No reversal in Turkey. The central bank held rates at its latest policy meeting, hinting it would continue with its new monetary policy, data permitting. Since December, the Bank has been cutting rates and raising reserve requirements – a combination that they say has a tightening effect overall. Early indications suggest the policy is working.
The measures taken by the Central Bank since November are reducing macro-financial risks by leading to a more balanced growth path, mainly through a slowdown in import growth… Read more
Europe’s permanent rescue fund will have half a trillion euro available to lend. This might seem a bit low, given current discussions about extending the size and mandate of the current (temporary) €500bn rescue system. But officials point out that the current system, comprising the EFSM* (€60bn) and the EFSF** (€440bn), can only lend about €255bn in order to maintain a triple-A rating on its debt; the permanent ESM***, by contrast, will be able to lend the full amount.
Agreement on the sum involved has not reassured markets, however: much is yet to be agreed, and upcoming Finnish elections could threaten unanimity on signing off the changes by March 24-25. That timeline was already tight. Several additional finance minister summits have been mooted or agreed before the end of March to help achieve the aim. Indeed, given that economic co-ordination and budgetary rules are also on the agenda, agreeing the fund’s size was the bare minimum. How the ESM will be funded remains unclear. One hopes agreements went further in private. Read more
Showing masterly timing, Mario Draghi, Italy’s central bank governor - fast becoming the frontrunner to succeed Jean-Claude Trichet as European Central Bank president - has a full-page interview in today’s heavyweight Frankfurter Allgemeine Zeitung.
Its publication comes as Angela Merkel’s government scrambles to decide who it should back for the ECB job after Bundesbank president Axel Weber self-destructed last week.
Under the headline “everyone should follow Germany’s example,” Mr Draghi not only draws lessons from Germany’s impressive economic rebound. He says exactly the sorts of things a German would want to hear from a central banker – the importance of combating inflation and of pursuing stability-orientated politics, how national governments should take responsibility for sorting out their own finances, etc. Read more
Mervyn King, Bank governor, penned his fifth quarterly letter in 12 months explaining inflation’s overshoot this morning. The chancellor replied. These letters should primarily be seen as an exercise in elegant excuse-making and often do not survive close textual analysis. That said, unless the Bank and Treasury are as incompetent at writing a clear letter as many believe the Bank is at controlling inflation (see Simon Ward of Henderson Global Investors), the signals clearly point towards rate rises soon.
What are the signals for rate rises?
Both the governor and the chancellor’s letters indicate knowledge about the Bank’s latest economic forecasts, due to be published tomorrow. The governor says that the Monetary Policy Committee forecast says that if interest rates follow market expectations, the chances are roughly 50:50 that UK inflation will fall back to the 2 per cent target from 4 per cent in January in two to three years time. Market expectations are for interest rates to go up in May and keep rising gradually with at least three rises in the coming year. Anything less than this and the Bank’s latest forecast, Mr King suggests, would leave medium-term inflation too high.
Here is the relevant passage from the governor: Read more
Annual inflation has risen to 4 per cent in the UK, twice the Bank of England’s target. In the year to December, consumer prices rose 3.7 per cent.
VAT and crude oil were the main drivers of the change. Chris Williamson, chief economist of Markit, said: “Clearly, these factors are largely outside of the Bank of England’s control, and would not be affected by any change to interest rates. However, the data do nothing to change the dilemma facing the Bank, whereby short-term price pressures are encouraging some members of the Monetary Policy Committee to hike interest rates, but others fear a rate rise will threaten the fragile recovery.” Read more
Rate rises might start to happen a bit quicker in Sweden following today’s rate rise. The repo rate rose 25bp to 1.5 per cent to help stabilise inflation and avoid resource utilisation being too high:
Inflationary pressures are still low in Sweden, but are expected to increase as economic activity strengthens… To stabilise inflation close to the target of 2 per cent and to avoid resource utilisation being too high, the repo rate needs to gradually increase. The Executive Board of the Riksbank has therefore decided to raise the repo rate by 0.25 percentage points to 1.5 per cent. The assessment is also that the repo rate needs to be raised somewhat faster in the coming period.