Daily Archives: January 24, 2011

Israel historical interest rate graphic“Monetary policy is still expansionary”, says the central bank, but will be a little less expansionary from February 1 when the base rate rises from 2 to 2.25 per cent. It will be the first rate rise in four months and it is likely more will follow*. The tightening move follows the introduction of a 10 per cent reserve requirement on foreign derivatives, effective January 27.

House prices have risen 17.3 per cent in the past year in Israel, a trend that accelerated last month. “The volume of new housing loans increased steeply in December,” adds the Bank. “The outstanding balance of housing loans at the end of 2010 was 14.7 percent higher than that at the end of 2009.”

It is likely the fear of a housing bubble has prompted the timing of Israel’s rate hike. Read more

Andrew Sentance, the hawk on the Monetary Policy Committee who limits himself to voting for a quarter point rate rise, has just rejected the main argument of his fellow Committee members.

Standard Bank-speak is that the UK’s inflation problem is caused by a series of one-off price shocks (tax rises, depreciation, commodity prices), but underlying inflationary pressure is low because there is a significant margin of spare capacity in the economy – an output gap –  which will prevent high inflation from persisting.

The mutiny from Mr Sentance is that he does not accept the output gap analysis when it is clear Britain’s economy is significantly influenced by things happening abroad.

“In the analysis I have set out I have made relatively little mention of the domestic “output gap”, because I find this a rather narrow way of thinking about how the demand climate affects inflation in an open economy like the UK.”

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James Politi

President Barack Obama delivers his “state of the union” address to Congress on Tuesday night: it’s one of the biggest political events of the year in the US, in that it sets the tone for the legislative agenda and the big policy debates for the rest of the year.

 Fiscal policy is expected to be at the heart of Mr Obama’s speech in 2011. From what we know at this stage, he will use the opportunity to call for new investments to boost America’s competitiveness in global economy.

At the same time, he will make an appeal for the US political system to start considering serious deficit reduction proposals to rein in the country’s debt burden, which is expected to balloon in the coming decades if no action is taken.

One big question heading into the ”state of the union” is what the balance will be between new spending proposals – from infrastructure, to clean energy technology to education - and deficit reduction initatives. Read more

And down they go again. A mere €146m ECB-bought bonds settled last week, following a bumper, €2.3bn, week the week before. As serious discussions began about enlarging the funds or the mandate of the EFSF, markets calmed and government bond yields fell, requiring less intervention from the ECB. Relatively speaking, however, bond yields remain high.

One idea floated at the discussions is that the EFSF will be allowed to lend money to sovereigns to buy back their own debt.

For what might be the last time in a long time, Hungary’s central bank has increased rates by 25bp. The third rise since November takes the rate on the key two-week bill to 6 per cent.

The rise was expected, partly as a result of inflation and partly politics. Inflation was 4.7 per cent in the year to December, considerably above the target of 3 per cent. Politics, because it’s assumed the MPC would want to raise rates before a significantly altered rate-setting committee takes over in March. Read more

Incentive realignment continues at the Central Bank of Turkey. Reserve requirements have been raised as signalled last week – though by more than many will have been expecting.

Turkey is trying to lengthen the maturity of deposits flowing into the country, as it explained at the outset of its new strategy in December: “The fact that maturities of liabilities are shorter than those of assets in the Turkish banking sector exposes the sector to liquidity and interest rate risk, which increases the sensitivity of the banking system to shocks,” it said.

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Market expectations over the timing of the Bank of England’s next interest rate rise have been moved forward significantly – intensifying the debate surrounding the accuracy of such predictions, especially following last week’s higher-than-expected inflation figures.

In only two months, market rate rise expectations have leapt from none this year to three up to January 2012, according to one of the best market gauges. Sterling forward contracts predict a 95 per cent, or more, certainty that rates will rise by a quarter of a percentage point in June, October and January next year – leaping from 0.5 per cent now to 1.25 per cent. Read more