Daily Archives: August 5, 2010

Basel policymakers, beware: higher capital requirements for banks can increase systemic risk. Although risks are lower for each bank individually, “systemic linkage” between the banks is higher. Depending on the banks’ balance sheets, this can mean higher systemic risk.

Researchers at the Dutch central bank explainRead more

Ralph Atkins

Jean-Claude Trichet, European Central Bank president, was in sprightly form at this month’s press conference, which has just finished. The economic data was proving better than expected, although a “less buoyant” second half of the year was expected and the ECB president stressed that “we should not declare victory”. He also seemed keen to assuage some of the gloom about the US outlook. But perhaps it also helped that Mr Trichet is off for some rest in Saint-Malo, the rocky seaport on France’s Brittany coast – his regular holiday retreat.

Underlining the sense of cautious optimism, Mr Trichet also suggested the ECB itself should receive plaudits for the improvement in eurozone prospects after the turmoil of the past few months. Usually, central bankers are wary of boasting. If it were the case Europe’s monetary union were to emerge from its worse crisis in its 11-year history without a negative impact on the real economy, Mr Trichet said, “perhaps part of the credit could come to the ECB”.

Most of the rate rises expected in India have already happened, if the RBI’s quarterly survey of professional forecasters is any indication.

The repo rate, currently 5.75 per cent, will end the financial year 2010-11 slightly higher than previously thought, at 6.25 per cent, ending the following year at 6.5 per cent. The reverse repo rate, currently 4.5 per cent, is still expected to finish FY 2010-11 at 4.75 per cent, but is expected to rise considerably to 5.5 per cent by end 2011-12 (not shown on chart). Read more

The European Central Bank has kept its rates on hold – the main refinancing rate at 1 per cent, marginal lending facility at 1.75 per cent and the deposit facility at 0.25 per cent.

As normal. No change, no statement.

We can only presume that the Monetary Policy Committee believes doing nothing was the best way to balance the risks of persistently high inflation against the risks that economic pain from fiscal tightening will reduce inflationary pressure too much. Read more

Greece is set to receive its €9bn second tranche of its Europe-IMF bail-out, following payment of the first tranche in May. The first quarterly review mission visited Athens from 26 July – 5 August 2010, declaring itself impressed with fiscal and structural reforms. The staff-level agreement made in Greece requires formal approval to release the funds.

Access to capital markets remains a key challenge – Greece can only access short-term funding at the moment – and the review encourages continued policy implementation to regain access:

Our overall assessment is that the programme has made a strong start. The end-June quantitative performance criteria have all been met, led by a vigorous implementation of the fiscal programme, and important reforms are ahead of schedule…

The contraction in the economy is in line with May programme projections: GDP is expected to decline by 4 percent in 2010 and some 2½ percent in 2011. Inflation is higher than expected – we have revised our estimate for 2010 to 4¾ percent – pushed up by indirect tax increases. With no signs of second-round effects, inflation is expected to decline rapidly…

 Read more

The Federal Open Market Committee meeting next Tuesday promises to be the most interesting for about 12 months, since the outcome is far from certain.

The recent slowdown in the US economy seems to have caused some members of the committee to soften their stance on monetary policy, and the markets have begun to speculate about a possible easing in policy. If this comes, it is likely to be very slight, since I doubt that the Fed has seen enough evidence yet to convince them that the economy is slowing in a dangerous way.

However, some members of the committee seem to be getting increasingly worried that the US may be about to fall into a deflationary trap, like the one which has affected Japan in the last decade. James Bullard, the president of the St Louis Fed, released a very interesting paper last week which analyses the Japanese precedent in some detail. Although he does not consider this the most likely development in the US, he does think that it is sufficiently probable to require contingency planning, in much the same way as the government might prepare for a terrorist attack which it hopes and expects will not happen. Read more