voted for no change, as she has all this year, warning of overtightening. This is the first time this year that the BoE has had a three-way split on this decision.

The BoE also updated its inflation expectations that inflation is expected to fall to 4.9% by the end of this year, a faster decline than expected in May. The BoE believes that inflation is expected to reach its 2% target by early 2025.

At the same time, the central bank warned that some key indicators (notably wage growth) suggest that certain risks from more persistent inflationary pressures may be starting to emerge. The MPC will continue to closely monitor signs of persistent inflationary pressures and overall economic resilience, including the tightness of labor market conditions, and the performance of wage growth and service price inflation.

If inflation in the United Kingdom is difficult to fall back, the Bank of England may continue to increase interest rates, said BoE Governor Andrew Bailey on the same day. At the same time, he said it is too early to predict the time of a BoE rate cut.

Fed's Barkin says the economy will slow further

While recent data show that price pressures have eased markedly, which is welcome, inflation in the U.S. is still too high, said Richmond Fed President Tom Barkin on Thursday. At the same time, he made it clear that a further slowdown in economic activity is "imminent." Nonetheless, he believes that this slowdown may not be as severe as in the past and will result in fewer job losses. The speech did not address the Fed's policy outlook.

Russia may consider reducing grain export tariffs to boost exports

Russian Prime Minister Mikhail Mishustin said the government could reduce tariffs on exports of grains, other commodities and fertilizers to boost exports to so-called "friendly" countries. The government is expected to reduce export tariffs for up to six months. In addition, tariffs will be temporarily reduced or zeroed for a certain number of exports for one year. The Russian government said this measure will help export regions whose logistics and costs have been negatively affected by sanctions.

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