Monthly Archives: June 2010

European Union governments that persistently violate the bloc’s rules on low budget deficits and public debts could be denied EU financial aid under proposals unveiled on Wednesday by policymakers in Brussels.

The European Commission, which enforces the EU’s fiscal rules, also suggested that countries in the 16-nation eurozone should have to pay interest-bearing deposits into an EU fund if they ignored warnings to keep their public finances in order. Read more

Better than good news: the removal of bad news. Times two.

Ireland has stopped posting negative growth for the first time in more than two years, and the ECB auction suggests tomorrow’s end to one-year liquidity won’t trigger the meltdown many feared. Read more

Ralph Atkins

European Central Bank hopes of a smooth return of €442bn of emergency loans it made to banks a year ago have been boosted after demand for three-month liquidity offered as an alternative fell far short of expectations.

Just €131.9bn in three-month liquidity was taken by 171 banks, the ECB reported on Wednesday. Analysts had feared that banks would demand €250bn or more. The low figure suggested banks’ nervousness about their future funding and inability to tap commercial markets might have been overdone. Read more

Adam Posen has just finished speaking at the Society of Business Economists’ annual conference. He repeated regularly he was speaking for himself not the Bank of England or the Monetary Policy Committee. And his remarks were a breath of fresh air because he didn’t duck difficult issues nor assume them away. Two things stood out:

  • Mr Posen’s conclusion that British inflation expectations are drifting up and neither one-off effects such as sterling’s depreciation nor higher commodity prices can fully explain the drift of inflation higher.
  • British monetary policy is again walking on a tightrope, suspended above higher inflation on one side and a renewed downturn on the other, making monetary policy very difficult to set. This is likely to make it reactive not proactive and liable to large errors.

Rising inflation expectations Although many in the audience disagreed, Mr Posen’s argument on inflation expectations rested on the argument that Britain’s recovery has been broadly similar to other countries, but its inflation performance has been very different. This he argued was easiest to explain, not by sterling’s depreciation, but by persistent inflation overshoot and mildly adaptive inflation expectations the public hold, as the chart shows.

“The most logical and empirically reasonable explanation for inflation creep is some unanchoring of inflation expectations, caused by the series of above-target outcomes for UK inflation in recent years.”

In a welcome display of transparency, Read more

Ralph Atkins

Eurozone inflation is giving little cause for European Central Bank hawks to worry. Largely unremarked amid the eurozone government debt crisis, ECB policymakers have toughened the tone a tad on price developments in recent months. But a “flash” estimate by Eurostat, the European Union’s statistical office, shows the annual inflation rate in the 16-country region dropped from 1.6 per cent in May to 1.4 per cent in June, slightly below market expectations. As the chart shows, the “flash” estimates are usually on the mark.

The latest fall almost certainly reflected trends in energy prices. “Core” inflation is likely to have remained stable. But there is no evidence of inflation trends picking up significantly any time soon. Last week, Jean-Claude Trichet, ECB president, told the European Parliament, he expected only ”further slight increases in inflation in the second half of the year”.

News today that German unemployment continues to fall – June saw a 21,000 fall to 3.23m, the lowest since December 2008 - might point to possible upward pressure on wages. But even if Read more

The newly-introduced base rate has reportedly been set at 8 per cent by India’s central bank, effective from July 1. Expectations were higher, in the 10-11 per cent range, when the introduction of a base rate was announced in February. Eventually, all loans* in India will be made on or above the base rate.

The current system – called the ‘benchmark prime lending rate’ – has been in use since 2003, and, like the current proposal, was introduced to improve transparency and integrity in the pricing of credit. At present, banks offer loans to big corporates at about 8-9 per cent, while the average BPLR is 11-12 per cent. SMEs are usually charged a higher lending rate of 14-16 per cent. Read more

Alan Beattie

The US will have much less room to grow than it believes and should therefore tighten fiscal policy more rapidly, according to estimates by the International Monetary Fund.

In the first report of the G20’s “mutual assessment process”, by which leading economies are supposed to hold each other accountable for growth, the IMF suggests that the “advanced deficit countries” – dominated by the US – should tighten fiscal policy more rapidly than planned. Read more

James Politi

Remember Ben Bernanke, Fed chairman, and Hank Paulson, then treasury secretary, heading up to Capitol Hill in September 2008 in desperation, begging lawmakers to spend a whopping $700bn to save the financial system? That may seem like distant history by now, but that money came in very handy again today.

After the death of Robert Byrd, the Democratic senator from West Virginia, yesterday, the prospects for passage of the massive financial reform bill, whose different versions were so ably reconciled during a series of marathon negotiating sessions on Capitol Hill last week, suddenly hit a wallRead more

James Politi

Today US economists received the latest reminder of how imperfect some of the consumer surveys really are.

The Conference Board’s consumer confidence survey today showed a sharp drop in June, to 52.9 from 62.7 in May. There are plenty of good reasons for the drop, which Federal Reserve officials pointed out in their monetary policy statement last week, including the reluctance of employers to hire new workers and a troubled housing sector. Plus, there is the sovereign debt crisis in Europe and even the disconcerting oil spill in the Gulf of Mexico.

But why, in that case, did the University of Michigan’s consumer sentiment survey only last week show confidence at its highest level since January 2008 ? Read more

Amendments to Serbia’s central bank law have been adopted by MPs today that could both help and hinder the Bank’s independence. A new governor is expected soon, now that the law has been approved.

Under the new rules, Serbia’s president will be able to nominate the bank governor. Previously, the governor was previously named and approved by parliament. Parliament will still confirm the nomination by majority vote.

