As eurozone leaders cheered Ireland’s attempts to bring its crisis under control, banks across the 16-country region provided a separate display of reviving financial market confidence. The European Central Bank reported it had rolled over much less than expected of €225bn in three-to-12 month loans to banks that expired on Thursday.
The news was a boost for the ECB, marking a significantly reduced reliance on the unlimited liquidity it has been pumping into the banking system since the collapse two years ago of Lehman Brothers investment bank.
On Monday, the IMF cannot contain its enthusiasm the UK’s harsh austerity plans. On Thursday it releases research warning fiscal consolidation “will hurt” and “are likely to be more painful if they occur simultaneously across many countries, and if monetary policy is not in a position to offset them”.
The IMF finds that, “fiscal consolidation equal to 1 percent of GDP typically reduces real GDP by about 0.5 percent after two years”. Does the IMF left hand talk to its right hand?
Sadly for journalists, the answer is “yes”. Both IMF documents hype-up their conclusions to give the appearance of deep contradiction. They are, in fact, consistent.
Robust growth, rising global prices and expanding credit have prompted Taiwan’s central bank to increase its key rates by 12.5bp. The move, effective Friday, takes the discount rate to 1.5 per cent, 50bp above its record low and equal to its 2003-4 low (see chart).
Easy credit has fuelled real estate and land speculation, which is clearly troubling the Bank: five of the 11 paragraphs are dedicated to the subject. Interest rates are only part of the Bank’s toolkit: several “targeted prudential measures introduced by the CBC are an integral part of the efforts to enhance risk management for real estate loans.”
The general reaction to Adam Posen’s speech on Tuesday has been to predict a 1-7-1 vote at next week’s Monetary Policy Committee with Mr Posen voting for a resumption in quantitative easing and Andrew Sentance voting for higher interest rates. I have no idea how the MPC will vote. But I do know that Mr Posen is not necessarily alone on the Committee in his central view that if demand is too weak, the risk is not just a temporary double dip but a persistent loss of output which can blight lives and an entire economy.
In fact, Mervyn King, the Bank of England governor made the same point at the February inflation report.
“I think if anything we’re more uncertain about how much spare capacity there is. It’s an extraordinarily difficult judgement to make, and I think the Committee – we had a long discussion of this – we were more inclined to think that this is a reduction in effective supply in the short run that could be reversed. So I don’t think we are confident that this reduction in supply capacity will necessarily persist. And indeed we are in a position where, if growth in demand were to be rapid, I suspect that much of the capacity which has been, quote, “lost”, would come back and be able to be used again, whether in the labour market or on capital stock.
Paradoxically, given its obsession with the subject, eurozone inflation looks the least of the European Central Bank’s worries at the moment. September’s annual inflation rate was 1.8 per cent (up from 1.6 per cent in August) according to Eurostat, the European Union’s statistical unit. That was exactly within the ECB’s goal of an annual rate “below but close” to 2 per cent. Energy and food prices probably accounted for the latest increase.
Although prices are generally considered “stickier” in the eurozone than in the US or UK, the region’s inflation rate is not often so on-target, even if the average since the euro was launched in 1999 is also more-or-less spot on (as Jean-Claude Trichet, ECB president, does not tire of reminding audiences).
The latest figure will further convince the ECB that it not need worry at this stage about deflation,