Daily Archives: February 21, 2011

After three weeks of relative calm, the ECB was forced to re-enter the fray and buy government bonds a couple of weeks ago, as rumoured by traders. Last week, €711m bonds bought under the eurozone central bank’s securities markets programme, settled.

Rumour has it the majority of bonds were Portuguese. Yields for the 10-year bonds remain on an upward trend despite this additional demand, however. The 10-year has typically closed above 7 per cent during February, touching 7.5 per cent several times in intra-day trading in the past few days. Read more

The Bank of Israel has raised its March interest rate by a quarter of one per cent, prompted by higher than expected inflation, strong economic activity and continued fears about an overheating housing market.

Israel’s central bank also said “the expected timing of an increase in the Fed interest rate has been brought forward”. Read more

Robin Harding

I’m not sure quite why Bernd Hayo and Matthias Neuenkirch of Philipps-University in Marburg, Germany, care about the behaviour of regional Fed presidents, but their latest working paper will interest Fed-watchers.

They took 612 speeches by members of the FOMC up to September 2009 and then coded them as ‘tightening’ or ‘easing’. Then they tested against economic variables to see what was motivating the speech.

Our results are, first, that Fed Governors and presidents follow a Taylor rule when expressing their opinions: a rise in expected inflation (unemployment) makes a hawkish speech more (less) likely. Second, the content of speeches by Fed presidents is affected by both regional and national macroeconomic variables. Third, speeches by nonvoting presidents are more focused on regional economic development than are those by voting presidents. Finally, voting presidents and Governors are less backward-looking in their wording than are nonvoting presidents.

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**updated 18.49**
Hungary’s base rate remains at 6 per cent after three quarter-point rate rises in as many months. The decision to hold was widely expected. Prices in the year to December rose by 4.7 per cent, against a target of 3 per cent. But rates were raised on December 20 and January 24, both of which should work to bring inflation down in the coming months.

It is the final meeting of the monetary policy council in its current form. A legislative change has been approved by the Hungarian parliament, which will allow the Hungarian government to appoint four new central bankers, which some fear will lead to policy focused on growth rather than inflation.

Apart from the continuing political instability in the Middle East, the most important macro events of the week were focused on inflation. We have known for a while that headline inflation is now rising, especially in the emerging world, because of the increases in food and energy prices. Now it appears that core inflation is also rising, despite the very large output gaps in most developed economies. Central bankers are now seriously split on whether to tighten policy, but the majority view still seems to be dovish.

This week, I learned that:

1. Core inflation is rising in most economies. This is in some ways surprising, since the output gap in the developed economies remains in the region of 3-4 per cent of GDP on most estimates. Until recently, this large degree of spare capacity was having the expected effect on core inflation, which was dropping at a rate of about 0.5 per cent per annum in the developed world. This gradual downward drift was predicted to continue during 2011 (for example, see this earlier blog on the impact on persistently large output gaps), but in recent months this pattern has been interrupted. The first graph shows the behaviour of core inflation in the 4 largest economies in the last two years.

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