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Europe Central Bank jumps ahead of the Fed in lowering rates. But future cuts may be limited

Europe Central Bank jumps ahead of the Fed in lowering rates. But future cuts may be limited

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Europe Central Bank jumps ahead of the Fed in lowering rates. But future cuts may be limited

The European Central Bank cut its key interest rate Thursday by a quarter-point, moving ahead of the U.S. Federal Reserve as central banks around the world lean toward lowering borrowing costs — a shift with far-reaching consequences for home buyers, savers and investors.

The ECB cut its benchmark rate to 3.75% from a record high of 4% at a meeting of the bank’s 26-member rate-setting council in Frankfurt.

Speaking afterward at a news conference, ECB President Christine Lagarde said inflation had eased enough for the central bank to start lowering rates. But with inflation in the eurozone expected to remain above the ECB’s 2% target into next year, Lagarde declined to say how fast or how deep any future rate cuts might be.

“Price pressures have weakened, and inflation expectations have declined at all horizons,” she said. “We will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim… We are not committing to a particular rate path.”

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Analysts say Thursday’s quarter-point rate cut will likely not usher in a swift series of further cuts as the ECB waits to make sure inflation has been brought under control. Though the annual inflation rate for May — 2.6% — is well below a peak of 10.6% in October 2022, the decline has slowed in recent months. Inflation even ticked up slightly from 2.4% in April.

Inflation in the services sectors, a broad category that includes everything from medical care and haircuts to hotels, restaurants and concert tickets, remains particularly elevated at 4.1%.

The ECB’s move represents a switch from the onset of the inflation surge, when the Fed took the lead in tightening credit by raising rates starting in March 2022, sending mortgage costs higher but also boosting returns for savers with money in certificates of deposit or money market funds. The ECB started four months later.

Major central banks around the world now are leaning toward lowering interest rates. Central banks in smaller economies have already cut rates, including in Sweden, Switzerland, Hungary and the Czech Republic. The Bank of England’s policymakers are scheduled to meet on June 20, but it’s not clear whether the governing board will cut the rate from 5.25%. Japan, an economic outlier among the world big economies, has started raising rates after years of below-zero rates and low inflation.

Central bank benchmarks are a big deal for governments, companies, home buyers, investors and and savers. The benchmarks influence borrowing costs across the economy, so lower rates can mean lower mortgage costs and credit card charges for consumers. Lower rates also can boost stock prices and the value of retirement accounts since they lower returns on conservative holdings like bank accounts or certificates of deposit relative to stocks, and can mean stronger economic growth that will boost corporate earnings.

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Rate increases combat inflation by making it more expensive to borrow in order to buy goods, lowering demand and taking the pressure off prices.

But high rates also hold back growth, and that has been in short supply in the eurozone, where the economy has shown very little growth recently.

The ECB’s higher rates quashed a nine-year-long rally in eurozone home prices and slammed construction activity, which is highly sensitive to borrowing costs. Higher rates have also raised the up-front costs for building new renewable energy production, raising fears that high rates could slow Europe’s transition away from fossil fuels under the 2015 Paris climate accords.

The inflation surge in Europe was unleashed first and foremost by Russia cutting off most natural gas supplies to the continent, and by logjams in supplies of raw materials and parts as the global economy rebounded from the COVID-19 pandemic.

Although the eurozone was hit first and hardest by the Russian cutoff, the resulting energy price spike has now largely subsided and inflation fell to 2.6% in May, down from a peak of 10.6% in October 2022 and within range of the ECB’s goal of 2%.

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As the central bank with the world’s dominant currency, what the Fed does spreads ripples far and wide. Widening the rate gap between Europe and the U.S. could in theory weaken the euro against the dollar by pulling more investment money out of the eurozone and into dollar holdings in search of higher returns.

That would hurt the ECB’s inflation battle by making imports more expensive. But in practice the euro has actually strengthened recently — from $1.06 in mid-April to its current level around $1.09 — even though the ECB has telegraphed a rate shift for weeks.

The Federal Reserve faces a very different economy, one in which inflation was fueled less by the Russian energy shock than by government pandemic recovery spending, and more robust growth fueled inflation. The U.S. consumer price index is at an annual 3.4%, some way from the Fed’s goal, also 2%.

Fed Chair Jerome Powell has said the bank expects to cut rates this year from the current benchmark level of 5.25%-5.5%, but no change is expected at the Fed’s next policy meeting on June 11-12. With inflation cooling slowly in the U.S., economists and investors now increasingly expect only one or two cuts this year.

Growth in economic output has hovered just above and below zero for more than a year before a modest upbeat surprise in the first three months of the year, when gross domestic product rose 0.3% from the quarter before.

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“While it is noteworthy that the ECB is forging well ahead of the U.S. Fed, the transatlantic difference in inflation and growth more than justifies this, in our view,” said Holger Schmieding, chief economist at Berenberg bank.

