Daily Archives: December 6, 2010

Chris Giles

These are the clearly audible words spoken by Michael Fallon, member of the Treasury Select Committee, to Andrew Tyrie, the Committee chairman at the end of the evidence given by Robert Chote, new chairman of the Office for Budget Responsibility.

Why did Mr Fallon MP call for the return of the Treasury’s chief economic adviser rather than the shiny new representative of the independent OBR?

Briefly, because Mr Chote irritated the Committee by playing with a dead straight bat, avoiding questions and talking round issues. The Committee was upset that the OBR had not performed sensitivity tests on not-so-extreme scenarios such as large exchange rate fluctuations following a crisis in the eurozone and that the scenarios tested by the Office were pretty benign.

The result was much as with Martin Weale’s appointment to the Monetary Policy Committee Read more

We’ve said a few times that there are right ways and wrong ways to criticise QE2. One of the wrong ways, it seems to us, is to say that the policy hasn’t had its intended affect on markets.

The goal of quantitative easing at the zero lower bound isn’t to lower nominal treasury yields (though that’s not a surprising immediate effect) but to lower expected real yields by raising inflation expectations.

As St Louis Fed president James Bullard explained last Thursday, so far so good. Since Bernanke gave his Jackson Hole speech telegraphing further QE, real interest rates are lower, inflation expectations and US equities are higher, and the dollar has broadly depreciated against other currencies.

Or if you want to look at it another way, at the very least the expected probability of deflation is lower than it was earlier this year — as you can see in this new chart from MacroblogRead more

ECB support for struggling sovereigns is at its highest since July. Data just released show that €1,965m bonds bought by the European Central Bank settled last week.

This number is expected to continue to rise. The FT reported on Thursday that the ECB was buying Portuguese and Irish bonds in €100m tranches, four times the previous clip size.

Hungary’s credit rating is just one notch above junk since rating agency Moody’s cut two notches and warned of further downgrades. Concerns about fiscal sustainability led Moody’s to cut to Baa3, now in line with S&P. Fitch remains one notch above its peers, but is expected to cut by the end of the year. The cut places Hungary’s rating just a notch above that of Greece.

Last week, Hungary raised its key interest rate 25bp to 5.5 per cent to combat rising inflation expectations. It was the first rise since October 2008, and was largely unexpected by the markets.