Daily Archives: October 29, 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: 

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. 

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. 

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. 

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.) 

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.