Monthly Archives: February 2011

**Update: Inflation figures came in lower than expected, dampening the bullish message somewhat. Consumer prices rose 2.87 per cent y-o-y to February, a fall from the previous month**

Expect another rate rise on March 9 – maybe even by 50bp. Assistant Governor Paiboon Kittisrikangwan told reporters today that interest rates are still too low, and that “normalisation” will continue if inflation keeps rising. Read more

ECB bond purchases settling last week fell to €369m as yields rose throughout the eurozone. €711m had been bought the week before, with Portugal widely rumoured to be the sovereign in distress.

Bond yields are now higher than when the central bank began its “shock and awe” bond purchase programme, back in May 2010. The ECB bought €16.3bn government bonds in that first week in a strong show of support for the eurozone, intended to reassure bond markets. Markets are no longer reassured; yields are higher; and ECB intervention is a shadow of its former self. Read more

Ralph Atkins

One lesson drawn from the global economic crises of the past few years is the need to improve financial literacy. But the view that problems could be avoided in the future simply by making sure investors understand into what they are putting their money is challenged in two research working papers just published by the European Central Bank.

The first looks at evidence from the UK and Ireland on what causes people to end up in financial distress and concludes that the problem goes beyond financial literacy and education. Read more

Loan growth is losing pace and $10bn short-term capital has left Turkey since the start of its new interest rate policy in December, central bank governor Durmus Yilmaz said Friday. Despite this, the current account deficit – one of the principal targets of the measures – will continue to rise in the first quarter due to base effects. Mr Yilmaz added he did not foresee a change in policy when his governorship ends in April.

The statements add up to declaration of success – but there was a caveat. Oil prices, driven higher by events in Libya, created a “new situation”, Mr Yilmaz admitted. Turkey’s rate-cutting, reserve-requirement-raising policy has so far been possible thanks to falling inflation and fairly high unemployment. (Rate cuts in an inflationary environment would have been far more dangerous.) If oil prices were to remain high, they would create an inflation risk that might constrain Turkey’s monetary plans. For now, as long as Saudi Arabia and its oil reserves stay out of the current turmoil, many believe the oil price shock will be short-lived.

Few analysts expect the European Central Bank to lift interest rates from the current 1 per cent at its policy meeting on Thursday, but Jean-Claude Trichet, president, is expected to further endorse the bank’s hawkish stance on inflation, despite today’s downward revision of January CPI to 2.3 per cent from 2.4 per cent.

“Given the emergency level of G7 rates, the fragility of the financial sector in Europe and the US, and the numerous economic and geopolitical uncertainties, the ECB is playing a long game, primarily to ensure that as and when it wishes to tighten policy, markets will not be shocked,” said Marc Ostwald at Monument Securities. Read more

Colombia raised rates 25bp late on Friday, the first rise since the financial crisis. The move, which took markets by surprise, takes the Bank’s key intervention rate to 3.25 per cent, compared with 10 per cent before the cuts began. Colombia also said it would continue its $20m-a-day dollar purchasing programme, through which it is trying to dampen appreciation of the Colombian peso.

Peru, meanwhile, yesterday raised its reserve requirement ratio for the second time in two months. The quarter-point rise applies to sol- and dollar- denominated bank reserves and is intended “to keep inflation expectations anchored within the 1 percent to 3 percent target range,” the bank said in a statement, according to Bloomberg. Peru also raised rates in January and February, taking the key rate from 3 to 3.5 per cent since the start of the year.

Robin Harding

Janet Yellen prefaces her speech today by saying that “it is not my intention to provide new information about the outlook for the US economy or monetary policy” but it is extremely tempting to read two scenarios that she sets out (as illustrations of the effects of Fed communications) as primary policy options for the next couple of years.

Scenario 1 – Delayed tightening

“If financial market participants appeared to be expecting policy firming to begin somewhat sooner than policymakers considered desirable or appropriate under such circumstances, the language of the forward guidance could be adjusted to shift expectations toward the somewhat longer horizon over which the Committee expected the federal funds rate to remain extraordinarily low.”

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Ralph Atkins

Shock news in the Bundesbank’s latest monthly bulletin: German house prices have gone up. The more-or-less flat profile of residential property prices over the past decade has been one of the defining features of Europe’s largest economy over the past year. It meant the country escaped a house price bubble, the downside of which is now being seen in the US, UK and, within the eurozone, in Spain and Portugal. (Instead German investors piled into US subprime mortgages – but that’s another story.) Read more

Each of the last five major downturns in global economic activity has been immediately preceded by a major spike in oil prices. Sometimes (e.g. in the 1970s and in 1990), the surge in oil prices has been due to supply restrictions, triggered by Opec or by war in the Middle East. Other times (e.g. in 2008), it has been due to rapid growth in the demand for oil.

But in both cases the contractionary effects of higher energy prices have eventually proven too much for the world economy to shrug off. With the global average price of oil having moved above $100 per barrel in recent days – about 33 per cent higher than the price last summer – it is natural to fear that this latest oil shock may be enough to kill the global economic recovery. But oil prices would have to rise much further, and persist for much longer, for these fears to be justified.

With global oil supply already impacted by Libyan shut-downs, the threat of an oil shock has moved well beyond the realms of the theoretical. According to recent reports, about half of Libya’s 1.6m barrels per day of oil output have been knocked out, and this has been enough to trigger a rise of about $14 per barrel in the spot price of oil in the past week.

Total Libyan oil production is less than 2 per cent of the world total, and it is of course most unlikely to be lost on a permanent basis. According to

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