Monthly Archives: December 2010

Merry Christmas from the Money Supply team!

We’ll see you again on January 4, 2011.

“The strongly increased risks of central banks may act as a constraint on the room for manoeuvre in future monetary policy.” That is the worst case scenario laid out by new research from the Bank of Finland. The thoughtful, comprehensive analysis of eight central banks looks at unconventional tools adopted during the crisis, concluding: “The actions by central banks during the crisis raise a number of questions concerning exit from the measures taken, the impact of the measures, central banks’ risks and independence and their governance structures.”

The turn of the year – and the final post on this blog for 2010 – make a summary of this paper seem appropriate. Which of the unconventional tools – if any – will be discarded in 2011? Read more

It’s all change in the Ukraine. Parliament has approved the replacement of the central bank chair with his deputy a year before his term had been due to end.

President Yanukovich made the request to replace Volodymyr Stelmakh on Monday, according to a statement on his website. Mr Stelmakh resigned this morning, and parliament approved the chairmanship of 34-year old Serhiy Arbuzov, with 282 of 450 legislators voting in favour. Mr Arbuzov has been first vice-governor since September of this year. Prior to this, he headed up PAO Ukrainskyi Biznes Bank, the country’s 63rd largest lender, which is based in the eastern Ukrainian city of Donetsk, Yanukovych’s home town, according to Bloomberg. Read more

Interest rates might need an “adjustment” to stem the rise in consumer prices, Brazil’s central bank has said. The country’s key selic rate has increased several times since the cuts that followed the financial crisis, but levelled off at 10.75 per cent in June.

The Bank’s inflation report, released yesterday, suggested such a rise was imminent:

Under the inflation targeting regime, deviations in projected inflation from the target of such magnitude suggest the need for implementation, in the short-run, of an adjustment in the basic interest rate, in order to control the growth pace mismatch between the domestic demand and the productive capacity of the Brazilian economy, as well as to reinforce the anchorage of inflation expectations.

Some analysts have interpreted this as a January rate rise.

Banco Central do Brasil explained that the balance of risks associated with inflation had “evolved unfavorably since the release of last Report”. Read more

Poland held rates but appeared bullish; the Czech Republic held; and Croatia has cut the rate it pays to commercial banks on their mandatory monetary reserves in local currency to 0.25 per cent from 0.75 per cent.

Meanwhile, Hungary has received a ticking off from the ECB for tardy timekeeping, and the Ukrainian President is apparently trying to replace his central bank governor with an ally. Read more

Hawkish comments from Poland’s central bank governor, following ambiguous data from the last minutes. The Bank kept its reference rate on hold at 3.5 per cent, as expected, but comments from Marek Belka suggest a rate rise is on the horizon.

Commenting on what he said was a decreased risk of strong capital inflows into Poland in the event of an interest rate rise, Reuters reports the governor telling a news conference: “This changes slightly the risk balance in favour of rate hikes or in favour of the start of a tightening cycle.” Mr Belka also reiterated his view that the Polish zloty has strong potential to appreciate. Read more

There are 5,193 more central bankers now than last year, apparently, with the world total standing at 340,342. This from data contained in the Central Banking directory 2011, published today, which suggest the 1.5 per cent rise this year is universal, evident across regions and among large and small central banks.

The expansion is a modest reversal of the trend in recent years. Central banker numbers have been dwindling, by 241,900 or 39 per cent over the past decade. Read more

The mushy middle on the Monetary Policy Committee is still dominant. Seven of the nine members voted to keep interest rates at 0.5 per cent at the December meeting, with Adam Posen dissenting by calling for more quantitative easing and Andrew Sentance preferring a tightening of monetary policy. So far, so boring.

But in this unchanged stand off, the majority of the Committee have moved modestly towards greater concern on inflation. The key sentence is this: Read more

Ralph Atkins

A final few market operations to oversee today and Thursday, and then the ECB will shut down for Christmas (although the euro’s monetary guardian insists, of course, it is “permanently alert”).

ECB policymakers need a good rest: 2011 could be stressful. The eurozone debt crisis remains far from resolved; what happens to Spain in coming months could prove crucial. And probably in the next six months we will learn who will succeed Jean-Claude Trichet as ECB president when he steps down in October.

With all that going on, setting interest rates might seem the easy part of the ECB’s work in 2011. But it does not make it any easier to forecast what could happen. Read more

The Posen-Sentance dichotomy continues. Minutes from the Bank of England show a repeat three-way split among voting patterns, in the formation 1-7-1. Adam Posen wanted to keep the base rate at 0.5 per cent, but increase quantitative easing by £50bn; Andrew Sentance wanted to raise the base rate by 25bp and keep the stock of assets at £200bn. The remaining seven between them voted, as we know, for no change.

Minutes also show increased uncertainty on inflation:

The MPC noted that inflation was likely to rise further over coming 6 months and could well reach 4% by the spring, somewhat higher than the November Inflation Report central projection.

The Committee’s central view remained that the persistence of spare capacity within the United Kingdom, which reduced underlying price pressures, was likely to cause CPI inflation to fall back as the impact of temporary factors waned. But the pace and extent of that fall in inflation was highly uncertain and was likely to depend upon a number of factors.

