Monthly Archives: January 2011

Ralph Atkins

A debt restructuring in Europe “is not in the plan,” Jean-Claude Trichet, European Central Bank president, has just told Bloomberg Television. The ECB would certainly hope that was not the case – it would worry about contagion effects.

But Mr Trichet’s choice of words did not appear to rule out the possibility in every eventuality. Perhaps that was wise: the consensus among financial market economists is that the level of Greece’s public indebtedness makes some kind of Greek rescheduling inevitable in coming months or years.

The ECB’s thinking towards Greece etc has not necessarily changed, however. Read more

Charts accompanying today’s rate-hold decision from Norway include Belgian data in with that of so-called “peripheral” countries – Portugal, Italy, Ireland, Greece and Spain. Yield charts also now include Belgium. (A table showing debt and deficit for PIIGS plus Belgium was included in both sets of slides.)

Norway held rates at 2 per cent as expected, pointing to a fine balance between current low (core) inflation and signs that it may be about to pick up. Read more

Economists at Davos are more optimistic than expected: they think a two-speed economy is sustainable – as long as developing countries move from export-led to consumption-driven model in the longer-term. One suggests a three-speed economy would be a better description. Chris Giles reports.

Andrew Sentance has company. Minutes from the Bank of England show Martin Weale voted for a 25bp rate hike, too – and for several other members the decision was “finely balanced”. The remaining seven voters on the committee might be feeling rather pleased with themselves this morning, after yesterday’s (very bearish) GDP figures. Adam Posen continued to vote for a £50bn expansion of the QE programme.

The threat to inflation expectations seems to have prompted Martin Weale’s decision, rather than inflation itself – which the committee says is temporary:

The continued elevated rate of inflation, which was forecast to persist, posed a significant risk to inflation expectations and hence to the medium-term outlook for inflation. This made more powerful the case which had been building for some time for a gradual rise in Bank Rate.

Those committee members who were tempted to vote for a rate rise appear to have been held back by how the move would be interpreted. Read more

James Politi

President Barack Obama certainly made America’s fiscal health a pillar of his “state of the union” address, calling it a key element of his plans to secure US global competitiveness. “A critical step in winning the future is to make sure we aren’t buried under a mountain of debt,” Mr Obama said. “We have to confront the fact that our government spends more than it takes in.”

Mr Obama did indeed dedicate plenty of space to deficit reduction in his speech – but there were no major surprises in terms of specific proposals for budget cuts, and there was no push for a comprehensive deficit reduction plan along the lines of last year’s Bowles-Simpson debt commission, which proposed cutting politically explosive areas such as social security, Medicare, and individual tax breaks.

Instead, this is what Mr Obama proposed, which fiscal hawks may find underwhelming, but others may argue is perfectly consistent with a strategy designed to continue stimulating the economy now and begin to move in the direction of fiscal retrenchment at a later date. Read more

Robin Harding

Today’s UK GDP shocker once again raises the question of whether the rapid, pre-announced tightening of fiscal policy underway in Britain is wise. But at least one new academic paper suggests that chancellor George Osborne has it right.

Ignazio Angeloni and colleagues at the Kiel Institute for the World Economy run fairly comprehensive simulations on exit strategies from crisis fiscal and monetary policies and conclude: Read more

Chris Giles

Mervyn King has just delivered an important speech in Newcastle. As ever with the Bank of England governor, it is extremely well-written and his argument is tight. The speech is, however, infused with overwhelming self-belief and even arrogance in the face of difficult economic circumstances. Those, in a nutshell, are Mr King’s great strengths and weaknesses.

This is far from an attack on the governor. I think his “big picture” view is correct, but his unwillingness to concede mistakes undermines policy and damages the Bank’s credibility, making the Bank’s job of getting its message across rather harder than it need be.

The big picture should come from him.

“We must not lose sight of the big picture. Large – very large – shocks to relative prices are an inevitable part of the real adjustment vital to the rebalancing of the UK economy.

 Read more

Bank Rossii chairman Sergei Ignatiev has told reporters that rates might be raised at next Monday’s meeting, Bloomberg reports. Mr Ignatiev hinted in December that rising inflation might lead to a rate rise in the first quarter, and that he was not scared of a stronger ruble.

