Monthly Archives: October 2010

Robin Harding

There is at least some chance that Monday 8th November will set an all time record for the most Fed speeches in a single day (maybe someone knows what the current record is?). That is the day that the FOMC will come out of blackout after what is likely to have been the momentous decision to launch a new round of quantitative easing. FOMC members will have their chance to explain, comment on, or condemn the decision and quite a few are likely to take their chance to frame the debate.

Here is what I expect to be the first of quite a few speech announcements: Read more

As the BoJ and ECB report easing credit standards, the Bank of Ireland has just proposed a new consumer code that includes stricter tests for mortgages and consumer credit. New provisions for housing loans include a 2 per cent stress test on the bank’s standard rate and stricter rules on what will and won’t count as proof of income. Self-certified declarations of income, for instance, would be out.

Another significant suggestion in the mortgage market applies to brokers. Mortgage intermediaries are not currently covered by rules that bind insurance brokers, for instance, to disclose the commission they receive on certain products. The new code would extend this requirement to them. Read more

In the early days of the telephone, human operators played a crucial role: you called the operator, asked for the Joneses at a certain address, and she called them for you and connected you. Telephones were never forecast to be ubiquitous: their number would be forever constrained by the cost and availability of human operators required to make the system work.

Few people – if any – envisaged automatic connection. When it finally came along, no doubt it was unpopular with telephone operators. But the sacrifice of their jobs – painful as it was – paved the way for the highly efficient system we know today. It is unlikely the telephone operators were consulted on the matter, much less given the deciding vote.

So there is a level on which it seems strange that EU policymakers should get to choose whether or not they remain a part of the fiscal sanctions process. Euro member states might be punished if they are fiscally irresponsible, going forwards, but then again they might not: it will depend upon votes by policymakers. The ECB’s proposal for semi-automatic sanctions has been thwarted: the decision to punish will remain lengthy – and political.

There is a problem with this. Read more

Growing divergence between countries’ economic policies is threatening the global recovery, Mario Draghi has said.”The economic recovery is strong in the emerging countries, weak in the United States and uneven in the euro area. The economic policy responses are divergent,” said the Italian central bank governor. As some countries intervene in currency markets and imbalances grow, floating exchange rates are “feeling the gap,” he added, concluding: “The world recovery itself is at risk.”

Mr Draghi, who is a contender to succeed Jean-Claude Trichet as ECB President next year, said the only option is for countries to co-ordinate their economic policies more closely. That co-ordination could include limiting current account imbalances, avoiding protectionist policies, encouraging flexible exchange rates and reducing the volatility of capital inflows to emerging markets. He also indirectly supported calls for semi-automatic sanctions in the eurozone. Read more

It might only be 0.1 per cent, but the aggregate rise in euro area unemployment in September masks wildly different experiences among the 16 member states. Only Germany and the Netherlands saw unemployment fall during September, both by 0.1 per cent. Most saw no change or a slight rise. The biggest rises in unemployment were Spain, Italy, Ireland, and – perhaps surprisingly – Austria.

So the headline change – of rising unemployment – is generally representative. It’s the levels that are misleading. Unemployment in euro member states ranges from 4.4 (Netherlands) to 20.8 per cent (Spain). Spanish unemployment continues to be worrying: it is high and it is climbing, steadily and quickly, month on month. Spanish unemployment has climbed an average of 0.2 percentage points in each of the past 10 months. Slovakia is also a concern in this regard, with unemployment now standing at 14.7 per cent, up 0.9pp on the year. (If we had recent numbers for Greece, they might also be on this list.) Read more

Interest charged on certificates of deposit have been raised 10bp to 0.60 per cent by the Danish central bank. The current account rate has also been raised by the same amount, and now stands at 0.7 per cent. The lending and discount rates remain unchanged at 1.05 and 0.75 per cent, respectively.

The move was triggered by rising short-term market rates in the euro area. Danish monetary policy is aimed at keeping the krone pegged to the euro, which has recently been strengthening. Pegging the krone to the euro means that Denmark inherits euro area inflation.

James Politi

One of the key debates within the Federal Reserve and US economic policy circles in recent months has been whether the high unemployment rate is mainly due to structural or cyclical factors.

In the end, the prevailing view is that although there are some mismatches in skills and geography in the US labour market, the main problem is a broad-based lack of demand, which will hopefully be aided by even lower borrowing costs – hence next week’s likely move towards a second round of quantitative easing.

But a survey out today by Challenger Gray & Christmas, may, on the margins, challenge that certainty. A quarterly poll by the Chicago-based employment group found that the “relocation rate” of American workers – or the percentage of job seekers who found a new position and moved to a different region as a result – hit a record low of 6.9 per cent  in the third quarter (the survey started in the 1980s).

To be sure, US labour market mobility – traditionally one of the strengths of America’s economic structure – has been on the decline. The annual average relocation rate in 1990 was 30.5 per cent, sliding to 22.9 per cent in 2000 and 13.3 per cent in 2009. But it has taken a plunge this year, with the average for 2010 now at 7.3 per cent. Read more

For the first time in two years, banks are reporting a net positive balance of credit demand from businesses. The net balance of demand rose by 13 percentage points for both large and small firms, though demand remains weaker for large firms that can use market financing as a substitute, according to the ECB Bank Lending Survey. Driving the rise was an increased need to finance inventory and working capital, as the chart shows, below; plus the negative contribution from fixed investment became less pronounced. Read more

UK house prices are going down very quickly, up very quickly, or mostly static (using Halifax, Rightmove and Nationwide indices respectively). But we should not discard indices when they diverge: the apparent confusion masks something useful. Below is a handy guide to interpreting UK house price indices.