Presidential nomination raises the fear of political meddling. Reuters expands:

The last governor, Radovan Jelasic, resigned in March after six years in office, with analysts saying he was unwilling to ease monetary policy in line with government demands to help the economy, which contracted three percent in 2009.

But many interpret the law overall as strengthening the independence of the bank. Belgrade media Read more

James Politi

President Barack Obama held one of his periodic White House meetings with Ben Bernanke, Fed chairman, this morning, and the ensuing statement may have caught the attention of some central bank watchers.

Naturally, Mr Obama said he and Mr Bernanke “share the view that the economy is strengthening”. But of course, with unemployment stuck at 9.7 per cent, the president could not avoid stating that “we’ve still got a lot of work to do”.

Later, Mr Obama’s remarks get potentially more significant. He says “both of us emphasized…that if we can make sure that we continue to do the things that we’re doing, deal with folks who need help – so passing unemployment insurance, for example; making sure that we are working to get credit flowing to small businesses that are still having some difficulties in the credit markets; strengthening consumer confidence – then we think the general trends will be good…”

So does that mean that Mr Bernanke has abandoned his long-held position of not taking a position on particular tax and spending initiatives Read more

The Dutch finance minister Jan Kees de Jager has called on the Dutch National Bank to formulate a remedial plan within the month, after a commission found their internal supervision wanting.

Investigating the bankruptcy of small Dutch bank, DSB, the Scheltema commission concluded that the DNB should never have issued them a banking licence in 2005. While the financial position of the bank was sound, the report concluded that fundamental improvements in corporate structure had been needed and should have been identified. (DNB aside, the 348-page report blamed unprofessional management and poor governance for DSB’s collapse.)

Responding to the commission’s report, Mr de Jager said: “The internal supervision within DNB needs to be changed, for instance via the supervisory board … the supervisory board needs to exercise more control of DNB’s supervisory tasks. The law needs to be changed and I will change the law.” Read more

A key interbank rate has jumped 9 per cent, indicating fears about the health of eurozone banks when 1,121 of them must repay €442bn to the ECB on Thursday. The rate at which banks lend to each other in euros, euribor, has only recently started climbing, following dramatic falls since the crisis.

Market reaction might seem belated, given how widely trailed this liquidity halt has been. A story this morning about Spanish banks lobbying the ECB has probably helped. Read more

Euroskeptic and on the dovish wing: that’s the quick profile of the newest member of the central bank board, Kamil Janacek. Eurosceptic president Vaclav Klaus is due to make the announcement about now. Currently chief economist of Komercni Banka, a Czech bank, Mr Janacek, 67, has known Mr Klaus for more than 45 years. He will be filling the only vacancy on the seven-member board.

The President is rearranging several key figures right now. Current board member Vladimír Tomšík, just 36, is due to be confirmed as deputy governor today, and new Czech prime minister Petr Necas was sworn in yesterday. Read more

Start pricing in a 25bp rise in Q4: that’s the message from the Thai Finance Ministry. The policy rate – the one-day repurchase rate – is currently at 1.25 per cent and has been on hold since April 2009, having been cut in four consecutive decisions from 3.75 per cent in August 2008.

Ralph Atkins

Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme.

On Thursday, the clock runs out on the ECB financing programme – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer. One senior bank executive said: “We are fighting them every day on this. It’s absurd.” Read more

Robin Harding

It takes some doing to get four or five economists into a speech on reform of the wireless spectrum but Larry Summers, director of President Barack Obama’s National Economic Council, was up to the task.

Here is part of his speech today explaining the president’s plan to make available an extra 500 Mhz worth of wireless spectrum via auctions over the next ten years.

Mancur Olson famously wrote about the tendency of stable democracies to become sclerotic as the accretion of entrenched interests blocked progress. In a similar vein, the great economic historian Alexander Gerschenkron took as his central theme the ironic advantages of what he termed ‘economic backwardness’. Gerschenkron suggested that countries that were late to industrialise were sometimes able to bypass many of the dead-ends and outdated practices that encumbered the early industrialisers. These countries, he stressed, could start with an open canvas free from what John Stuart Mill once called “the slavery of antecedent circumstances”.

The argument here is that because America’s wireless spectrum is already heavily used, it may lose out to rivals with emptier airwaves, which they can quickly use for innovative technologies.

A couple of points. First, an implication of Mr Summer’s logic is that the president is removing a competitive disadvantage here, not creating a competitive advantage. That would suggest this kind of measure is needed to sustain – rather than increase – the trend growth rate.

Second, the link Read more

James Politi

Kevin Warsh, a governor at the Federal Reserve, has just delivered a very interesting speech in Atlanta.

His main point is that the Fed could start selling mortgage assets it bought to sustain the housing market during the crisis independently of its moves to raise interest rates, putting him squarely in the camp of inflation hawks on the Federal open market committee. Ben Bernanke, Fed chairman, has suggested that any asset sales should come only after monetary policy tightening underway, but Mr Warsh seems to disagree. “Any sale of assets need not signal that policy rates are soon moving higher. Our policy tools can indeed be used independently. I would note that the Fed successfully communicated and demonstrated its ability to exit from most of its extraordinary liquidity facilities over late 2009 and early 2010, even as it continued its policy of extraordinary accommodation,” he said.

The Fed governor, a former Morgan Stanley investment banker and George W. Bush administration official, also attempted to quash the rising talk that the Fed might actually start buying assets again in response to continued weakness in the housing sector and the sluggish recovery, saying that such a move “should be subject to strict scrutiny”. Read more