There were big issues for the ECB’s governing council to debate at its latest interest rate-setting, which has just ended. As its members gathered for dinner in Frankfurt last night, the US Fed was unveiling its $600bn quantitative easing plan. There were also the proposals for reforming eurozone governance to review.
News from the press conference Jean-Claude Trichet, ECB president, gave afterwards will be running soon on ft.com. But with everything else going on, I have the impression the council did not really consider the next steps in its “exit strategy”. Indeed, the discussion was deferred until December, when decisions are due to be announced.
Sadly, as a result, Mr Trichet’s introductory statement retained the same tortured language as I complained about last month on the future of its unlimited liquidity provision. Read more
It’s acronym war. Sovereign wealth funds in Norway and Russia are backing away from Irish and Spanish debt, sending bond prices down and yields up – in some cases to record levels. Rumour has it the ECB is trying to help by buying peripheral eurozone debt, which is slowing but not halting rising yields.
So the big question is: will the rescue fund be needed? The ECB’s largest weekly bond purchase was about $23bn, after all, and these SWFs between them command $663bn. What proportion of that is invested in Spain and Ireland, we can’t be sure, but the (very short) list of Russia’s remaining investable countries suggests the Russian holdings in each country were significant.
Take Ireland. Irish 10-year bond yields reached record highs of 7.53 per cent today. Not a lot has changed in the country itself. But (perhaps ill-timed) discussions on the shape of a permanent rescue fund in the EU have changed a great deal. First, the possibility of a debt restructure is alive and well; a permanent fund is needed, after all. Second, there is talk that bondholders will have to bear some of the loss in the case of a restructure. Default no longer means delay: it might mean a significant loss.
The point at which the Eurozone Financial Stability Fund would offer its services, and the rate at which it would lend are unknown. A mooted rate is 8 per cent, and Ireland seems perilously close. Two things here. Read more
For the first time since records began, core prices are falling in Switzerland. Core inflation, which excludes food, drinks, tobacco, seasonal products, energy and oil, recorded a 0.1 per cent drop during October, according to official data, the first fall since at least 1994. Swiss interest rates are expected to remain on hold into at least Q3 2011.
Consumer price inflation for the year was slightly below expectations, with prices rising 0.2 per cent year-on-year. The Swiss central bank has warned that overall inflation could also turn negative next year, but Citi analysts don’t think the country risks prolonged and harmful deflation: Read more
As expected, no change at the European Central Bank today. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1 per cent, 1.75 per cent and 0.25 per cent respectively.
The decision follows an earlier ‘hold’ decision from the Bank of England, and yesterday’s $600bn QE announcement from the Fed. Anyone doubting the rapid divergence of global interest rates need only consult other decisions made this week: Australia raised rates by 25bp and there are bullish noises from the Chinese following its recent rate rise. Iceland, on the other hand, cut rates 75bp this week.
As expected, the UK’s central bank held rates today and kept the stock of assets unchanged at £200bn.
The UK’s base rate has now been on hold for the longest period since the war. The previous longest-serving interest rate was a 2 per cent rate that stretched from 1939 to 1951. Read more
China’s central bank has signalled a shift toward rate normalisation, following its recent rate rise. The People’s Bank said it will “gradually guide monetary conditions back to the normal state while continuing the comparative loose monetary,” according to Xinhua. The remarks were made in the Bank’s third quarter Monetary Policy Implementation report released before the Fed meeting and not yet available in English.
China’s change in tone may usher in a new period of tightening, as inflationary pressures mount. The Fed’s decision to pump $600bn into the US economy will push down the dollar. Since the renminbi closely tracks the dollar, the Chinese currency will not be allowed to strengthen proportionately, and the extra money in the system will increase the supply of renminbi, adding to inflationary pressure. Read more