Daily Archives: February 9, 2010

Simone Baribeau

Inflation in Mexico more than doubled to 1.09 per cent in January as residents were hit with growing government taxes and fees.

Sales tax rose countrywide from 15 to 16 per cent at the beginning of the year, increasing the cost of some foods, beer and cigarettes. At the same time cash-strapped municipalities have been raising the cost of public transportation and telephone calls. Read more

Brussels has just approved €6.9bn of ‘urgent rescue aid’ for ABN Amro and Fortis Bank. The cash is destined to separate Fortis from both its Netherland unit and its (2007-acquired) ABN Amro operations. The separated parts will then be merged. The various units have insufficient cash to achieve the reconstruction by themselves.

Meanwhile the Irish government is set to acquire further stakes in its top banks as a result of loans being transferred to the country’s “bad bank”, central bank governor Patrick Honohan said today. “It is pretty clear the government will be acquiring additional equity stakes,” Mr Honohan told an event at Trinity College Dublin.

Well done to the Swedes. While the world frets and dithers about house price bubbles, the Swedish central bank has come up with a plan. In less than a year, a new commission will report back on all you could wish to know about Swedish housing bubbles: what makes them likely; what pops them; what tools are – or should be – available to combat them; and whether Swedes are currently in one.

The report will focus on residential property, although the (better studied) commercial property sector will be included. The commission will be run from within the central bank by heads of the monetary policy and financial stability departments. A related conference will be held in the autumn of this year and the final report is expected no later than January 31, 2011. Read more

Current US monetary policy is likely to prove excessively inflationary for China and Hong Kong, but both countries are ‘stuck’ with the effects of Fed policy as they have pegged their currencies to the dollar.

So says Janet Yellen, San Francisco Fed chief: Read more

Three issues should dominate tomorrow’s Bank of England inflation report: changes to the Bank’s economic forecasts; the implications of these changes for monetary policy; and the degree to which the Bank is confident it can offset further fiscal tightening with looser monetary policy.

Will we get clear indications of the Bank’s thinking on these three areas? There is no good reason why not, but a lack of justification for obfuscation doesn’t usually prevent the practice. All three are related so I have used the following decision tree to help my thinking.

In the diagram negative numbers represent the degree of policy loosening implied relative to November, while positive numbers indicate a degree of policy tightening and:

 Read more

Saudi Arabia, Qatar, Kuwait and Bahrain will begin discussing measures to set up a common central bank at a meeting on March 30 in the Saudi capital Riyadh, Asharq al-Awsat reported, citing the secretary general of the Gulf Cooperation Council, Abdel Rahman Al-Atiya.

The meeting, to be attended by central bank governors of the four nations, will be considered the first held by the joint central bank. They will also discuss the creation of a monetary union. Read more

Hector Sants resigned on Monday night as head of the Financial Services Authority, the City watchdog, in a dramatic move that throws the direction of financial regulation into question.

Mr Sants had been a vocal advocate of banking reform both in the UK and internationally in the wake of the financial crisis. He had also been outspoken in his criticism of the plans of a potential incoming Conservative government to disband the FSA. Read more

Ralph Atkins

A change in travel plans by Jean-Claude Trichet, European Central Bank president, has caused a flurry of excitement in financial markets this morning. He is leaving early a Reserve Bank of Australia conference in Sydney in order to get back for Thursday’s European Union leaders summit in Brussels. The buzz in markets is that this could be a sign that a bail-out is being prepared for Greece.

It is a good story to trade on (the euro is up a bit) but is such speculation credible? I am not so sure. It didn’t help that the first reports said Mr Trichet was returning for an extraordinary meeting of the ECB’s governing council - an understandable mistake for anyone in Australia not familiar with the EU’s array of councils and presidents.

But my understanding is that the ECB president always intended to be at Thursday’s summit in Brussels, which was Read more

With very little enthusiasm, Israeli politicians have given preliminary approval to a bill that would completely change the policymaking framework of the central bank. The first reading was passed 22-2 (that’s 24 people voting out of a possible 120). Two further approvals are required before the bill can become law.

Currently, the central bank governor has sole responsibility for making interest rate decisions, after discussions and a non-binding vote by central bank department heads. The bank has worked this way since 1954.

Discussions have been underway for 12 years to move toward the European/American model, in which a committee or board cast binding votes on the interest rate decision. The current proposal is to create a six-member board headed by the governor. Read more

Robin Harding

A trope of current writing about the BoJ is that it is coming under increasing political pressure from the Democratic party government to ease monetary policy. Pressure, maybe, but it’s an arm around the shoulders rather than a cattle prod in the back.

Public government pressure takes the form of regular comments by finance minister Naoto Kan. Here is a sample, via Reuters:

“They are holding a policy board meeting today and the BoJ has reiterated it would keep very easy monetary conditions … To be honest, I feel they could do more, but we are following the same policy direction by communicating with each other.”

It’s not very scary stuff. There are also other reasons why the BoJ feels nothing like the political pressure to act on deflation that it did back in 2001. Read more

Simone Baribeau

Unless you’re in Ireland.

An economic letter put out by the Federal Reserve Bank of San Francisco today put the US housing run-up in perspective. In a cross-country comparison they found that home prices in the US rose less than those in a whole swath of European countries.

It’s worth noting that the graph seems to be consistent with data from the Federal Housing Finance Agency (formerly Ofheo), rather than the more commonly used Case-Shiller 20-city index, which would have shown US home prices more in line with Spanish ones. Each index has its advantages. The FHFA’s tracks the same home over time across the US, but only looks at homes worth below a certain amount, likely skewing the increases downward. The Case-Shiller index includes the higher value homes, but only includes 20 of the US’s cities, likely skewing upward). Read more

Simone Baribeau

William C Dudley, president of the NY Federal Reserve, today spoke at length about the dangers of allowing a financial institution become “too-big-to-fail.”

Though he said there is “no one silver bullet” to prevent financial crisis (and, indeed, his speech highlighted the importance of effective macroprudential supervision and increasing the robustness of the financial system), he said that it was “critical that we ensure that no firm is too big to fail.”

The moral hazards with giant institutions were two-fold, he said. First, too-big-to-fail institutions would be able to get cheaper credit, since they’d effectively have an implicit government guarantee. Second, institutions would have an incentive to become large, simply so they could get the government backstop, reguardless of their financial health.

Notably, though, his solutions to the too-big-to-fail problem did not mention actually limiting firms’ size.  Read more

Simone Baribeau

The Federal Reserve board members have argued that asset bubbles are hard to identify when they’re growing. In retrospect, though, St. Louis Fed president James Bullard is calling a bubble a bubble.

Asked by Fox Business News about the housing market recovery, Mr Bullard made clear he wasn’t holding his breath waiting for the market to pick back up.

We have too many houses, so I wouldn’t expect that to really boom on us.

Housing prices have “by and large” stabilised, he said. And even there, he hedged. Read more