Daily Archives: January 14, 2011

Robin Harding

Eric Rosengren, Boston

Mr Rosengren gave an updated – and relatively optimistic – growth outlook but argued that it would be constrained to some extent by the weakness of housing.

My own forecast is for growth of 3.5 to 4.0 percent over 2011. This is certainly an improvement, but – soberingly – would still leave the unemployment rate close to 9 percent at the end of this year, a rate far above anyone’s estimate of full employment.

 Read more

Robin Harding

Today’s CPI data (headline +1.5% yoy, core +0.8%) has led to a rush of analyst emails proclaiming that US disinflation is dead. This chart is indeed looking a little less threatening:

I’ve seen two main arguments why core inflation is not going to go down any further. Both are quite plausible but I still have doubts. Read more

Robin Harding

This exchange from the June 2005 FOMC transcript is quite fun:

MS. YELLEN. One of the things we’re seeing in California and elsewhere in our District—and maybe this is true nationwide—is a growing use of piggyback loans. Loan-to-value ratios of 90 to 95 percent are common in California, and we’ve even seen combination loan-to-value ratios and piggyback loans going up to 125 percent. I guess that means two things, one of which is that the traditional first mortgage looks utterly conventional. Those mortgages have an 80 percent loan-to-value ratio and I suppose they are being sold off to Fannie and Freddie. The other thing is that with such conventional mortgages being sold to Fannie and Freddie, there’s no need for private mortgage insurance. So Fannie’s and Freddie’s books may look better in some sense—less risky—than they really are because of all of the second mortgages going up to possibly 125 percent. Read more

Irish banks borrowed €51.1bn in special funding from their central bank in December, latest data show – a €6.4bn increase on the previous month. The ECB will be pleased, however, to see that Irish banks borrowed €4bn less from Frankfurt, with loans falling to €132bn during the month. It is too early to say whether Irish banks are increasingly looking to Dublin instead of Frankfurt for support – but the ECB would certainly welcome that.

In Ireland’s bail-out, €17.5bn of the €85bn package was from the Irish government itself, put into the c. €25bn contingency-bank-fund pot.

We can add another name to the list of possible replacements for Gertrude Tumpel-Gugerell: Slovakia says it is proposing a former vice-governor of its own central bank, Elena Kohutikova. Ms Tumpel-Gugerell – currently the only woman on the ECB’s 23-strong governing council – will step down at the end of May.  Ralph has suggested her replacement is likely to be a woman.

Ms Kohutikova is currently board member of Vseobecna Uverova Banka, the Slovak unit of Italy’s Intesa SanPaolo, Reuters reports. She was in charge of monetary policy issues, financial markets operations, risk management during her stay at the NBS. Euro zone finance ministers will meet in Brussels on Monday, when they are expected to discuss possible replacements for Ms Tumpel-Gugerell. Read more

Robin Harding

Read them here:


My tip is to head first for the June 2005 meeting where the FOMC held a full day discussion of house prices. It should make for interesting reading…

The European Central Bank has struck a tougher stance on inflation, increasing the chances of an interest rate rise and sending the euro higher in spite of the eurozone debt crisis.

Jean-Claude Trichet, president, said on Thursday that the ECB had never ruled out an increase in official borrowing costs and its actions to combat inflation were “disconnected” from its steps to prop up the eurozone banking system. Read more

Ralph Atkins

Jean-Claude Trichet was keen on Thursday to flash his inflation-fighting credentials. His warning about a possible interest rate increase sent the euro sharply higher, even though the European Central Bank president still saw inflation remaining in line with the ECB’s ”below but close” to 2 per cent target over the policy-relevant medium term.

Details of December’s inflation rate, just released, confirmed that the latest acceleration to 2.2 per cent was driven almost largely by oil prices. Underlying, or “core,” inflation remained stable at 1.1 per cent.

But Mr Trichet might also have had an eye on his legacy – he steps down at the end of October. At Thursday’s press conference in Frankfurt, he said that since the launch of the euro in 1999, eurozone inflation had averaged 1.97 per cent – bang in line with the target.

Annual data are less impressive, however. Read more

Every two weeks, on average. That’s how often China is introducing some form of tightening at the moment. The People’s Bank has just increased the reserve ratio again, by 50 basis points, or a half of one percentage point. This increases the amount of cash banks have to keep with the central bank, thus reducing the amount available to lend. Our calculations suggest rural and small-medium sized banks will have to keep 15.5 per cent of their deposits with the central bank, while larger banks will need to keep 19 per cent. In October of last year, PBoC introduced a further division between banks, increasing the reserve requirements of the six largest banks temporarily, keeping the ratio of other large financial institutions on hold. If that division has now expired, the ratio for the six largest banks is now also 19 per cent. The move will be effective January 20.

Mopping up liquidity in this way is one tool to combat inflation. Another is to let one’s currency appreciate. Signals have been sent today from a senior central bank official that China will allow further flexibility in the yuan. “Flexibility” is a one-way bet in the markets at the moment, and the State Administration of Foreign Exchange today set the central parity rate of the yuan at 6.5896 against the dollar, a new record.

Chile has held rates at 3.25 per cent, following its pledge to buy $12bn in the forex market to weaken the peso. Pundits had been split roughly equally between a rate hold and a small rate rise. The central bank has typically been raising rates regularly but by small increments of late (see chart, right).

Inflation in Chile is running at 3 per cent, exactly on target (which allows for one per cent either side of this) – but it is rising quickly. Chile recently pointed to the effect of the Fed’s $600bn stimulus programme on its currency – i.e. causing appreciation – and in doing so, joined a chorus of opposition from emerging markets trying to cope with an influx of “hot money”.