Daily Archives: March 9, 2011

The behaviour of the world’s two main central banks, and the relationship between them, have profound effects on global financial markets. As a broad rule of thumb, the ECB (and the Bundesbank before it) have tended to act in a very similar manner to the Fed, except about 6-12 months later. In fact, that is one of the most well established rules in the analysis of monetary policy making.

It does not imply that the ECB deliberately “copies” the Fed, which it clearly does not do. But it does imply that circumstances have usually produced this symbiotic relationship between the two key central banks. When this relationship has been broken in the past, it has usually spelled trouble.

The “normal” relationship between European and US monetary policy is clearly depicted in the first graph. It is obvious that where the US leads, Europe generally follows. Since the inception of the euro, the statistically optimal lag between the monetary policy rates set by the Fed and the ECB is about 10 months, with the Fed in the lead, and the correlation between the two series using that lag is about 0.85.

 

In an effort to improve liquidity and boost the economy, the Croatian National Bank has cut interest rates to 0.25 per cent from 0.5 per cent. Key discount and repo rates remain on hold. Rate cuts are currently rare among central banks, split mainly between raisers and holders. Croatia’s central bank has also waived fees on the local currency (kuna) reserve requirement.

Via google translate: 

A look at the data on Greece and Ireland should stay the hands of policymakers keen to bail-out Portugal. If those two bail-outs were intended to reassure markets, they have failed. Clarity on bondholder rights might be a better target.

Ireland was bailed out in November. Despite knowing €85bn is on tap, markets priced Ireland’s ten year cost of debt at a record high yesterday: government bonds trading in the secondary market closed at 9.39 per cent. See green line on chart, right. (Note: this number does not affect the Irish government directly since they do not finance their loans from the resale market: it is a proxy for the rate the government would have to pay to borrow from the market at auction.) These record levels are more than a percentage point higher than levels that prompted the bail-out, and just higher than the previous record which occurred post bail-out (since yields, bizarrely, rose).

Greece was bailed out in May. But Greece’s ten year cost of debt touched a record 12.82 per cent during yesterday’s trading. Their ten year debt closed at 12.68 per cent, second only to a rough patch in January. Bail-outs are useful when there’s a temporary cashflow problem – but continued and rising market stress should tell us that something else is at play. 

The Bank of Thailand has raised rates 25 basis points to 2.5 per cent, as expected. The decision was unanimous. The central bank held back from a larger rise, saying it viewed high food and energy prices as temporary:

“The MPC viewed that unless political unrest in the Middle East becomes widespread and affects global oil supply, the current spike in oil and commodity prices will not significantly impact the continuity of global recovery.”

The whereabouts of the governor of Libya’s central bank, the man who holds the key to the Gaddafi regime’s finances, have confounded officials, diplomats and bankers who have been desperate to find him over the past two weeks.

Farhat Omar Bengdara has spent much of the time since the outbreak of the uprising against Muammer Gaddafi outside Libya but it is has been unclear whether he supported the regime or was co-operating with the opposition

ECB rate rises – thought imminent – are likely to be gradual, says Jens Larsen, chief European economist at RCB Capital Markets. Back-to-back rate rises are unlikely, and one or perhaps two rate rises are expected this year.

Vulnerable economies – such as Spain, Italy, Ireland, Portugal and Greece – will be more sensitive to the tightening effects of a rate rise, which leads Mr Larsen to doubt the ECB will want to raise rates quickly. Indeed, Reuters pointed out earlier that 80 per cent of Irish mortgages are attached to a variable rate and nearly nine in ten Spanish mortgages are tied to the interbank lending rate, euribor. (For comparison, FSA data suggest the proportion of UK mortgages on variable was 68 per cent as of Q3 2010.) That makes those borrowers more vulnerable to a rise in interest rates – doubly so, if they have become dependent on low rates during the past two years.