Monthly Archives: July 2010

Chris Giles

Now that strong growth has returned to the UK economy, the chances of the Bank of England increasing its purchases of assets and pumping more money into the economy – known in the trade as QE2 – have correspondingly declined.

But today there are three tidbits worth noting about quantitative easing, which suggest the Bank is happier about the functioning of the corporate bond market; that it needs to articulate better its reasons for thinking QE works; and that it made an initial loss on the first £200bn of QE purchases.

  • The Bank did not purchase any corporate bonds today for the first time since April. This is second order stuff, but good news at the margin. It suggests the Bank did not find sufficiently attractive offers of corporate bonds for sale where the prices suggested stressed markets and a low level of liquidity in the market. According to the quantity of the Bank’s purchases, the signs of stress have declined from a recent peak in early June.
  • The point of QE. Robin’s interesting post yesterday

 Read more

Ralph Atkins

Eurozone mortgage borrowing surged last month to the highest level in almost two years in a sign that bank lending across the 16-country region may be flickering back to life.

Lending for house purchases rose at an annual rate of 3.4 per cent in June – the fastest since September 2008, according to European Central Bank data. The acceleration pointed to a revival in consumer confidence and an increased willingness by banks to fuel the economic recovery with loans to the private sector. Read more

The Reserve Bank of India has raised the repo rate 25 basis points, and the reverse repo rate 50bp – more than expected. “The dominant concern that has shaped the monetary policy stance in this review is high inflation,” said the bank. Rates now stand at 5.75 and 4.5 per cent, respectively.

While the recovery has consolidated within India, the central bank notes a “significantly” altered global economy: Read more

Robin Harding

An interesting new NBER working paper by Vasco Curdia of the New York Fed and Michael Woodford of Columbia University will likely feature on Ben Bernanke’s reading list as he ponders both the options for further Fed easing (should it be necessary) and the Fed’s eventual exit strategy from easy policy. Mr Woodford is one of the world’s top monetary economists and a former colleague of Mr Bernanke at Princeton.

Here is part of the abstract:

We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times.

To attempt to paraphrase these conclusions:

- Quantitative easing – e.g. buying Treasuries to increase bank reserves with no commitment to keep them high in the future – doesn’t work. Read more

James Politi

With worries about the huge US budget deficit running rampant in Washington – just look at Friday’s midsession budget review by the White House, which forecast deficits in excess of $1,400bn this year and next -  fiscal policy options are clearly limited for Congress and the administration.

And so the attention of policymakers and politicians is quickly turning to longer-term tax policy issues, like the looming expiration of some $3,000bn of tax cuts enacted by President George W. Bush in 2001 and 2003, as I explain in today’s paper.

Last week, the big story was that Kent Conrad, the Democratic chairman of the Senate budget committee, broke with the administration’s official line that the tax cuts should only be extended for Americans earning up to $250,000, and allowed to expire for the wealthy. Read more

Israel’s central bank will raise August’s key interest rate 25bp to 1.75 per cent. The raise, not yet shown on the chart which is accurate to today, will be the fifth 25bp increase since the bank started raising in 2009.

Rising inflation expectations are motivating the move: Read more

Ralph Atkins

The European Central Bank is becoming masterly at making a virtue out of its modesty. Its latest boasting is about how little it has been spending on buying eurozone government bonds. Figures just released showed the ECB bought bonds worth only €176m last week – the lowest weekly amount since the programme started in early May. In the first week, it had bought €16.5bn.

ECB policymakers have hinted that the programme would be scaled back significantly. But the message from the ECB’s governing council is that this is a sign of strength, not weakness. Athanasios Orphanides, central bank governor of Cyprus, told a press conference in Nicosia that eurozone government bond spreads would ease as confidence in its economy and banking system returned. “I personally feel happy that the programme didn’t have to be activated to the same degree as earlier,” he said.

As a strategy, such chastity could, arguably, prove as effective in rebuilding financial market optimism as doing the opposite: that is, buying on a large scale and trumpeting its activism, which might have been the instinct of other central banks. Certainly, it fits with the emphasis Jean-Claude Trichet, ECB president, has recently placed on the ECB acting as an anchor of stability. Read more

The value of a Big Mac is everyhere equal: that’s the premiss of this index from the Economist. Using the burger price as an identity allows us to compare the relative value of countries’ currencies.

Norway comes out most overvalued versus the dollar; Argentina the least. In dollar terms, a Norwegian Big Mac is a meaty $7.20, almost double the American value ($3.73) and nearly four times the Argentinian price ($1.78). Read more

Chris Giles

For those interested in deckchairs, there is a lot of reshuffling of them going on in British financial regulation, outlined in a Treasury consultation document today. A short summary is: the Bank of England will have much more power to do essentially the same things that the tripartite authorities planned under the previous government.

