Daily Archives: June 30, 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