A rise in the discount rate would be the first since the financial crisis, taking interest rates from their near-year-long record low of 7.75 per cent. Read more

Strong demand for today’s eurozone bond issue, priced at a yield equivalent to 2.89 per cent. Hardly surprising. For exactly the same risk profile as German bonds, you get half a percentage point extra payment per annum for your money. (48 basis points, to be precise.)

The news is being greeted as a vote of confidence in the eurozone. Likewise, Japan’s pledge to buy at least 20 per cent of the bonds was treated as an offer of support. Klaus Regling, EFSF chief, said: “The huge investor interest confirms confidence in the strategy adopted to restore financial stability in the euro area.” But does it? Really?

Surely hard-headed profit-seeking is a more plausible explanation? After all, a vote of confidence would be investors buying Portuguese, Greek or Irish bonds; whereas here they are buying bonds backed in full by Germany. The legal framework of the EFSF makes clear that member states are each independently liable for debt issued, up to their maximum commitment. The only exceptions are countries currently “stepping out” (Greece; Ireland) and those that have not yet signed up in full (recent euro-joiner Estonia). See the table below. Read more

Ralph Atkins

Whoops! I don’t think he was meant to say that.

Ewald Nowotny, Austria’s central bank governor, has told journalists that he did not expect the ECB to lift its main policy rate in the next six months. That is not the ECB governing council’s official line, as set out earlier this month by Jean-Claude Trichet, president, according to which the euro’s monetary guardian could act at any time to keep inflation under control. Mr Trichet sent the euro sharply higher after highlighting price risks faced by the eurozone.

“I expect no decision on [interest] rate hikes in the first half of the year,” Mr Nowotny said at a conference in the UK, Reuters reports. Read more

Ralph Atkins

German consumer optimism has brightened further. The GfK research organisation in Nuremberg estimates its “consumer climate” index will rise again in February, reaching a level last seen in the second half of 2007 – before the global financial crisis took its toll. Germans’ “propensity to buy” this month was the highest since December 2006, it reported.

But “propensity to buy” does not mean actually buying. The most recent German retail sales figures have been disappointing. November saw a 2.4 per cent fall compared with October. While economists generally expect 2011 to see a revival in consumers spending, on the back of steep falls in unemployment, rising wages and a general improvement in German confidence, few expect a dramatic surge. Read more

India historical interest rate graphicIndia’s Reserve Bank has raised rates to tackle inflation, while extending bank liquidity measures due to expire next week. The repo and reverse repo rates stand 25bp higher at 6.5 and 5.5 per cent, respectively, while easing measures are extended to April 8.

Indian wholesale price inflation historical seriesThe rate rise was prompted by recent price rises. “Inflationary tendencies are clearly visible,” said governor Duvvuri Subbarao in the statement. “Inflation is the dominant concern… the reversal in [its] direction is striking.” The strength of his words make a 25bp rate rise seem insignificant.

But given global inflationary pressures from food and fuel, India’s December figure was not so dramatic. Viewed historically, annual wholesale price rises of 8.4 per cent still fit into the downward trend seen since April of last year, when inflation was running at 11 per cent. It is too early to say whether December’s figure is the start of a sharp increase in inflation – and today’s decision should make that a little less likely.

Despite the tightening measure, the RBI also announced today that it would alter and extend easing measures Read more

Chris Giles

In recent weeks, the Bank of England’s problem has been inflation. It is too high at 3.7 per cent in December and going higher. Now the Bank has something apparently worse on its hands: stagflation. The Office for National Statistics has just shocked everyone by saying the UK economy contracted by 0.5 per cent in the final quarter of 2010. Expectations had been for a 0.5 per cent increase.

Nothing could cheer the Monetary Policy Committee more. Now it can bat away suggestions it should be raising interest rates with the comment that this would be nuts as the economy is again contracting. High inflation is nothing to worry about if the economy is still in intensive care. Read more

Robin Harding

Current policy rate: 0 to 0.25%
Consensus expectation: no change
Simple Taylor rule policy: -0.8%
Core PCE price index: +0.8% (November yoy)
Inflation objective: 2% or a bit below

Notable special measures in operation
• Circa $2,200bn in completed asset purchases, holding $1,072bn of Treasuries and $989bn of MBS as of 20th Jan, 2011.
• $600bn increase in asset purchases in progress between November 2010 and June 2011. Read more

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

Chris Giles

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.”

 Read more

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.