Monthly Archives: March 2011

The Kobe earthquake of 1995 was an immense human tragedy, hitting a region of Japan where building standards were nowhere near adequate to cope with the shock. I am sure we all have very sad memories of a disaster in which more than 6,000 people died. Read more

Moody’s decision to downgrade Spain’s sovereign credit rating from Aa1 to Aa2 was very unwelcome to the Spanish government yesterday, but it may have come as a timely reminder to other European leaders, meeting in Brussels today, that they are still a very long way from solving the sovereign debt crisis.  Read more

The behaviour of the world’s two main central banks, and the relationship between them, have profound effects on global financial markets. As a broad rule of thumb, the ECB (and the Bundesbank before it) have tended to act in a very similar manner to the Fed, except about 6-12 months later. In fact, that is one of the most well established rules in the analysis of monetary policy making.

It does not imply that the ECB deliberately “copies” the Fed, which it clearly does not do. But it does imply that circumstances have usually produced this symbiotic relationship between the two key central banks. When this relationship has been broken in the past, it has usually spelled trouble. Read more

This week, the oil shock continued to build, but financial markets still viewed it as insufficient to puncture the upswing in the global economy. Business survey indicators in America and Europe hit new peaks for the cycle, but China continued to lag. The ECB responded to the upswing by pre-announcing their intention to raise interest rates next month – the first of the major central banks to do so in the developed countries. But the Fed remained determinedly dovish. The extent of this continental drift between the big two central banks is quite unusual. Read more

For the last several months, the publication of non farm payroll figures has failed to validate other data which have been indicating that the US labour market is really starting to improve.  Read more

Today’s hawkish statement from the ECB means that a rise in interest rates from 1 per cent to 1.25 per cent is almost certain to be announced next month. Only a major discontinuity in Europe’s financial markets can now prevent it. The key question is whether this rate increase is just an isolated event, which proves to be mistaken and is therefore rapidly reversed – like the infamous quarter point rise announced by the ECB in July 2008, when the world economy was already in recession. Or does the ECB announcement definitively mark the low point for global policy rates? If so, it will prove to be the first step of the central banks’ “exit” process, and the start of a lengthy period of monetary policy normalisation. Read more

The combination of a rapidly growing economy, and a surge in oil prices, has raised questions about the strength of the doves’ hand at the Fed. Previously in firm control, the doves had until yesterday been silent about the recent mixture of strong GDP growth and rising headline inflation. Was the case for exceptionally easy monetary policy beginning to fray at the edges? Not in the mind of New York Fed President Bill Dudley, who is among the most eloquent spokespersons for the dovish standpoint. Read more