Daily Archives: January 18, 2011

Belgium looks set to raise less debt than initially thought despite the fact the auction was shifted from the open market to a syndicated deal through the banks. Reuters reports €3bn is due to be raised, against earlier discussions of €4-5bn:

Market participants are starting to express disappointment with the progress of Belgium’s 10-year syndicated deal, where final terms have been set at Eur3bn to price at +93 bps over mid-swaps. For reference this contrasts earlier talk of shooting to raise EUR4bn or more likely Eur5 bln, from original (and still cheap) guidance of +90/93 bps. More worrying is how the deal reportedly neared Eur7 bln of orders, and now is talked for a book of only Eur6 bln.

Spain also shifted from auction to syndicated deal this week, which renders the chance of auction failure very low by shifting – at a cut – the fund-raising responsibility onto a group of banks, who then in turn lend to the sovereign. It’s a relatively safe option that can lead to larger deals, as lenders feel more confident lending to several institutions than just to one.

Back to Belgium, is the ECB planning to combat the country’s rising yields? 

The European Central Bank has emerged from the financial crisis as one of the few institutions with its reputation intact – and its powers greatly enhanced – so a job on its governing council is a pretty good gig by any measure.

One is coming up in June, when Austrian economist Gertrude Tumpel-Gugerell is leaving after eight years at the top table. Two candidates have been put forward to replace her: Peter Praet, 61, a well-regarded director of the Belgian central bank for the past decade; and Elena Kohutikova, 57, a former Slovak national bank deputy governor and now an economist at Vseobecna Uverova Banka, a unit of Italy’s Intesa SanPaolo. A decision is expected at the next meeting of Finance ministers on 15th February.

One factor that could prove decisive is that Ms Tumpel-Gugerel is currently the only woman at the top of the ECB. The EU also likes its institutions to be “geographically-balanced”, usually a code that all the top jobs shouldn’t just go to the bloc’s largest and oldest members. The five remaining directors at the ECB hail from France, Germany, Spain, Portugal and Italy – surely another edge for Ms Kohutikova. 

Chris Giles

In response to my previous post, brook.src commented that UK inflation would rise further in October 2012 from the planned rise in tuition fees. They made a very valid point, one that was important in the inflation figures in 2006 when tuition fees were last raised.

But Brook.src is wrong about the scale of the change. In August 2006, Mervyn King said he thought the 155 per cent rise in tuition fees were likely to add 0.25 percentage points to inflation for a three-year period (as they were introduced over three years). In the event, the Office for National Statistics estimated the effect at a much lower 0.12 percentage points

Canada strikes a bearish note as it chooses to keep policy rates on hold, saying “any further reduction in monetary policy stimulus would need to be carefully considered”. So the target for the overnight rate stays at 1 per cent; the bank rate at 1.25 per cent and the deposit rate at 0.75 per cent.

In an “environment of significant excess supply,” says the Bank, “considerable monetary stimulus” is still required for inflation to reach its target of 2 per cent +/- 1 per cent. Headline inflation was exactly on target at 2 per cent y-o-y in the most recent November data, but it does not yet appear stable. Rather, it fell from 2.4 per cent the previous month. Core inflation, which strips out volatile components such as energy, is trailing behind its 2 per cent target at 1.4 per cent.

Chris Giles

See Chris’ reply to comments in this new post

Is a UK rate rise in February likely? No. But it is important to play this thought experiment in your mind after December’s bad inflation figures. Imagine the Monetary Policy Committee had known for certain in mid-2009 that inflation would average 3.4 per cent in the fourth quarter of 2010: what would it have done?

Would it have ceased quantitative easing earlier? Would it have raised rates to prevent inflation rising so far above its target in a reasonable timescale? Or would it have had the guts to publish an inflation forecast with inflation in medium-term letter-writing territory?

Not easy questions. No wonder Howard Archer of IHS Global Insight likens the Bank of England’s squirming with high inflation – 3.7 per cent in December – to Sir Alex Ferguson’s famous comment that “it’s squeaky bum time”. 

Consumer prices rose by 3.7 per cent in the year to December, driven by transport costs and food prices. A rise of roughly half the size was expected. Importantly, core inflation – which strips out the more volatile components such as energy and food – also rose, to 2.9 per cent, having been static for a number of months at 2.7 per cent.