Monthly Archives: January 2011

Bulgaria has nudged up its interest rates. The base rate will be 0.19 per cent in February, up from 0.18 per cent in January and December, and 0.17 per cent the month before that.

The country pegs its currency, the lev, to the euro, and hopes to join the single currency in the next few years. Initially, the aim was for 2012, but now 2013 or even 2014 look more likely. Read more

Robin Harding

December core PCE came in at at a new low of +0.7 per cent on a year ago. The Dallas Fed trimmed mean PCE was steady at +0.8 per cent on a year ago, but the six-month annualised rate ticked up to +1.0 per cent, which is an interesting trend.

I post these numbers so often because an end to disinflation is the goal of QE2 that remains to be achieved. Plenty of analysts anticipate a stabilisation – in particular they expect the large housing component of PCE to stop dragging it down – but there are still only hints of this in the data.

If core PCE continues to drift downward in the next few months to, let’s say, 0.5 per cent in April, then I think there are FOMC members whose instinct would be to go beyond $600bn. Read more

Eurozone inflation has pushed further above the European Central Bank’s target in January, exacerbating its discomfort in the wake of strong rises in oil and food prices.

Annual inflation in the 17-country region reached 2.4 per cent, the highest for more than two years and clearly beyond the ECB’s target of a rate “below but close” to 2 per cent, driven in part by rising inflation in GermanyRead more

Back to zero for the ECB, as latest data reveal the central bank didn’t buy any government bonds settling last week under the Securities Markets Programme.

Yields on government bonds – which ECB purchases act to depress – remain near record highs in several southern European countries, and in Belgium. In Portugal, in particular, yields remain above the important psychological level of 7 per cent. Read more

Russia has surprised markets by holding rates after a number of bullish hints in recent months. The central bank has, however, raised reserve requirements, joining a long list of emerging markets adopting this as their favoured tightening tool.

Bank Rossii is targeting hot money with the move: it has raised the reserve ratio more sharply for corporate non-residents than for ruble-only, individual or other types of liability. From February 1, banks will have to store 3.5 per cent of non-resident rouble and forex corporate liabilities with the central bank, a 1 percentage point increase. Other types of bank liability – such as those in roubles from individuals – will be raised half a point to 3 per cent. Use the dropdown on the chart below to explore historical reserve requirements at the Bank of Russia.

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MPC member Martin Weale’s next vote is unclear, as forthcoming economic data will need to be balanced against the longstanding risk of higher inflation.

In an article for the Guardian, Mr Weale explains his concerns about price rises, saying: “There is a risk that continuing rapid economic development in China and elsewhere will lead to persistent upward pressure on commodity prices,” which could lead to higher inflation expectations. “The cost of a small rise now,” he says, “would be lower than the eventual price of addressing higher ingrained inflation.”

At the last MPC meeting, Mr Weale joined Andrew Sentance in voting for a 25bp rate rise. Shortly thereafter, preliminary UK growth figures suggested the economy shrank in December – a surprise to analysts, economists and journalists alike. A contraction – if sustained – removes much of the basis for a tightening of monetary policy, leaving Mr Weale’s decision seemingly at odds with economic reality.

Central bankers are not fortune-tellers, though, as Mr Weale’s article points out. “Economic policy needs to respond to the facts; to ignore them would be absurd. But how much weight should be placed on the most recent data, which may be erratic and subject to revision?” Some may find Mr Weale’s indecision alarming, but personally it is a relief to see central bankers tussling with so many factors. Their struggle is a sign of their awareness. Read more

Robin Harding

I went for strong in writing up today’s preliminary Q4 numbers but there was enough going on in the release to argue it either way.

The case for strong is this:

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Israel’s foreign currency reserves stood at $70.9bn at the end of December, according to Bloomberg – but they may well be needed.

Central bank governor Stanley Fischer has warned that capital inflows could reverse sharply, leading the Bank to sell its reserves to try to slow any sudden weakening of the shekel. “One of the things that does concern us is that we have a lot of money coming in,” Mr Fischer told Bloomberg Radio in Davos. “If opinions change quickly money goes right back out and it could go out very fast.” Read more

Ralph Atkins

The European Central Bank still faces a stand-off with Dublin. The FT reports today the warning by Lorenzo Bini Smaghi, an ECB executive board member, that Ireland cannot expect to renegotiate the terms of its bail-out. The matter has become an issue in the country’s election campaign.

RTE, the Irish broadcaster, has now posted the full interview with Mr Bini Smaghi. It’s a great example of slick, central bank transparency. Diplomatically but firmly, Mr Bini Smaghi warns Ireland’s politicians that if they imposed losses (a “haircut”) on Irish senior bank bondholders, “immediately you would have a run on the banks”. Irish account holders themselves would worry about the security of their savings. The end result could be a collapse of the banking system – and the Irish taxpayers would face an even larger bill.

