Daily Archives: December 16, 2010

€5bn is the number, so reports of a doubling of the ECB’s capital were not far wide of the mark. The ECB’s €5.76bn subscribed capital will be €10.76bn as of December 29, though the paid-up capital will be introduced in phases. €5bn was the maximum capital increase the ECB could ask for without politicians’ approval.

On December 29, the ECB will receive the first of three cash infusions for €1,163,191,667 from the 16 eurozone national central banks (NCBs). The remaining two instalments will be paid at the end of 2011 and 2012, with all three totalling €3,489,575,000, or nigh on 70 per cent of €5bn, coming from eurozone NCBs.

Non-euro EU subscribers – such as the UK – normally cough up just 7 per cent of their subscribed capital, which goes toward the costs of running the European System of Central Banks, of which all EU countries are a part. Non-euro subscribers receive no profit share in the good times, but risk no share in the losses either.

This minimal percentage has been almost halved for non-euro countries, from 7 to 3.75 per cent, essentially keeping the value of their current shareholding static. Read more

As expected, Turkey’s central bank has cut its key rate as part of a two-pronged strategy to address hot money and inflation. The following information is from the Bank, courtesy of Google translate:

“The bank said the measures, taken in tandem with hikes to the lira required reserve ratio due to be announced on Friday, would not have an expansionary effect on monetary conditions,” reports Reuters. Read more

Poland’s latest minutes show something interesting, but we lack the information to interpret quite what. At the last rate-setting meeting, the Polish central bank held rates. Minutes just released showed that, as is now the norm, “some members” proposed a 50bp increase in the refinancing rate. This time, however, in addition, “some members” proposed a 25bp increase as well. This did not happen last time.

Minutes do not divulge who these members are, or even how many of them there are. Thus we cannot figure out whether one 50bp rate-rise proponent has softened their view, or whether all 50bp-rate-rise advocates stood firm, and someone who previously voted for a rate hold is now in favour of a rise. It’s a change, but whether it’s bullish or bearish compared to last month, we cannot tell. The most we can surmise is that at least two members of the ten-strong council are in favour of raising rates. Read more

Markets are already expecting a cut today: yields on Turkish government bonds are at record lows following hints of a new strategy from the country’s central bank. That strategy could include cutting rates to combat hot money, while raising reserve requirements to mop up the extra liquidity that this would create.

Lex points out the irony of cutting rates to slow the economy in an article entitled: Turkey: an anti-stimulus stimulus. The move, if it happens, is quite a gamble. Cutting rates, with the threat of more to come, may discourage yield-hungry foreign investors, as intended. But will government and the banks play their part in restraining the consumption that will be encouraged by lower rates? It’s possible, says Lex,but such virtue is unlikely with an election looming and little tradition of financial restraint.” If the plan backfires, expect inflation. Read more

Adam Posen, external member of the Bank of England, has just given a speech arguing that the current fuss about inflation is misplaced. When MPC members fret about good output data or the latest signs of rising household inflation expectations, they should get a grip and look at longer term trends. It is a cogent argument, welcome in reminding everyone to be wary of data blips, and will certainly go down badly with some on the MPC.

Why? Well, in his typical robust style Mr Posen pulls few punches. He suggests that Andrew Sentance, the Committee hawk, is akin to a US climate change-denier who feels the cold chill of one winter’s day and declares all climate scientists wrong. Others on the Committee are rather like a naive foreigners who see a good run of results from Newcastle United and think the team will win the premiership.

“Yes, it is possible that UK supply capacity disappeared despite relatively low increases in unemployment and liquidations, that a large and ambitious fiscal consolidation undertaken at a time of already low interest rates will not be a drag on consumption, that declining unit labor costs do not presage a meaningful decline in inflation, and so on. It is also possible that our recent snows mean that global warming is not happening, and recent performance in matches mean that Newcastle will win the Premiership. Possible, but I would not bet on it, and I certainly would not make policy on the basis of such a forecast.”

 Read more

Liquidity measures are given their own paragraph in today’s monetary policy announcement from the Reserve Bank of India, as tempering inflation allowed the central bank to hold rates. The (temporary) end to the Bank’s rate normalisation programme was expected after the governor gave a strong hint last month.

“The extent of [liquidity] tightness has been beyond the comfort level of the Reserve Bank,” said the statement, which announced two liquidity injection measures. There has been a cash crunch in the banking sector since at least early November, when the RBI extended temporary easing measures.

The first measure, which has been used temporarily before, is to reduce the amount banks have to keep with the central bank. The statutory liquidity ratio will be permanently reduced from 25 to 24 per cent with effect from December 18. The last time this was done, one estimate equated the reduction to an additional 45,000 crore Rs ($10bn) liquidity.

The second measure Read more

Several news outlets are reporting bullish overtones from Norway’s central bank, as it today kept rates on hold for the seventh month. The phrase they refer to is this: “the key policy rate should not be kept low for too long.”

This phrase was also used in October, however, and should not prejudice the reader against data on inflation and exchange rates that encourage a continued low rate. Norges Bank’s phrase might be to manage inflation expectations, or its definition of “too long” might simply be longer than that of the average journalist; but it would be quite odd if the central bank were to raise rates imminently. The bank itself says: “Both the consideration of bringing consumer price inflation up to target and the consideration of stabilising developments in output and employment imply a low key policy rate.”

Norway’s y-o-y inflation is 1.9 per cent, against a target of 2.5 per cent. It is projected to fall below 1 per cent before rising next year, with the outlying scenarios including deflation (see chart, right). Norges Bank is clearly worried about falling inflation. At the last monetary policy meeting in October, the Bank mentioned a fear that “financial imbalances … may trigger abrupt and sharp falls in output and inflation.” Read more