Each index tells us something, and the differences between them tell us even more. Asking prices are rising (Rightmove, non-adjusted) while mortgage approval prices are falling, particularly at the lower end of the market (Halifax and Nationwide). The Rightmove index could suggest prices are about to start rising again, but is more likely accounted for by seasonal effects as Rightmove itself points out. Read more

Thai central bankers have a double cause for celebration today: projected Thai exports have been revised up for the rest of 2010 and ratings agency Moody’s has removed its negative outlook on the country’s Baa1 credit rating.

Today’s inflation report from the Bank of Thailand suggests an enviable track record, with “strong growth” in the second quarter “mainly driven by merchandise exports and private spending”. Thailand is not impervious to the global economy, however: the Bank speaks of weakening external demand and forecasts exports to fall back to trend in 2011. Read more

The central bank of New Zealand is in good company: it started raising rates in the middle of the year and is now adopting a wait-and-see approach. In doing so the Kiwis join Australia, Brazil, Canada, Malaysia, Norway, South Korea, Thailand and, arguably, Sweden. These large economies all followed the same pattern: large cuts in rates during the crisis; a period of flat rates; rate rises; and now flat rates again, at a slightly higher level than the last time, but not back to levels considered normal over the past ten years.

The world’s central banks are forming distinct groups in this regard. Chile, India, Israel and Taiwan are still raising rates; Iceland and South Africa are still cutting. Other large economies – such as the US, Europe and the UK – have neither raised nor cut their rates since the crisis. Arguably there are two groups to watch for further signs of global economic stress: one, with Japan and Mexico in it, contains central banks that have started cutting rates again after a pause. The other group doesn’t exist yet among major economies: that of rate-raisers who go on to cut Read more

The Bank of Japan has unveiled details of a Y5,000bn ($61.4bn) asset-buying programme that marks its return to an unconventional “quantitative easing” policy, while keeping rates on hold and lowering its economic forecast.

The details of the scheme approved by the central bank’s policy board on Thursday were in line with initial plans it announced earlier this month that have been welcomed by Tokyo policymakers keen to see stronger monetary action to support Japan’s fragile economic recovery and combat entrenched deflation. Read more

James Politi

Peter Orszag is certainly not worried about ruffling feathers in Washington. Last month, the former budget director under Barack Obama surprised the White House by taking a public stand in favour of a temporary extension of Bush-era tax cuts for wealthy Americans, which the administration opposes.

And today, Mr Orszag, now at the Council on Foreign Relations, offered a critical view of the Federal Reserve’s plans for a second round of quantitative easing in a blog post for the New York Times.

Mr Orszag’s view is that QE2 may “create more problems than it solves”, based on the notion that the effect of the Fed’s fresh round of monetary easing will be similar to “having the Treasury sell short-term T-bills and using the proceeds to buy back 10-year bonds”. Read more

Five times as many five pound notes will be dispensed by ATMs by Easter next year, according to Bank of England governor Mervyn King. That still won’t be many relative to ten- and twenty- pound notes: just 0.2 per cent of all bank notes dispensed are currently the five pound denomination.

Since 70 per cent of banknotes reach the public via cash machines, the absense of five pound notes from ATMs has constrained their circulation even though the Bank has 300 million of the notes ready. Opinion surveys show there is a particular demand for five pound notes. Read more

Rates have been held today by Poland’s central bank, but some additional liquidity will be drained from the system by the decision to increase the amount of capital banks have to keep with the central bank. The reserve ratio will be increased from 3 to 3.5 per cent, the bank said, via Google translate.

No further information was given as the press conference hasn’t happened yet.

Norway expects to hold its key rate at 2 per cent for several quarters, barring any shocks, the central bank said today. Reduced growth forecasts for the US and a world recovery “still shrouded in uncertainty” are dampening inflationary pressures. It’s becoming a familiar refrain among former rate-raisers: a moderate recovery domestically offset by continuing fears for trading partners.

Key rates are close to zero in many countries and the expected upward shift in interest rates has been deferred further ahead. Long-term interest rates are very low. The level of activity among Norway’s trading partners will probably be below normal for several years. This will contribute to holding down inflation abroad.

 Read more

Charlie Bean, deputy governor of the Bank of England, has just given a speech, which explains the current dilemmas of monetary and fiscal policy rather better than any I have read recently.

It is difficult to do it justice on the Blackberry, but well worth a read if you want an honest account of the difficulties both of forecasting the recession and of understanding the current circumstances.

Most important is that Bean is completely free of ‘structural deficits disease’ – the affliction under which policy makers behave as though they know how fast the economy can recover before inflation emerges or know the size of the fiscal hole that needs to be filled.

Instead, Bean says: “While judging the margin of spare capacity is always a problem for policy makers, it is particularly difficult at the current juncture because a banking crisis accompanied by a deep recession is likely to lead to some impairment of the economy’s supply capacity. Moreover, different approaches presently suggest very different degrees of supply impairment”. Quite. Read more