Daily Archives: February 8, 2011

Robin Harding

At 10am tomorrow, Fed chairman Ben Bernanke will testify to the House budget committee, while just down the street Rep Ron Paul, who wants to End the Fed, will hold a hearing entitled “Can monetary policy really create jobs?”

The contrast will be interesting (and I’m sure Mr Paul’s staff had the media in mind when scheduling).

Mr Bernanke’s testimony is unlikely to contain any surprises ahead of his semi-annual Humphrey-Hawkins testimony, which I expect to happen about March 1st (not sure whether the House or the Senate will go first). Mr Bernanke is likely to repeat the cautiously optimistic note he struck at the National Press Club last week.

Mr Paul’s hearing, by contrast, will be different. 

Early indications suggest Turkey’s unorthodox monetary policy is working: the maturity of deposits held at banks seems to have lengthened since December and consumer credit is falling. With a weakening lira and falling inflation, it is likely the ultimate objective – of reducing the current account deficit – is also being achieved.

So, deposit maturities. I confess I don’t have exact maturity data, but my conclusion is implied by the chart to the right. The chart shows the split of lira-denominated deposits at both private and public banks in Turkey.

The thin yellow strip represents lira deposits by non-residents and since the data do not split them further we shall ignore them for this analysis. The blue area represents “sight” deposits (i.e. like a current account, you can grab your money and run). These, then, have the minimum possible maturity (zero). The red area are “time” deposits, which are placed with the bank for a certain time. They might be a month or ten years, the data do not tell us. But they definitely have a longer maturity than sight deposits. And the proportion of sight deposits has fallen substantially since December, from 15.9 to 14.5 per cent. 

Chris Giles

Current policy rate: 0.5 per cent
Quantitative easing stock: £200bn
Consensus expectation: no change
Inflation target: 2 per cent “at all times”
CPI inflation rate: 3.7 per cent in December

Commentary 

Read the accompanying article: Bank of England

Ralph Atkins

Talk of a Greek debt restructuring is becoming ever harder to avoid for European policymakers. A paper just published by the respected Bruegel think-tank concludes “that Greece has become insolvent and that further lending without a significant enough debt reduction is not a viable strategy”.

According to Bruegel’s calculations, even on optimistic assumptions the primary surplus required to reduce Greece’s debt ratio to 60 per cent of GDP in 20 years would be 8.4 per cent of GDP, rising to 14.5 per cent under a cautious scenario. As Bruegel’s economists write: “Over the last 50 years, no country in the OECD (except Norway, thanks to oil surpluses) has ever sustained a primary surplus above 6 per cent of GDP.”

Greece’s problems have been exacerbated by deep investor mistrust and its heavy reliance on overseas financing. The good news is that the situation in  other eurozone “peripheral” countries is not as acute. As Bruegel also notes, the European Union establishment has also moved away from complete denial about the Greek problem. 

A tightening measure was about due in China: it’s been 25 days since the last one, against an average of 17 days since October.

The People’s Bank of China just increased rates by a quarter of a point, which raises the one-year deposit rate to 3 per cent and the one-year lending rate to 6.06 per cent. The last move to stem inflation and mop up excess liquidity was a raise in reserve requirements on January 14. MPC member Li Daokui said at that time a rate rise was likely in the first quarter and indeed spoke of an “intensive adjustment” in this period. The raise is effective tomorrow.

Inflation might have risen to 6 per cent in January, Bloomberg reports from analysts at Daiwa Capital Markets. In December, it rose to 4.6 per cent. The economy grew by 9.8 per cent in the fourth quarter, faster than the pace in the previous three months. See below for a history of China’s tightening: 

Israeli foreign currency reserves rose to $73.4bn by the end of January as the country’s central bank bought foreign currency to dampen the shekel. The Bank bought $2.09bn and benefitted from an upward revaluation of its reserves by $628m, reports Bloomberg news wire.

Since the start of the year, the shekel weakened against the dollar, from 3.51421 to 3.712 per dollar, which explains the upward revision. Last time there was a net weakening in the currency over the month, it was followed by a net reserve reduction the month after (October-November last year). By that logic we could expect Israel’s foreign exchange purchases to fall during February.