Daily Archives: February 25, 2011

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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Fighting currency appreciation is an expensive business. It cost the Swiss SFr 21bn ($23bn) before they gave up and let the franc rise. New figures out from the Bank of Israel show it cost them NIS 17.6bn ($4.8bn). The Bank’s overall loss was NIS 17.9, of which 98 per cent can be attributed to exchange rate moves.

Israel’s foreign exchange stockpile has been growing – but the governor says these reserves might prove useful if there is a reversal of capital flows. Israel has been raising rates to contain inflation and dampen the too-buoyant housing market. The governor has called for international rules on foreign exchange markets and capital flows, just as exist currently for trade.

Luc Coene, Flemish-speaking vice governor of the National Bank of Belgium, will be promoted to governor when French-speaking Guy Quaden steps down on March 31. His five-year term will begin April 1.

The move was widely expected. Mr Coene had been due the promotion last August when Mr Quaden was meant to retire, but Belgium’s inability to form a government meant no final decision was taken at that time. Read more

High inflation has prompted the first rate rise in Russia since the financial crisis. All rates are affected by the quarter-point rise, including the deposit rate and the benchmark refinancing rate. This has surprised analysts. A Reuters poll, for example, predicted a 25bp rise in the deposit rate, with about half of respondents expecting a simultaneous rise in reserve requirements. The majority had expected the refinancing rate to be left on hold.

The rate rise, which will take the refi rate to 8 per cent, is effective February 28. Reserve requirements – raised at the end of last month – will be increased by the same amounts as last time: i.e. 1 percentage point for corporates, and 50bp for individuals and other. That move will be effective March 1. Use the dropdown below to explore historical reserve requirements (note: the most recent changes are entered by announcement date rather than effective date). Read more