Monthly Archives: January 2011

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

Hungary’s central bank is set to lift the base rate by 25 basis points to 6 per cent next Monday – the third such rise in as many months. Economics is the main driver, but, as so often in Hungary right now, politics is also involved. According to a Reuters poll more than two-thirds of analysts expect a hike. Most arguments for predicting an increase are fairly orthodox – surprisingly high inflation of 4.7 per cent in December, rising wage trends, and the recent Polish rate increase.

But Nigel Rendell, emerging market strategist with RBC Capital Markets, points to another likely cause – prime minister Viktor Orban’s plans to reshuffle the rate-setting monetary council. “Yes, they’ve got to put the lid on inflation, but the most pressing issue is the expected change to the Monetary Council,” he says.

Under draft proposals put forward by Orban’s centre-right government, all four new members (of the seven-man council) to be appointed from March would be chosen by parliamentary committee, and therefore, observers believe, pro-government. “That means they’re likely to be dovish, and unlikely to vote for further rate increases. So the current council has to strike while the possibility is there,” argues Mr Rendell. Read more

Thailand, Indonesia and India have all made bullish noises of late, suggesting they may raise rates in the near future.

Indonesia’s central bank governor said today that it remained vigilant against rising inflationary pressures, which is good to know from a bank that has been keeping at least one eye firmly on growth. Consumer price inflation rose to 6.96 per cent in the year to December, against a 2011 target of 5 per cent +/- 1 per cent. The central bank has kept rates at their post-crisis low of 6.5 per cent to drive growth via commercial loans, Reuters reports. The IMF has called on the country to raise rates, which recently cut import duties on food to try to dampen price rises.

India is expected to raise rates next Tuesday, January 25. A “vast majority” of Read more

Turkey’s rate cut yesterday will be followed by another raise in reserve requirements in the coming days, continuing the central bank’s plan to discourage short-duration capital flows. Bloomberg news wire reports:

The Turkish central bank’s decision to reduce the benchmark interest rate was unanimous, Turalay Kenc, a member of the Monetary Policy Committee told Bloomberg HT television. Read more

In June last year, the Bank of New Zealand issued the country’s first covered bond – securities backed, for example, by mortgage payments. (So the bank, receiving loan payments, in turn issues debt, receiving cash for that and allowing them to lend more.) Seven months later, the central bank has already seen fit to limit issuance of these bonds to 10 per cent of a bank’s total assets.

The practice allows a bank to increase leverage. The popularity of this and similar leveraging techniques in the US and Europe has been blamed for difficulties faced during the credit crisis. Complex interdependencies are created by reselling debt, repackaging it or simply issuing new debt on the basis of cashflow from other debt. Read more

Robin Harding

An important question about US inflation in the coming year or two is the extent to which rising commodity prices will feed into core inflation. As discussed in the piece that Chris and I did last week, the feed through from headline to core has been very low – in fact close to zero – in recent years.

One channel by which an impact could come is if rising commodity prices push up costs for manufacturers in the developing world and that translates to higher prices for imported manufactured goods in the US. In that regard, and in light of China’s strong GDP and high inflation figures today, this is an interesting chart:

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Reserve requirements are so in vogue. Israel’s central bank is the latest to adjust their ratio, bringing in a 10 per cent requirement for non-residents dealing in foreign exchange derivatives, specifically FX swaps and forwards. The move will be effective January 27. The bank said:

In the last few months the volume of foreign exchange derivative transactions by nonresidents has increased markedly. A significant part of the increase in nonresidents’ transactions is in short term instruments. This measure will strengthen the Bank of Israel’s ability to achieve the objectives of its monetary, foreign exchange and financial stability policies.

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Robin Harding

There is an blogosphere flap today about a minor change to Federal Reserve accounting: it will mark its liability to the Treasury on a daily rather than annual basis and recategorise it as “Interest on Federal Reserve notes due to U.S. Treasury”.

Here is the change:

Effective January 1, 2011, as a result of the accounting policy change, on a daily basis each Federal Reserve Bank will adjust the balance in its surplus account to equate surplus with capital paid-in and, in addition, will adjust its liability for the distribution of residual earnings to the U.S. Treasury. Previously these adjustments were made only at year-end.

