Daily Archives: February 18, 2010

Simone Baribeau

And finally – the Fed increases a rate. Of course, it’s the discount rate not the federal funds rate, and Ben Bernanke, Federal Reserve chairman, and others have been quite clear that raising the discount rate is not tightening monetary policy.

“Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the release said, echoeing written comments from Fed chairman Ben Bernanke last week. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC).” Read more

Argentina’s expected co-operation with the government has been confirmed explicitly by the central bank president and the economy ministry. Bank president Mercedes Marco del Pont told reporters that the Banco Central will co-ordinate its policies with the country’s Economy Ministry, while economy minister Amado Boudou announced the formation of a new economic council, which will group officials from both institutions.

Focus at the central bank will be on company output rather than inflation, said Ms Marco del Pont: “We want to focus on price stability but from a different, non-orthodox view, from the supply side.” Annual inflation is running at 32.1 per cent, according to a report by Graciela Bevacqua, the former head of the consumer price department at the national statistics institute. Read more

Economists in the US, have signed a petition for a hiring tax-credit… so civilised. Brad De Long, professor of economics at UC Berkeley (and well-known blogger) has posted a draft letter from a bevy of reputable economists (including Joseph Stiglitz and Mark Zandi) asking Congress to implement “additional emergency policy measures to jump-start job creation.” Their preferred measure – a tax credit.

A well-designed temporary and incremental hiring tax credit is a cost-effective way to create jobs, and could work well in the current environment. At a time when GDP is beginning to rise and demand is starting to return, private firms are likely to respond to such a tax incentive by hiring sooner and more aggressively than they otherwise would have done.

 Read more

Traders are reporting interest from Asian banks in gold on sale from the IMF, says ReutersRead more

Ralph Atkins

Know anybody who had to borrow €3bn suddenly over the weekend? A surge in overnight emergency lending by the European Central Bank has become a talking point in financial markets. Use of its marginal lending facility, which incurs a penal interest rate, jumped at the end of last week and stayed above €3bn on Monday or Tuesday. Was a eurozone bank in trouble? Or was the urgent need for extra liquidity just due to a technical hitch, perhaps related to the start of a new ECB monthly lending cycle?

In the event, it may have been more technicalities than trauma. Use of the facility slumped to just €52m overnight from Wednesday. Whoever need the money appears to have turned to the latest ECB regular weekly offer of liquidity instead, at which banks’ demands continue to be met in full. But minds are not totally at ease. “It’s difficult to say for sure whether this was a genuine funding issue for some banks or one particular bank, or just some adverse liquidity management,” says Nick Matthews, European economist at Royal Bank of Scotland. Read more

Consumer price inflation in Canada rose sharply to 1.9 per cent in the 12 months to January, taking the rate to the midpoint of the bank’s 1-3 per cent target range. The annual rate in December was 1.3 per cent.

The increase, the highest since November 2008, is not worrying the bank, however, and it is not likely to trigger interest rate rises before Q3. Analysts had expected a rise to 1.8 per cent. Read more

Russia’s central bank probably bought more than $2bn in foreign currency today to stall the ruble’s advance to the strongest level against its currency basket in almost 14 months, forex trading managers told Bloomberg. The rouble fell below 34.90 against the dollar-euro basket, breaking Bank Rossii’s floating export-friendly target band of 35 to 38. The currency remained within the 26 to 41 band the bank pledged to defend in January. Bank Rossii does not comment on daily or weekly interventions.

Related stories: Russian forex intervention likely, Feb 17

The International Monetary Fund voted yesterday to release €200.3m to Latvia, the third installment of a €1.7bn credit line approved in December 2008. The IMF has already transferred about €1bn during the program, which was also extended by nine months until the end of 2011. An EC transfer of about €500m is expected to follow in about mid-March.

“The Latvian authorities are to be commended for their strengthened program implementation, which yielded better-than- expected fiscal performance in 2009 and helped improve confidence,” Takatoshi Kato, deputy managing director of the fund, told Bloomberg. Latvian legislators have passed spending cuts and revenue increases of about 500m lati ($966.7m) in its 2010 budget to meet the loan’s terms. Read more

Sterling fell today as it was revealed that the government was forced to borrow last month as tax receipts fell sharply.

Net borrowing was more than £9bn higher in January than a year earlier, as the government faced a deficit of £4.3bn compared with a £5.3bn surplus in January 2009. January is a crucial month for taxation, and this is the first year to record a deficit in the month since at least 1993. Read more

South Africa’s finance minister has announced a significant shift in central bank policy in a radio interview. His comments will raise more questions about the bank’s independence.

The South African Reserve Bank will adopt a flexible approach to inflation. The bank will be allowed ‘temporary deviations’ from its target of 3 – 6 per cent in the pursuit of growth, reports Business Week.”[Inflation will not be] the sole focus of what the bank does,” said Finance Minister Pravin Gordhan. “We’re very mindful of growth.” Read more

The National Bank of Georgia has kept its refinancing rate on hold at 5 per cent. The rate was lowered in November from 6 per cent. Georgia’s inflation target is set at 6 per cent for 2010-12 but annual inflation is currently under target at 2.7 per cent.

Bonds are back on the menu for UK companies, driving an increase in gross and net capital issuance for the first time in months. Net issues of commercial paper, a form of short-term largely unsecured lending, also rose substantially within january, ending the month above zero.

A survey of CFOs in January rated credit as hard to obtain, and said that equity and bond issuance was preferable to bank loans. It may be that the increase in capital issuance is being used to pay off bank debt for the larger companies. That option, of course, is not available to smaller firms.

Members of the Bank of Japan board agreed unanimously to hold the uncollateralized overnight call rate at 0.1 per cent, and will “aim to maintain the extremely accommodative financial environment”.

“The Bank recognizes that it is a critical challenge for Japan’s economy to overcome deflation and return to a sustainable growth path with price stability,” the statement says. Indeed, the Bank of Japan is under some pressure from the Finance Ministry, to target inflation of 1 per cent. The Bank does not currently set a formal inflation target. But as Robin has pointed out on this blog, the pressure is more of an ‘arm round the shoulders than a cattle prod in the back’.

Moody’s has raised Oman’s local and foreign currency government bond ratings to A1 from A2. The country ceiling for foreign currency bank deposits has also been lifted to A1 from A2 and the country ceiling for foreign currency bonds has been raised to Aa2 from Aa3. Oman’s local currency country ceilings remain at Aa2. The outlook on the ratings is stable.

“The main driver of today’s rating change is the comparative strength of Oman’s public finances within its rating peer group,” explained Tristan Cooper, a senior credit officer in Moody’s sovereign risk group. Read more