Daily Archives: October 21, 2010

James Politi

Conventional wisdom in Washington is that Ben Bernanke, Federal Reserve chairman, is pretty much alone in his quest to deliver a jolt to the US recovery.

With concerns about the deficit running rampant, Congress is unlikely to push through any significant fiscal stimulus anytime soon, particularly if there is a shift in power with strong Republican gains in the midterm congressional elections. As much as the Obama administration may want to move forward with new economic programmes, it is clearly hamstrung by the headwinds on Capitol Hill.

But not all may be lost…..

A research note by Michael Feroli, economist at JPMorgan, just highlighted some interesting ways in which fiscal policy could achieve what Charles Evans, president of the Federal Reserve Bank of Chicago, recently described as a crucial policy objective: lower short term real interest rates. 

Using inflation-linked bonds to forecast inflation? Beware – new research suggests they are only decent predictors in the short-term. Over long horizons, the relationship is actually negative:

We showed that the break-even inflation is informative about future inflation over horizons of 3, 6, 24 and 30 months. For the 3- and 6-month horizons, besides being informative, break-even inflation is an unbiased estimator as well. However, over the horizons of 24 and 30 months, the relationship between the break-even and future inflations is negative. On the other hand, for the horizons of 12 and 18 months, breakeven inflation has almost no power to explain future inflation. 

August saw a large reduction in debt repayments by individuals and businesses in the UK, which caused net lending figures to rise, according to the Bank of England. This is likely to be temporary, as further data suggest net lending declined again in September.

Net lending to businesses in August increased for the first time since February – by £0.3bn. This number – the difference between gross lending and repayments to lenders – reflects repayments falling more quickly than gross lending, which also fell on a quarterly basis. Businesses have been keen to repay their debt – to reduce leverage, perhaps, or to reduce the debt stock that will need refinancing for smaller businesses.

A similar picture is painted for secured lending to individuals. Net lending in August rose significantly – by £1.7bn – but other data suggest the net flows fell again in September. Again, the net figure does not suggest an increase in lending: gross lending remains broadly unchanged and even fell slightly, but repayments increased. Indeed, “household demand for secured lending for house purchase was reported to have fallen unexpectedly in 2010 Q3, according to the Credit Conditions Survey, though demand for buy-to-let investments rose slightly for the first time since 2008 Q3.” 

UK spending review

Other news

Loan demand has improved in Japan following the recent rate cut and promise of further stimulus. Demand for credit from consumers and local government became slightly stronger during October, while demand from companies weakened but at a far less severe rate than last quarter, according to a survey of senior loan officers from the Bank of Japan.

The picture wasn’t entirely rosy, with local governments’ demand strengthening at a sixth of the rate last month (see chart). And we must be wary of seeing a new trend from this datapoint or even in attributing the change in this volatile and subjective indicator to the rate cut. This is clear from the respondents’ view of next quarter, also shown on the chart: i.e. a slight weakening of demand. (Their predictive power last quarter was excellent.) Banks continue to ease their credit standards, and point to increased competition and efforts to grow as reasons for the change. 

No surprise from the monetary policy committee at Brazil’s central bank: its target overnight interest rate, known as the Selic, remains unchanged at 10.75 per cent a year, the committee announced on Wednesday evening after its latest meeting (held every six or seven weeks).

The Copom, as the committee is known, was unanimous in its decision, as were analysts in their expectation that this was what it would do. The bank was hardly likely to raise interest rates so soon after the finance ministry unleashed its latest weapons in the currency war, even if inflation expectations have been creeping up.

According to the central bank’s latest survey of market economists, published on Monday, consumer price inflation is expected to reach 5.2 per cent this year and 4.99 per cent in 2011, above the government’s target of 4.5 per cent. Expectations have been on the rise for the past five weeks. Meanwhile, economist at the bank’s “top 5″ institutions (those who most often get these things right) are predicting CPI of 5.31 per cent this year and 5.71 per cent in 2011. So it looks as though a big miss is on the cards, this year and next.