Adjusting the surplus account balance and the liability for the distribution of residual earnings to the U.S. Treasury is consistent with the existing requirement for daily accrual of many other items that appear in the Board’s H.4.1 statistical release.

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Turkey’s central bank has just cut their benchmark rate 25 basis points, building upon moves last month that cut the same rate 50bp and raised reserve requirements. The two-pronged move was intended to weaken the lira, make exports more attractive and thus reduce the current account deficit – a blight on an otherwise booming economy.

The particular problem with Turkey’s bank reserves is their maturity profile, which is quite short-term, making the country vulnerable to external shocks. Rather than focusing on inflation and growth, a great deal of attention in Ankara must be focused on securing the next slice of funding. Encouraging longer-term maturities is a smart move; financial stability increases in proportion to the average maturity of deposits. Read more

China and Russia sold off substantial amounts of US debt during December – a month that saw the biggest treasuries sell-off since the collapse of Lehman’s. Market commentators entered denial mode: this was “not necessarily the start of any particular trend,” said one. “It’s too early to infer that China is shifting its diversification stance,” said another.

All this denial suggests the market is waiting for bad news – a theory backed up by volatility futures, which suggest a great deal of volatility is constantly expected roughly two months away. Whatever the date, Bad News is due in roughly two months’ time (these are VIX futures, and yes, you can buy a future on just about anything). Are these connected? Here’s one theory.

US borrowing costs have been kept artificially low for years, thanks to demand for US treasuries by world investors. The fact that the dollar is a reserve currency, and is considered safe, has kept demand for the debt high even when it is not a profitable investment. The normal laws of supply and demand are distorted. The people buying and the people selling are doing so for different reasons.

This asymmetry should be a cause for concern. Read more

Brazil has raised rates by 50bp to 11.25 per cent to try to bring inflation back to target. The central bank also introduced new reserve requirements for dollar short sellers recently, in an effort to counter inflationary pressure on the real. Prior to the rise, the selic rate had been on hold for about six months at 10.75 per cent (see chart).

Consumer price inflation ran at 5.91 per cent in the year to December, in the upper end of the target range of 4.5 per cent +/- 2 percentage points. This was the highest since at least December 2008, when the Bank’s historical series begins.

Robin Harding

The St Louis Fed has just launched a brilliant new resource called FOMC Speak. It’s an archive of all public comments by members of the FOMC including interviews and video.

Kudos to the St Louis Fed, which is also responsible for FRED, the best place to find US economic data.

China’s doing it. Brazil’s doing it. Turkey’s doing it. Now Serbia has also substantially increased the proportion of deposits banks will need to keep with the central bank.

The reserve requirement on foreign-currency deposits has been hiked to 30 per cent from 25 per cent. They have been kept constant on dinar deposits of less than two years, and cut to zero on dinar deposits of more than that. Many Serbs and Serbian businesses prefer to deal in euros, perhaps remembering hyperinflation in the 1990s. Read more

*Updated 1509GMT

Interest rates will be a quarter of a point higher from tomorrow in Poland, after the MPC voted to increase them. The key refi rate will be 3.75 per cent. The move was expected, after bullish signals in December followed by strong hints from council members in the new year. Those comments suggested this would be the start of a rate normalisation policy, rather than a one-off reactive decision. All else equal, expect further rate rises ahead.

Headline inflation rose to 3.1 per cent in December, driven by higher energy prices. Initial estimates suggest core inflation rose, too. “The inflation rise,” said the Bank, “was accompanied by a rise in inflation expectations.”  This was given as the main reason for the rate rise in today’s news conference.

Governor Marek Belka has also said in recent months that he saw a decreased risk of strong capital inflows into Poland. Inflationary “hot money” inflows are encouraged by rate rises, which increase the return to investors. If those inflows are subsiding, Poland would be liberated to raise interest rates without fear of undue inflation.

Effective tomorrow, the 25bp rate rise will be the first Read more