Daily Archives: February 2, 2011

Robin Harding

The Financial Crisis Inquiry Committee has put up a large swathe of documents including a fair few from inside the Fed. I haven’t spotted any massive stories yet but there’s some interesting reading.

Ben Bernanke asks  Kevin Warsh how much capital Lehman would need to survive by itself, 14th September 2008 Read more

Do the markets know something we don’t?

S&P cut Ireland’s credit rating by one notch today, taking it to A- (still several notches above Moody’s and Fitch, at equivalent peggings of Baa1 or BBB+ respectively). Yet markets continue to relax, with the Irish ten-year cost of debt falling 20 basis points today, a fifth of one percent; at 5.45pm they were 8.8 per cent.

The cost of debt for Spain, Portugal, Italy, Belgium and Greece have all fallen, too. Greek yields are below 11 per cent for the first time since early November.

Gary Jenkins, head of fixed income for Evolution Securities, says: “It is interesting that while the story [that the EFSF mandate will be widened to allow debt buybacks] has been doing the rounds for three weeks now, yesterday was the first day since then that we have witnessed yields moves of such a magnitude, which does make one wonder if there has not been a leak ahead of the European leaders’ summit on Friday.” Read more

Ralph Atkins

Rising financial market confidence vis-à-vis the eurozone is encouraging news for the European Central Bank, which holds its interest rate-setting meeting on Thursday. It comes just in time. Surging oil and food prices, which have driven headline inflation higher, are encouraging the ECB’s hawkish instincts.

True, the ECB’s main policy interest rate is widely-expected to remain at the record low of 1 per cent. After reaching 2.4 per cent in January, eurozone inflation is still expected to moderate later this year. But Jean-Claude Trichet, president, is likely to hint again at the ECB’s willingness to act at any moment to keep inflation expectations under control and ensure the annual rate remains within its ”below but close” to 2 per cent target over the medium term.

The process of financial market normalisation makes such threats more credible. But the signals that the ECB is receiving are not straightforward.  Read more

The Bank of England would “have to” raise rates if oil price inflation remained high, Charlie Bean has said. Sterling has strengthened as traders have bet on an earlier rate rise.

The deputy governor of the UK’s central bank told businesses in Wales that inflation was driven by three factors: the weaker pound, VAT and commodity prices -

“We have seen substantial rises in food prices, which, in part, are connected to issues over bad harvests, but only partly,” he said. “We have seen oil prices rising, recently they have reached $100 a barrel, and global prices have been rising. The background of all these developments is the strong growth of emerging markets putting upward pressure on the price of commodities.” Read more

The Institute for Fiscal Studies, along with Barclays, are currently presenting their annual fiscal forecasts and Budget judgement. Most of the central headlines are comforting to the government. The economists think that on the basis of the official economic forecasts, the public finances are broadly on track – the hole in the public finances will be closed by 2015 or so.

The concern is that all the risks seem to be on the downside relative to official forecasts.

There are good reasons to worry that the economy might be hit harder from austerity than the Office for Budget Responsibility thinks, such as the difficulty the Bank of England will have in offsetting tight fiscal policy with loose monetary policy. Consumers are being hit hard from high import prices squeezing incomes. UK investment rarely bounces back sharply from recessions. And export performance has been disappointing and we don’t really know why. Read more

Iceland’s central bank has just cut its interest rates by 25bp, leaving the key current account rate at 3.25 per cent. The Bank hasn’t stopped cutting since the financial crisis, though this is the smallest cut since 2002. Previous cuts have been monthly, and mostly half a percentage point (see chart).

The tiny island-state’s economy appears in relatively good shape. Inflation has fallen below the target of 2.5 per cent, and inflation expectations, which were nearing double digits, have fallen below 5 per cent. Indeed, with inflation at just 1.8 per cent, one might wonder why rates have been cut at all. According to the Bank, temporary factors were at play in pushing down January’s inflation:

One-off factors added to the seasonal drop in January. Favourable exchange rate developments over the past year, declining inflation expectations, and the slack in the economy continue to contribute to low and stable inflation.

 Read more