The existing tripartite Council for Financial Stability and the Bank’s Financial Stability Committee will effectively be merged in function and rebadged as the Financial Policy Committee of the Bank. Like the existing councils, the new FPC will have representatives from prudential regulators and from Treasury. It will also have some outside representation on the 11-strong Committee which will meet four times a year other than at times of crisis.

On the substance of the FPC’s remit, there is a lot of stuff in the Treasury consultation about the way the FPC will operate its tools and a bit of fretting about interaction with monetary policy, but there is still rather little on the macro-prudential tools the FPC will be given. Obviously, this is the important bit and the paucity of information here is disappointing, since it does not go much further than the Bank of England’s discussion document on the role of macro-prudential policy from last November.

But the tools the government is thinking of giving the FPC are the following: Read more

Central banks in the east Asia Pacific region are planning closer co-operation managing their liquidity requirements, as each bank’s ability to provide liquidity “may be limited”. Some banks lack confidence that their liquidity management procedures could cope with renewed stress in the money markets. This from a study presented at last week’s EMEAP meeting, which ended on Friday.

That some of the 11 central banks lack confidence in their liquidity management is implied in the study’s executive summary: Read more

*Updated to included the originally missing bank, Sunday 10.21am

The results are in. Complaints have already begun that the stress tests weren’t stringent enough, but with the handy table below, you can fashion your own stress test… just pick your preferred Tier 1 ratio and click the column heading to sort. Read more

Chris Giles

The stress test results are out now and seven European banks have failed – five Spanish banks, one already failed German bank and one Greek bank. Over the next few hours and days, investors will digest the considerable information put out by the Committee of European Banking Supervisors and decide whether they agree with the following conclusion from CEBS.

The aggregate results suggest a rather strong resilience for the EU banking system as a whole and may appear reassuring for the banks in the exercise, although it should be emphasized that this outcome is partly due to the continued reliance on government support for a number of institutions.

If investors are similarly reassured, it should ease pressures in bank funding markets and limit the chances of a further liquidity squeeze on European banks. If not, the exercise could backfire. Read more

Canadian consumer price inflation has once again touched one of its target boundaries (2 per cent +/- 1 per cent). Consumer prices rose 1 per cent in the 12 months to June, following a 1.4 per cent increase in May.

Energy prices explain most of the drop. Energy prices rose 1.3 per cent between June 2009 and June 2010, having increased 6.2 per cent in the 12 months ending in May. Excluding energy, the CPI advanced 0.9 per cent in June, compared to 1 per cent in May. Read more

Confirmation that PIGS banks are the riskiest of the stress test batch, according to credit default swap data – just as banks from two of these countries reveal capital-raising plans.

Sort the stress test banks on the column headings below to see for yourself. Markit has kindly provided five-year CDS data for as many banks as possible, plus the year-to-date change (in basis points). (Quick reminder: the higher a CDS spread, the greater the cost to insure against default, i.e. the higher the market-perceived risk. A 300bp spread means it would cost $30,000 to insure $1m.) Read more

Chris Giles

No-one predicted that the UK economy would storm ahead quite so much in the second quarter. Initial estimates from the Office for National Statistics suggest the economy grew by 1.1 per cent between April and June compared with the previous quarter – far above the already pretty strong consensus of 0.6 per cent. The surprise came because services was measured to have stormed ahead in May, by 1 per cent.

There is no doubt that this is above-trend growth and it helps to explain the favourable tax revenue, labour market and survey data that have been a feature of the British economy for some time. Construction, business services, finance and government services were the biggest contributors to this growth rate. While government services cannot continue to contribute 0.2 percentage points to growth in future quarters, given the looming cuts, there is no reason to say other sectors will automatically fall back.

For the authorities, this unexpected good news really puts the cat among the pigeons. For the Bank of England, this is evidence the recovery is gathering steam and ultra-loose monetary policy is working. It also helps to explain a little why inflation has been overshooting. It will certainly make it much easier for the Monetary Policy Committee to argue that there is no need to loosen monetary policy in response to the tough Budget. And it will raise expectations of higher interest rates again, if this remarkable quarter of growth continues. Read more

The acting head of the Bank of Indonesia has been formally confirmed as its new governor, after facing tough questions from the House of Representatives on tax fraud. Read more

The central bank of China and monetary authority of Singapore have agreed a three-year currency swap valued at 150 billion yuan ($22.1bn), the People’s Bank of China announced today:

“In order to promote bilateral trade and direct investments, Bank of China and the Monetary Authority of Singapore on July 23, 2010 in Beijing signed a bilateral currency swap agreements. The size of the swap agreement for the 150 billion yuan / about 30 billion Singapore dollars. Agreement has a term of 3 years may be extended by mutual agreement.” (translated from the original using Google translate, h/t Bloomberg)