Monthly Archives: December 2009

We’ve greatly enjoyed reading your thought-provoking comments over the past few months, and look forward to sharing an even better blog with you in the New Year.

Krishna Guha

If the Fed is bothered about primary dealers lacking the balance sheet capacity to do reverse repos on a large scale, why not use its regulatory powers to ease these constraints? The Fed might want to do as much as $500bn in reverse repos. The dealers have balance sheet space for $100bn at most.

A short-term reverse repo with the central bank ought not to be the kind of asset a bank needs to set much capital aside for, nor the kind of asset that counts against crude leverage limits. I am not an expert on the regulatory side of this but I suspect the Fed might be able to do something about this if it put its mind to it. Read more

Botswana’s central bank today cut the bank rate by 1 percentage point to 10 per cent. The bank has now cut this benchmark rate by 5.5 percentage points in the past year, as inflation has eased. Inflation, falling 1.9 per cent in November to 5 per cent, is comfortably within the 3 – 6 per cent target range, and is expected to remain low because of subdued growth. Unlike India and parts of east Asia, food prices are falling in Botswana, as are fuel prices. Read more

FDIC chief Sheila Bair recently predicted more US bank failures in 2010 than in 2009. Russia is apparently predicting the same. Gennady Melikyan, the central bank’s first deputy chairman, said: “This year we revoked the licenses of 44 banks – next year I think that number will be significantly greater.” He added that an increase in bank defaults had already been noted in countries that were hit by the financial crisis earlier than Russia. Nigeria is already entering a second phase of bank bail-outs.

The Bank of England has been more cagey. In its financial stability report, the bank refers Read more

The Turkish central bank has stopped cutting rates, holding the overnight borrowing rate at 6.5 per cent and the lending rate at per cent. The bank’s press release said: “Strong base effects would be observed in forthcoming periods… leading to a significant increase in annual inflation, especially in
December, yet core inflation would remain at low levels. The Committee has emphasized that it would be necessary to keep policy rates at low levels for a long period of time.”

Other rates were also held: the late liquidity window interest rates (4pm – 5pm) kept the borrowing rate at 2.5 per cent and the lending rate at 12 per cent, and the interest rate on overnight and one-week maturity borrowing facilities (provided for primary dealers via repo transactions) at 8 per cent.

Minutes from last week’s central bank meeting have countered rumours of an early rate rise in Brazil. The dovish notes forecast a “gradual recovery” with inflation “contained”. While the bank’s inflation forecast has risen since October, at 4.5 per cent it is hovering about the midpoint of the target range. The market reaction suggests traders do not expect a rate rise in the first quarter next year, meaning rates will remain at their record low of 8.75 per cent.

The central bank of the Philippines has voted to hold the overnight borrowing rate at 4 per cent and the lending rate at 6 per cent. London-based research firm Capital Economics expects the first increase in the overnight borrowing rate to occur in April, rising gradually thereafter by about 25bp, to end the year at 5.5 per cent. The rate will be increased to combat inflation amid rising government spending, though price rises are expected to be modest due to the peso’s rise against the dollar.

When your public finances are in a deep hole and you need to raise money fast, there is nothing governments like more than taxing foreigners. History is littered with efforts to make outsiders pay for local public services and wars. They range from customs duties and turnpike tolls to modern airport departure taxes and hotel taxes. Let’s face it, if we could tax martians, we would. Read more

The seven member policy board voted unanimously to keep its key interest rate at 0.1 per cent, as expected. In its regular two-day meeting, the board also vowed to defeat deflation. The central bank cut the rate to 0.1 per cent a year ago, and 16 of 17 analysts who gave projections to Bloomberg for next year said the rate will remain on hold for all of 2010.

Robin Harding

The Bank of Japan said today that:

The Policy Board does not tolerate a year-on-year rate of change in the CPI equal to or below 0 percent.

 Read more

Recent demand for Fed short-dated credit has risen, bucking the downward trend. Data from Fed auctions shows both the demand and the number of bidders rose for 28-day credit at the most recent auction, on December 14. The bid/cover ratio of the most recent auction was 0.61.

 Read more

Simone Baribeau

Alan Greenspan, former Federal Reserve chief, warned today on the risks US social programmes – Medicare, Medicaid and Social Security – pose to the US’s ability to finance its deficits in testimony prepared for the Senate Committee on Homeland Security.

For more than two centuries, we have been able to hold the level of U.S. federal debt to well below our long-term capacity to borrow.

But for the next decade or two, on some reasonable sets of assumptions, our borrowing cushion shrinks significantly, threatening to test our capacity to raise funds to finance unprecedented deficits.

The challenge to contain this threat is more urgent than at any time in our history, in part because of today’s limited flexibility of adjustment, especially of entitlement spending whose constituencies are well entrenched.

 Read more

… but with a majority of republicans voting against.

For analysis of the swing votes, see this: Bernanke has a Republican problem

Krishna Guha

Another Republican swing vote that looked as if it was up for grabs has just gone against Bernanke – Kay Bailey Hutchison. Bernanke can rely on Republicans Bob Corker and Judd Gregg. But with David Vitter also saying he does not want to proceed before there is more information on AIG – and hardcore opponents Jim Bunning and Jim De Mint guaranteed No votes – that looks like at least half the Republican group on the commitee against by my calculations. Read more

South Korea has already recovered the remaining $450m USD loans extended to local banks, a day after the Fed announced closure of its temporary global liquidity-providing swap scheme by February 1, 2010.

Including the $450m, the BOK has recovered the full amount from the swap arrangement, which was worth $16.35bn. The Fed originally set a $30bn USD currency swap limit with the Bank of Korea on October 30, 2008, and has extended the deadline twice. BOK officials say the agreement helped to stabilise the local currency but that its closure will have “little impact” on Korean financial markets

Krishna Guha

OK so it’s not exactly Goldilocks. But maybe we are seeing a post-recession version of Goldilocks – call it Goldilite. The markets must be not too hot and not too cold, but just right.

The Fed marked up its assessment of growth yesterday but made no change to its assessment of inflation. In fact recent data suggest inflation risk has gone down not up: core inflation is flat, surveyed inflation expectations have edged lower and the dollar, commodities and gold have stabilised. Read more

Indian food prices surged an annual 20 per cent in early December as supply shortages hit, heightening expectations the central bank is set to tighten policy to curb inflation.

Food prices are jumping because of shortages after crops were hit by the weakest monsoon rains in 37 years and then flooding in parts of the country, but the price rises come as the economy is picking up strength after a dip in late 2008 and early 2009. Read more

Interest rates are unlikely to be the main topic of conversation at the Bank of Japan’s policy meeting, which started today: deflation and the strong yen are probably top of the agenda.

The bank is expected to keep rates at 0.1 per cent, and further measures are unlikely to be announced. Two weeks ago, the bank injected Y10,000 in 0.1 per cent three month loans, and the effects are still flowing through. Money market rates are falling and the economy is more liquid. Read more