Daily Archives: December 9, 2009

Adam Thomson of the Financial Times writes about the political implications of Mexico’s newly nominated central bank governor Read more

The Mexican president has named finance minister Agustín Carstens as the next central bank governor. Ernesto Cordero, who until this week headed Sedesol, the country’s social development ministry, will take over from Mr Carstens. Insiders say that the move also allowed Mr Calderón to install another confidante in a key ministry – an emerging pattern not lost on political analysts – in the form of Mr Cordero. 

Read more at ft.com

Extended periods of low interest rates increase the amount of risk banks take. Monetary policy may influence banks’ perceptions of – and attitudes towards – risk in at least two ways: (1) directly, through the search for higher yields, especially where return targets are nominal; and (2) indirectly, through the impact of interest rates on valuations, incomes and cash flows, which can in turn modify how banks measure risk.

So monetary policy is not fully neutral from a financial stability perspective. It is important that monetary authorities learn how to factor in the effect of their policies on risk-taking, and that prudential authorities be especially vigilant during periods of unusually low interest rates, particularly if they are accompanied by other signs of risk-taking, such as rapid credit and asset price increases. Read more

Yes, rising. The composition of lending in China is changing significantly (see chart). Although net lending fell in Q3 and in October, that was driven by a sharp reduction in short-term loans. Medium- and long-term loans, which arguably provide greater support for investment and for the real economy, continued to grow at a brisk pace during Q3:

 Read more

Safe haven flows that favoured the dollar have been reversing. Carry trades always defy measurement, but such positions, with the dollar as a funding currency, are thought to be increasing, putting upward pressure on higher-yielding currencies. And with asset prices rising, the hedging US dollar holdings by European and Australian institutional investors also weighs on the dollar. Read more

Both output volatility and depth of recession experienced in the OECD were negatively correlated to trade openness and exposure to terms-of-trade shocks. They also exhibited strong negative correlations with inflation volatility. The latter suggests that, to the extent that monetary policy succeeded in stabilising inflation, it also played a key role in explaining differences in output volatility – both between countries, and over time. Read more

Alistair Darling’s task in the pre-Budget report was to improve the credibility of Britain’s deficit reduction plans for the public, the markets and for those running monetary policy. I am convinced this report will fail on all counts.

With a couple of hours digging through the numbers, the report strikes me as deeply political and its presentation extremely unhelpful. This is not the way to gain credibility. Why? Read more

Not to be outdone by its rivals at Fitch, who on Tuesday downgraded the sovereign rating of the Hellenic Republic of Greece, Standard & Poor’s on Wednesday revised its outlook on the Kingdom of Spain to negative from stable. The agency affirmed the existing ‘AA+’ long-term and ‘A-1+’ short-term sovereign credit ratings. Read more

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence.” – Paul Volcker, former chairman of the Fed

Ralph Atkins

Last night Axel Weber, Bundesbank president, showed mastery of the art of central banking at a dinner hosted for Frankfurt’s business journalists. That is a polite way of saying that he was charming, happy to discuss issues at length – but circumspect.

On Greece’s rating downgrades, Mr Weber pointed out the urgency of Athens exerting greater fiscal discipline. But despite lots of questions - highlighting growing German concern about Greece - he was not explicit on whether the ECB would ever actually exclude Greek assets from its liquidity-providing operations (which would be a risk if the ECB returned to pre-crisis minimum rating standards after 2010).

Mr Weber was soothing on Dubai, pointing out that Read more

Rumours are circulating that Mexico’s centre-right president wants a new central bank governor.

The speculation has gone down badly with bankers, who respect the incumbent, Guillermo Ortiz, and want him to remain in office while the country struggles with recession. Mr Ortiz, identified more with the opposition party, also chairs the board of the Bank for International Settlements, the central bank for central banks. Read more

Glenn Stevens said on Tuesday that the central bank will take rising Australian mortgage rates into account when it sets monetary policy. The governor of the Reserve Bank of Australia also said a “neutral” level for Australian interest rates may be lower than previously forecast with widening margins between benchmark and mortgage rates. Read more