Daily Archives: March 3, 2011

As Ralph predicted, the ECB has extended its offer of unlimited funding at its three-month operations until July 12, rather than reverting to auctions. Funds would be lent at an indexed fixed rate, of as yet unknown value – derived from the rates at weekly ECB auctions.

Since the collapse of Lehman Brothers in September 2008, the ECB has met in full banks’ demands for liquidity. It is frustrated that some banks – perhaps as few as a dozen – remain “addicted” to this liquidity and unable to fund themselves normally.

So far, it has stopped providing unlimited six-month and one-year loans; a logical next step on Thursday would be to reintroduce auctions for three-month liquidity. But the ECB could delay this – in spite of its hawkish inflation instincts, there are reasons for a prudent non-standard measures “exit strategy”.

Delay is exactly what the ECB has done, by three months. Given Ralph’s predictive prowess, worth noting his suggestion that tempers as well as interest rates might rise in April: Read more

“Strong vigilance” is warranted with a view to containing rising inflation, the ECB president said today, sending the euro sharply higher – for that is one of the key phrases associated with imminent rate rises. Analysts are now predicting more than one rise in 2011.

Of the nine occasions the phrase been used since 2005, seven times rates were raised at the next meeting. It’s not definite, of course. Of the remaining two occasions, once there was a two-meeting gap before rates were raised; and in the other case there was a change of heart. (No action was taken for almost a year – and then that rate rise was swiftly reversed with the post-crisis rate cuts that left us at the record low rates we see today.)

Although upside and downside risks still roughly balance, they exist “in a context of elevated uncertainty,” said Mr Trichet. Read more

In another extremely clear speech from Charlie Bean, the deputy governor of the Bank of England highlights the difficult trade off the Bank faces between the genuine fears of a feeble recovery and the growing signs of more persistent inflationary pressure.

As I have pointed out before, Mr Bean faced a similar dilemma in 2008, wrote about it, and is slightly chastened by the experience. In today’s speech there is something for everyone although the most interesting parts are on page 8 and 9.

First, he articulates the reality that accounting exercises showing weak domestically generated inflation completely fail to acknowledge that domestic prices would be different (and higher) had VAT, energy prices and import prices not risen. This is something Mervyn King also used to stress until he stoppedRead more

Who said charity didn’t pay? A 7.1 per cent return sounds very attractive.

Annual accounts from the ECB tell us they made €438m profit on sovereign bonds bought since May of last year to help reassure markets and prevent bail-outs. This translates to a €5.5bn profit across the eurosystem – if the ECB holds 8 per cent of the bonds, as convention would suggest.

We don’t know what proportion of the bonds are held by the ECB and what proportion by the national central banks. But the ECB holds 8 per cent of the total banknotes in circulation and why would policymakers change it? Working the numbers gives us a sensible yield, too: 7.1 per cent. (see workings, right). Read more

VAT, energy prices and import prices contributed about 2-4 per cent to headline inflation at the end of last year (blue band in chart, right), according to estimates quoted by the Bank of England. Compare that with a contribution of -0.5-1.3 per cent (green band) from more typical domestic (and more manageable) factors such as wages and producer profits, to catch a glimpse of The MPC’s policy dilemma.

That is the title of Charlie Bean’s speech, just delivered at ABI’s Economics and Research conference in London. Be careful interpreting these numbers: the -0.5-1.3 per cent range of inflation contribution “does not provide an estimate of what inflation would have been if commodity prices, the exchange rate and VAT had all remained at their 2007 levels,” said Mr Bean. Without movements in sterling and global prices, “inflation might have been somewhat higher than indicated by the green swathe”. But they would be unlikely to have pushed inflation “materially” above target. Read more

Europe’s refinancing rate remains at 1 per cent, with the deposit and lending rates staying at 0.25 and 1.75 per cent, respectively.

Eurozone consumer prices rose 2.3 per cent in the year to January, exceeding the bank’s target of “below but close to 2 per cent”.

Holdings of sovereign debt will be included in European stress tests, which will include country-specific adverse scenarios designed by the ECB. There was some doubt whether sovereign debt would be included after Cebs, the EBA’s predecessor, was reported in November saying it wasn’t “clear that a repeat of the sovereign risk sensitivity analysis will be necessary in 2011″. How times change.

Collaboration on methodology will begin tomorrow (Friday) between the EBA and individual countries’ supervisory bodies. Scenarios plus the sample of banks will be published March 18. Broad principles of stress test methodology are expected in April. Several months will be needed to complete the tests, which will be published in June. (Note: new US stress tests, which are due for completion this month, will not be published.) And what will happen should a bank fail? Read more

Brazil has raised rates half a point to 11.75 per cent, the second rise in three months. Copom, the monetary policy committee, voted unanimously for the raise to rein in inflation. A single sentence accompanied the decision, offering no clues as to the thoughts of policymakers on the future direction.

Prices rose 6.08 per cent in the year to February, above the central bank’s 4.5 per cent target, though within tolerance bands of +/- 2 percentage points. Given the strength of recent inflation, some analysts had expected a three quarter point rise in the selic rate. Significantly, though, food price pressures have receded in Sao Paolo, data showed today.