Monthly Archives: December 2010

High inflation expectations have nudged Hungary’s central bank to increase the base rate again. At a scheduled meeting, the central bank surprised markets by announcing a rise of 25bp to 5.75 per cent. The move is effective tomorrow, Tuesday December 21.

As with many countries, food prices have pushed prices up recently. Until a couple of months ago, inflation was falling in Hungary, above but toward the 3 per cent target from a recent high of 6.4 per cent in January. Now the CPI is at 4.2 per cent y-o-y, up from 3.7 per cent to August. Read more

The European Central Bank has expressed concern that Ireland’s rushed bank rescue package may interfere with the Frankfurt institution’s operations to provide funds in support of the eurozone financial system. The euro’s monetary guardian has “serious concerns” that flaws in the Irish bail-out legislation would usurp the ECB’s rights over the collateral proffered as security for liquidity, according to a position paper posted on the ECB’s website.

The warning reflects ECB fears of the risks involved in providing liquidity to Ireland’s banks. The most recent data show Irish banks having €136bn ($179bn) in loans outstanding from the ECB – a quarter of the total in the eurozone – and €45bn in emergency liquidity assistance from the Irish central bank. To obtain liquidity, eurozone banks have to put up assets as collateral. Read more

The ECB and Bank of England have announced a temporary liquidity swap agreement in which the UK central bank may provide up to GBP10bn to the ECB in exchange for euro. The agreement allows sterling to be made available to the Central Bank of Ireland as a precautionary measure.

A small sigh of relief from London today. Bank of England governor Mervyn King is to be the vice-chair of the newly launched European Systemic Risk Board, established yesterday and whose inaugural meeting takes place January 20, 2011. Relief, because the appointment suggests eurozone concerns won’t dominate the Board, and that the UK’s banking-driven economy will be represented.

Relief, however, will be limited in some quarters. There is a relative lack of bankers and technical experts, who really understand the tricks of the banking trade. Even if there are ex-bankers among the various levels of hierachy and sub-committees, it is not the same as plugging the institution directly into the banking sector. This is not an oversight but part of the Act: “No member of the General Board (whether voting or on-voting) shall have a function in the financial industry.”

There are two Advisory Committees because “the composition of the ESRB will be very high level …[and] it can happen that the ESRB needs to draw on more specific competences than the ones usually available at the ECB.” The Technical committee comprises representatives nominated by central bankers and regulators – there will be about 60 of them. The Scientific committee, which should have 15 independent experts – though suggested categories are academics, trade unions and small businesses. Read more

British banks should stop paying large cash bonuses and dividends in order to increase their ability to resist the threat of a wider and deeper eurozone crisis, the Bank of England demands on Friday in its latest Financial Stability Report.

Officials worry that although banks have improved their ability to absorb losses, the interconnectedness of the European banking system will amplify losses from peripheral economies, such as Greece, Ireland and Portugal. Read more

It jumped last but – not to be outdone – Moody’s has slashed five notches off its Ireland rating, taking it to Baa1 (which is equivalent to Fitch’s BBB+ and about three notches above junk). They’ve also slapped a negative outlook on it, meaning a further downgrade is likely in the next two years if there is no improvement. A multi-notch downgrade was likely – the ratings agency said so itself – though it has come relatively late in the game, after similar cuts by S&P and Fitch.

S&P now offers Ireland the highest rating at A, two notches above Fitch and Moody’s. Under the original ECB collateral requirements of A-, this would mean Ireland’s bonds could still be used – just – as collateral at the central bank. As it is, the “temporary” lowering of collateral requirements to BBB- is still in force, so Ireland need not worry. (As with Greece, the ECB would probably make an exception for Ireland even if its ratings were cut below this level.) Read more

€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

Chris Giles

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

Robin Harding

Tim Duy says that the the Fed is behind the turning tide of economic data and “remains locked into a forecast that anticipates output growth hovering near potential”.

“In short: In general, the data flow of the last eight weeks is clearly encouraging. To be sure, not every release, like the employment report, is perfect. But enough are perfect that forecasters are quickly reversing the downgrades made just a few months ago during the mid-year slowdown. Will the data suddenly turn on us again? Always possible, always something to watch for, but I don’t think that should be the expected path. Right now, the data suggest the US economy might start firing on more than just a few of its eight cylinders. A little optimism is justified. Don’t expect the Fed to reverse course soon – they have yet to embrace the possibility that the economy is set to grow at something above trend. But a data flow like this cannot be ignored forever. Look for more glimmers of hope creeping into Fedspeak in the weeks ahead.”

I agree with most of Tim’s analysis but I don’t agree that the Fed has an overly negative forecast. The Fed’s forecasts have, if anything, been overly optimistic – but the data have moved in their direction and private forecasters are moving up to meet them. Put it another way: the tide of the data may have turned but the FOMC is quite a long way up the beach. Read more

Robin Harding

The Cleveland Fed has updated its inflation expectations model after the release of the November CPI. It shows a tidy rise across all time horizons.

At the ten year horizon, inflation expectations rose to 1.64 per cent from 1.51 per cent, an improvement but still well below the 2 per cent that prevailed earlier this year when nominal yields were last at this level. The same holds true for 10yr TIPS spreads: Read more

Say what you will of the dizzying rise of South Africa’s rand, it has certainly helped to restrain inflation by keeping a lid on import prices. Consumer price inflation – which was over 10 per cent in late 2008 – has been running towards the bottom of the Reserve Bank’s target range, 3 to 6 per cent.

But data released this week suggest that inflationary pressures may be starting to build again – and that they could return with a vengeance when the currency weakens. At 6.2 per cent, November’s producer price inflation figure, released on Wednesday, surprised on the upside. So did the previous day’s consumer price inflation number of 3.6 per cent. Read more

Ralph Atkins

The European Central Bank has a new target! Not only does it want to control inflation, it wants to save the environment, too. It has just published its first “environmental statement”, signed off by Vítor Constâncio, vice-president, which reveals a goal of reducing its total carbon footprint by 15 per cent in 2011 compared with 2009.

The ECB is hardly a smoke-belching industrial company (please, no jokes about hot air production). But it does operate three high-rise buildings in Frankfurt and has more than 1,500 staff, quite a few of whom travel around the world regularly. The euro’s monetary guardian also produces a lot of weighty, paper-consuming publications.

So how is the ECB doing when it comes to greening its operations? Read more