Monthly Archives: February 2011

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

Robin Harding

I’ve written here before that one possibility under discussion at the Fed is tapering off its $600bn QE2 asset purchases in order to minimise market disruption when they end.

Today, president James Bullard of the St Louis Fed raised the option of tapering so total purchases when the programme stops at the end of June are less than $600bn.

“The natural debate now is whether to complete the program or to taper off to a somewhat lower level of assets”

Mr Bullard told reporters after an interesting speech that he would favour a small reduction in the programme at the next meeting in March to reflect the better economic outlook.

Several market commentators have also put forward a slightly different version of a taper: Read more

James Politi

The US is little more than $200bn away – or about 2 months – away from reaching its congressionally mandated national debt limit of $14,300bn.

The need to increase it to avoid a potentially disastrous US default is the next fiscal battleground in Washington, after the lawmakers stop squabbling over a government shutdown.

Republicans want to use the opportunity to push for more spending cuts, while Democrats say this is not the place to negotiate.

On Thursday, Moody’s Investors Service offered its analysis of the likelihood that a major crisis will ensue, threatening America’s triple-A credit rating much earlier than even the most ardent fiscal hawks would imagine. Read more

Only twice since the Bank gained independence has a sitting governor been outvoted. One was in August 2005, when the committee voted for a cut while the governor preferred a hold. In the other, two years later, the governor voted for a rate rise, and was outvoted to keep rates on hold. Might we be about to see a third case?

For the prosecution, three pieces of evidence. The first is the voting pattern. Never since the Bank gained independence has there been such a long period in which members of the committee have voted against the governor. Typically, there’s the odd vote for a change, while the governor and a majority prefer to hold. Demand for change then either grows – taking the governor with it – or fizzles out. But dissent has now lasted for nine consecutive Bank of England meetings – the longest on record. (The previous record was seven.)

Next, an insightful point from Alan Clarke of BNP Paribas. Read more

James Bullard delivered an interesting, chart-rich speech on inflation, QE2 and global output gaps on Thursday. The now non-voting St Louis Fed President was a strong advocate of QE2 as a way to reverse alleged deflationary pressures. Bullard hits back at those claiming the Fed is importing inflation, saying — as Ben Bernanke did in Paris on Friday — that some “countries are choosing to import US monetary policy to some extent”.

But — and now we get to the really interesting bit of the presentation — Bullard does wonder whether the US should consider ‘the global output gap’. As John Kemp pointed out in his column on Thursday morning:

It is the first time a senior official at the U.S. central bank has acknowledged global capacity issues rather than a narrow focus on U.S. unemployment and capacity utilisation might give a better indication of where inflation is headed.

Bullard uses the following chart to suggest that “the global ouput gap is probably much narrower or even positive”:

 Read more

Russia’s finance minister has indicated a preference for a hike in interest rates when the board meets on Friday. Governments are often pro-growth, with central banks taking the unpopular – and sometimes anti-growth – decisions needed to fight inflation. Not in this case. “The central bank is independent, but I think it is the time to take additional measures,” Russia’s finance minister Alexei Kudrin told the BBC, Reuters news wire reports.

Bank Rossii surprised markets (and us) in January by following bullish hints with a raise in reserve requirements instead of a rate rise. Prices have risen 2.9 per cent in the first six weeks of 2011: at that rate, annual inflation for 2011 would be 25 per cent. Read more