 Read more

Remember how every man and his dog were speculating about an imminent interest rate hike in China?

Well it seems most analysts have now changed their tune.

From Bloomberg on Monday:

China’s benchmark interest-rate swaps fell for the third day on speculation policy makers will refrain from raising interest rates before year-end. Bonds rose.

Banks’ reserve requirements and central bank bill sales may be better tools for controlling inflation than interest rates because higher rates may attract capital inflows and pressure repayment of local borrowings, reported the People’s Daily today, citing Ba Shusong, a researcher for the nation’s cabinet.

The amount of cash lenders must set aside as reserves will rise by 50 basis points from today, the sixth increase this year.

“We don’t see a further interest-rate hike by the end of the year as the central bank already increased the reserve requirement ratio,” said Emmanuel Ng, a strategist in Singapore at Oversea-Chinese Banking Corp. “Bill auctions, where yields haven’t been that aggressive, show there’s no rush to raise interest rates.”

Market consensus is now increasingly suggesting that China will restrict itself to quantitative tightening rather than deploy any outright interest rate hikes to cool inflation. And, if rate rises were to come, they would only be very gradually implemented.

 Read more

Merry Christmas, banks. If you start running low on dollars in the new year, your central bank will now be able to access the greenback via currency swaps just extended by the Federal Reserve. For several countries, anyway.

Temporary swap agreements, set up most recently in May with the ECB, BoE, BoJ, SNB and Bank of Canada, were due to expire in January but have now been extended to August 1, 2011. These agreements allow a central bank to receive dollars in return for their own currency, which are then converted back at the same exchange rate at a later day (be it overnight or up to about three months). It’s a liquidity-providing, cash-crunch-prevention measure.

The swap lines are essentially unused at present. Only $60m is outstanding. So why extend? Robin, who’s writing on this for the paper as I type, says the move clearly reflects concerns about Europe. That would explain the curious coincidence of a BoE-ECB swap being set up on Friday (specifically to provide sterling to Ireland). Read more

Keeping the show on the road became the G20′s main achievement at the acrimonious Seoul summit in November. But if you have to keep pedaling to stop the global trade imbalances bicycle from toppling, a new speech by Andy Haldane of the Bank of England demonstrates that the road ahead is uphill.

It is difficult to say much fresh about trade imbalances. Everyone knows they are big; they are a threat to the global economy; they played a part in the recent crisis; and countries fundamentally disagree over who is responsible for their existence and who should change policies to reduce their threat.

But Mr Haldane has an interesting stab at the subject, showing he has ambitions extending considerably outside his current responsibility for financial stability.

As a current account deficit must, by definition, also represent a situation where investment is greater than savings (and vice versa), he Read more

Lisbon might soon have more difficulty accessing debt through the markets, precisely because Moody’s is worried that it will. With rather circular reasoning, Moody’s said it was placing Portugal’s A1 rating on downgrade review because of “concerns about Portugal’s ability to access the capital markets at a sustainable price”. Yields will no doubt rise further on the news.

Moody’s is also worried about the effect of bank support on the government’s debt, as well as the impact of austerity measures. The rating looks perilous, then, since Moody’s fears will rise whether Portugal cuts or spends. Read more

The Irish cost of debt is now above the levels that prompted the bail-out. Yields on ten-year bonds closed at 8.4 per cent on Friday and rose higher today. On November 23, yields of about 8 per cent prompted the bail-out (and then rose higher…).

There are further signs of tension in Ireland, which it seems the bail-out has done little to allay. First, a £10bn swap was set up on Friday between the Bank of England and the ECB in order to provide Irish banks with sterling liquidity that they might otherwise struggle to find.

As the ECB worries about Irish bail-out legislation, and the EU rushes to raise the cash, bond yields in Ireland, Greece and Spain seem to mock these administrative efforts; the latter two again at record highs.

If the legal status of euro area bonds were the major cause of market nerves – rather than Ireland’s fiscal Read more

After reaching a modest Ireland-crisis-high of €2.7bn last week, the ECB’s bond purchases have fallen sharply to €603m. With the cost of debt in Spain and Greece again reaching record highs, is this sort of quantity enough?

Many will say not, especially after bond purchases during the Irish bail-out were revealed last week to be just €2.7bn. What with the bail-out panic and the ECB quadrupling the minimum bond purchase size from €25m to €100m, most had expected a far larger increase in the central bank’s shopping bill. Of course, bearish markets can be subdued with large rumours instead of large purchases – but it’s not a strategy that can work for long.

At the hawkish end of the consensus, the Confederation of British Industry is forecasting a rate rise in the second quarter of next year, with rates rising gently then more steeply to mid-2012, leaving rates at 2.75 per cent by Q4 2012.

“The CBI expects inflation throughout 2011 to be higher than previously forecast, reflecting greater inflationary pressure from energy and commodity prices. CPI inflation will significantly exceed the Bank of England’s 2 per cent target in 2011 for a second year, mainly due to the impact of higher VAT. This upward push to inflation will end by Q1 2012, when inflation is forecast to dip just below target before ending the year at 2.4 per cent,” argues the business lobbying group. Read more