“If anything, the five quarters of stagnation in the eurozone economy from autumn 2022. 

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Budget 2024-25: Sindh announces up to 30pc increase in salaries

Budget 2024-25: Sindh announces up to 30pc increase in salaries

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Budget 2024-25: Sindh announces up to 30pc increase in salaries

The Sindh government has proposed up to 30 percent increase in salaries of its employees in the budget for next fiscal year 2024-25. 

Chief Minister Murad Ali Shah, who also holds the portfolio of finance minister, presented the budget in the provincial assembly on Friday. 

He said the government had proposed 30pc increase in salaries of officials from Grade 1 to 6, adding that there was 25pc increase for officials of Grade 7 to 16. Similarly, officers from Grade 17 to 22 would get 22pc hike in their salaries. 

Furthermore, the provincial government has propsed 15pc increase in pension of the retired employees. 

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Presenting the budget with a total outlay of Rs3,352 billion, he said, the government had decided to allocate Rs959 billion for development projects.

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Rs37,000 minimum wage: Sindh follows in the footstep of federal govt, Punjab

Rs37,000 minimum wage: Sindh follows in the footstep of federal govt, Punjab

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Rs37,000 minimum wage: Sindh follows in the footstep of federal govt, Punjab

The Sindh government has revised the minimum wage for unskilled labourers to Rs37,000 in line with decisions of the federal and Punjab governments. 

The minimum salary has been increased by Rs5,000 as previously it stood at Rs32,000. The proposal was laid forth by Chief Minister Murad Ali Shah while presenting the budget for the fiscal year 2024-25. 

Meanwhile, the Sindh government has proposed up to 30 percent increase in salaries of its employees in the budget for next fiscal year 2024-25. 

The chief minister said the government had proposed 30pc increase in salaries of officials from Grade 1 to 6, adding that there was 25pc increase for officials of Grade 7 to 16. Similarly, officers from Grade 17 to 22 would get 22pc hike in their salaries. 

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Furthermore, the provincial government has propsed 15pc increase in pension of the retired employees.

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Budget 2024-25: Let’s figure out the cost of essentials

Budget 2024-25: Let’s figure out the cost of essentials

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Budget 2024-25: Let's figure out the cost of essentials

The federal government has announced a staggering Public Sector Development Programme (PSDP) worth Rs1,500 billion. 

According to the budget document, all federal divisions have been allocated budget, except the Poverty Alleviation and Special Safety Division, which deals directly with matters concerning 95 million people who are living in abject poverty. 

Sadly, the Poverty Alleviation and Special Safety Division gets nothing in the PSDP 2024-25. 

Worse still, the Ministry of Poverty Alleviation and Social Safety does not have any minister as its head, rendering it almost moribund for more than 10 months. Earlier, Dr Sania Nishtar was chairing it during the PTI government, followed by Shazia Marri during the PDM government. 

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Last year, 12.5 million people slipped into poverty, which took it from 34.2pc to 39.4pc, according to the World Bank. 

The government has conveniently ignored the poor in the budget. Other than announcing Rs598.71billion under the Benazir Income Support Programme (BISP), no substantial amount has been earmarked for reducing poverty. 

Your next read: BUDGET 2024-25 – A LAYMAN’S GUIDE 

Analysts believe that 27 percent increase in BISP from Rs471.3 billion to Rs598.71 billion has been made to placate the Pakistan Peoples Party, which may take the wind out of PML-N’s sails anytime. 

BURGEONING TAXES 

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On the other hand, if we delve into the details of burgeoning taxes, Sales Tax stands out in afflicting the poor the most. 

Now a sales tax of 10pc will be charged on stationery items. 

Tribal area residents who have been experiencing extreme poverty will now have to pay 6pc tax on the supply and import of plant machinery as well as electricity on both residential and commercial connections. 

Following the similar trajectory, a 10pc sales tax will be charged on the local supply of vermicelli, buns, poultry feed, cattle feed, sunflower seed meal, newsprint, books, oil cakes and tractors. 

On mobile phones whose value is less than $500 (Rs139,240), 18pc tax has been imposed. If the value of purchased phone exceeds $500, an existing rate of 25pc will remain unchanged. 

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Earlier, the retailers of leather and textile products who paid 15pc sales tax will now have to pay 18pc tax. 

Drug prices will increase massively as the sales tax on raw materials used in production of pharmaceutical items has been raised to 18pc from 1pc. This will be applicable on medical treatment, diagnostic equipment, heart surgery, neurosurgery, electrophysiology, endoscopy, endosurgery, oncology, urology, gynaecology, disposables and other medical equipment.

Besides, 20pc sales tax on import of syringes, needles, catheters, cannulae, blood collection tube of glass and blood collection tube of PET.

Moreover, charitable hospitals with 50 or more beds will pay 18pc sales tax on imported medical goods. 

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