Irish taxpayers had to bear responsibility for the crisis, he made clear. They supported a low tax system that created the good times; it was only right that they should shoulder the cost when things went wrong.

Mr Bini Smaghi denied the ECB had pushed Ireland into last year’s bail-out, Read more

Alexandre Tombini, Brazil’s new central bank governor, has sought to establish his credentials as an inflation fighter with the release of a tougher-than-expected statement from the central bank. Mr Tombini, a central bank technocrat, replaced established hawk Henrique Meirelles in November. Analysts had feared the appointment might signal a closer relationship between central bank and finance ministry, and, ultimately, less rigour in monetary policy.

In the minutes of the central bank’s policy meeting of last week, released on Thursday, the institution warned about the need to restrain wage growth and public spending if Brazil is to meet its inflation targets. Wage rises were singled out as a particular risk facing the economy. [Bloomberg reports today that consumer, construction and wholesale prices rose 11.5 per cent in the year to January, exceeding expectations.]

“The prospective scenario for inflation has evolved in an unfavourable manner,” the central bank said in minutes from the last copom meeting, at which interest rates were raised 50bp. “The committee notes relevant risks arising from the gap in supply and demand.” Early indications from Ms Rousseff, president, and Mr Mantega, finance minister, suggest they are changing tune on fiscal spending, with both calling for budget cuts to help rein in inflation and the appreciation of Brazil’s currency, the real, against the dollar.

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Robin Harding

Ready for some true Fed balance sheet wonkery? Sit back and enjoy…

The US Treasury has announced today that it will suspend the Supplementary Financing Program (currently $200bn) that it runs to help the Fed. Here is the Treasury statement:

“Beginning on February 3, 2011, the balance in the Treasury’s Supplementary Financing Account will gradually decrease to $5 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over. This action is being taken to preserve flexibility in the conduct of debt management policy.”

The point of all this is to give the Treasury more space to borrow as it waits for Congress to raise the debt ceiling – but it has consequences for the Fed. Read more

Imported inflation from emerging countries can no longer be ignored, and central banks on the receiving end might need to tightly constrain domestic inflation to compensate.

This from an important speech by Lorenzo Bini Smaghi today in Bologna. The ECB executive board member points out that food inflation is here to stay and the era of ever-cheaper TVs is over, too:

Unlike the previous decade, the process of reducing the prices of manufactured goods imported from developing countries seems to have ended, particularly in respect of products imported from China. The gradual appreciation of the exchange rates of these countries should further affect the prices of products imported from advanced countries.

So several factors are working to increase imported inflation: Read more

The new Basel III rules requiring banks to hold more capital are too weak and should be doubled to provide optimal protection against future economic shocks, researchers at the Bank of England have concluded. The discussion paper issued on Thursday compares the economic costs of forcing banks to hold more equity against potential losses with the benefits of having safer banks.

It concludes that the greatest benefit would occur if global regulators required banks to hold equity capital equal to between 16 and 20 per cent of their assets, adjusted for risk. The new Basel III minimum, approved last year, is of 7 per cent and phases in gradually over eight years. Read more

Klaus Regling, EFSF chief, is apparently wondering whether he could have demanded better terms for Tuesday’s 2016 bond, given spectacular demand. Indeed, he probably could have secured a higher price (lower yield) – a valuable lesson for the remaining €21bn-odd debt to be issued this year. But would Ireland benefit if he did, or would the EFSF just stand to make a bigger margin?

The 2016 €5bn bond issued by the eurozone yesterday is intended to finance a loan for Ireland. Lex points out that of the €5bn raised at 2.89 per cent, only €3.3bn will be lent to Ireland – at about 6.05 per cent. (The final cost to Ireland and the exact loan amount won’t be known tillthe EFSF has reinvested the cash reserve and buffer.) Read more

Malaysia might be the next in a long series of central banks turning to reserve requirements. The central bank held the overnight policy rate today at 2.75 per cent for the third meeting, as expected. Inflation ran at just 2.2 per cent in the year to December.

Bank Negara Malaysia signalled, however, that it would consider tools other than rate rises to mop up excess liquidity. “Large and volatile shifts in global liquidity are leading to a build up of liquidity in the domestic financial system,” said the Bank, continuing: Read more

Waiting for more robust growth and a little inflationary pressure, the Reserve Bank of New Zealand has again kept rates on hold. The official cash rate has been held at 3 per cent since mid-2010, when two 25bp rate rises lifted the rate from its record low of 2.5 per cent.

Governor Alan Bollard said: Read more

Robin Harding

In its statement today the FOMC removed language about buying assets at a pace of $75bn per month, causing a bit of a stir in the markets.

December 15th:

In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

January 26th:

In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

There are a few ways that you can read that: Read more