Daily Archives: March 11, 2011

Robin Harding

Some commentators have their knickers in a twist about the rise in the monetary base since February. The reason for it, of course, is that the Treasury has suspended its Supplementary Financing Programme in in order to buy time for Congress to raise the debt limit. The correlation between the SFP and bank reserves (and hence monetary base) is very clear.

 

The ECB is succeeding in its mission to wean Irish banks off emergency eurozone support – but at a cost. Data from the Irish central bank suggest that support for Ireland’s banking sector rose €18.9bn in the month to February 25 to stand at €70.1bn (red on the chart). ECB support fell €9bn to stand at €116.9bn (blue on the chart). This means that combined assistance rose €10bn to €187bn, a new record. As you can see on the chart, combined assistance (the total height of the bar) dipped in the month to January, but has now risen again, suggesting banks’ needs are growing.

For the Irish central bank, assistance to the banking sector (under “Other assets”) now constitutes more than a third of total assets. Indeed, assistance for banks is approaching half of the country’s GDP. As David Owen, chief European economist at Jeffries points out: “There is a school of thought that this €70bn or so of emergency liquidity is a contingent liability of the Irish state and so should be treated as such. If so, then outstanding Irish government debt-GDP could soon be heading towards 175 per cent. It will be interesting to see what the IMF says on the subject, when it publishes its assessment of the economy and debt dynamics 15 March.” Indeed it will.

Interest rates are back in vogue at the People’s Bank: the concern over capital inflows shouldn’t reduce the case for using them, governor Zhou has said. He also said that raising banks’ reserve requirements, which reduces the amount available to lend, is a liquidity management tool that cannot necessarily replace other monetary tools. China has raised rates three times since October last year and raised the reserve requirement five times. There has been a relatively long gap since the last monetary tweak, on February 18.

These pro-interest rate comments are courtesy of SocGen research, taken from the PBoC press conference at China’s annual plenary session of the National People’s Congress. 

Eurozone government bonds could in future be issued by a single authority with countries’ budget plans being approved by the bloc’s political leaders, a top European Central Bank policymaker has suggested. The proposal by Lorenzo Bini Smaghi, ECB executive board member, is one of the most radical yet for preventing a repetition of the eurozone’s debt crisis, and would involve a big step towards political integration in the 17-country bloc. It highlights the pressure the ECB is exerting for a bold response to the crisis by political leaders, who were meeting in Brussels on Friday.

Mr Bini Smaghi, whose proposals also include a ban on eurozone members defaulting, said eurozone politicians often did not understand how financial markets worked and warned that there was “insufficient capacity to ‘think European,’ that is to channel national decision–making in a broader framework”. He also urged greater centralisation of bank supervision in Europe to prevent national regulators favouring their own countries’ financial institutions – citing the risks Ireland’s banking system had created for the rest of the eurozone. 

Ralph Atkins

A poignant moment for Jean-Claude Trichet, European Central Bank president, before he flew to Brussels for Friday’s eurozone summit. At a Frankfurt press conference he unveiled the winning design for a memorial commemorating the more than 10,000 Jewish citizens who were assembled at the city’s Grossmarkthalle (market hall) before deportation to concentration camps during the second world war. The giant hall is being redeveloped as the ECB’s permanent headquarters in the German financial capital.

The competition followed years of debate about the form such a memorial should take – and how it could fit with the security and other requirements of the ECB. Mr Trichet said the chosen design, by Cologne-based architects Katzkaiser, with a ramp leading to the cellar of the building, would “reflect the drama of deportation and the holocaust with an extremely powerful set of symbols”. For more pictures, here’s the link to the official website.

In a “preventative” measure to tackle inflation and inflation expectations, Peru’s central bank has raised rates 25 basis points for the third consecutive month. The reference interest rate now stands at 3.75 per cent.

The move was widely expected given rising – but still moderate – inflation pressures. Annual inflation to February was 2.23 per cent. Month-on-month the increase was 0.38, just below January’s monthly increase of 0.39, which was the highest in two years. The Bank’s target is to keep inflation below 3 per cent. The central bank has indicated that monetary policy remains accommodative at 3.75 per cent, and that 4.5 per cent would be more “neutral”, suggesting further rises lie ahead. There might be a pause at the next meeting, however, given moderate and tempering inflation.

Malaysia has held rates but raised the proportion of deposits banks must keep with the central bank, as signalled by the bank. The reserve requirement will double from 1 to 2 per cent, effective April 1. The overnight policy rate remains at 2.75 per cent.

Raising the reserve requirement has become a favoured alternative to raising rates in countries wanting to tighten without attracting certain types of destabilising short-term capital inflows. Bank Negara Malaysia described the use of the reserve requirement as “pre-emptive” and “an instrument to manage liquidity and not a signal on the stance of monetary policy”. From the Bank: