Daily Archives: March 24, 2011

Ralph Atkins

The eurozone debt crisis re-erupts. Bond market tensions soar over the escalating problems faced by Portugal and Ireland. But there is no sign of the European Central Bank intervention today.

Surprising? It should not be. The ECB would not want to be seen helping governments overtly, especially with a European Union summit just beginning in Brussels. Only once politicians have acted has it in the past seen the case for an appropriate ECB response.

Most famously in May last year, Jean-Claude Trichet, president, said the governing council had not even discussed bond purchases at its meeting in Lisbon. Then a day later, came the Brussels summit that drew up the original eurozone rescue package. Only afterwards did the ECB launch its purchasing programme.

Now, there are other reasons for the ECB to hold back. Read more

In a speech titled “MPC in the dock” this morning, Spencer Dale, Bank of England’s chief economist, provides both the best defence of the Bank of England’s monetary policy stance I have read in a long time and a much more coherent explanation of recent poor UK economic performance than the Office for Budget Responsibility in yesterday’s Budget.

The title shows the pressure the Bank finds itself in and Dale’s embrace of humility rather than the usual hubris is welcome. When Bank officials – and the governor in particular – take a leaf out of their chief economist’s book and stop saying they have nothing to learn and they have been entirely consistent, people will be much more willing to listen to their argument.

Mr Dale was clear that inflation was set in the UK and not imported, as many MPC members have recently suggested. He was honest that he probably would have voted for different monetary policy had he had better information about the coming price shocks rather than taking the absurd stance the governor took that of course he would not have done anything differently. He pointed out where the MPC was learning from its mistakes, particularly on the issue of import price pass through.

To summarise the speech Mr Dale posed four clear questions. Read more

Cast your mind back to the good old days, when a high yield meant 6 per cent and nervous market talk might culminate in whispers of a bail-out. Compare and contrast with the situation now, where two states have long since passed the point of bail-out and there is real and present danger of a default.

Much focus is on Portugal, lined up somewhat unwillingly for the next cash injection. It must make an unappealing prospect as two already-medicated patients have just taken a sharp turn for the worse. Yields on Irish bonds rose nearly an entire percentage point during trading yesterday to touch 10.7 per cent. As a reminder, Irish yields were about 8 per cent at the time of the bail-out. And it bears repeating: Irish yields are above bail-out levels even though Ireland has been bailed out. Ditto Greece.

Eurozone leaders are due to begin a scheduled meeting in Brussels about now. They’ll have plenty to discuss. A possible bail-out of Portugal will certainly be on the agenda but it might not make the top of the list. After all, Read more

Fitch has just downgraded Portugal two notches to A-, placing the rating on credit watch down, meaning that further downgrades are likely. It’s not great news for the Iberian nation, which faces increasing pressure for a bail-out as yields rise and domestic politics worsen. But the bigger ratings news is yet to happen and it is likely to come from Standard and Poors.

Fitch’s downgrade just brings its Portuguese government rating in line with those of its peers: all three main agencies now hold equivalent ratings. Moody’s downgraded Portugal two notches to A3 (=A-) about a week ago, leaving the rating with a negative outlook. S&P was quicker off the mark, lowering its rating in April 2010 and placing the rating on watch down on November 30. Read more

UK Budget
A fiscally neutral UK Budget produced amid tight constraints claims to chart a course to growth by focusing on increasing the supply of land, labour and capital rather than productivity. Broadly pro-business, the Budget sticks to the government’s longer-term plan to secure market confidence, long-term growth and Britain’s Aaa rating via austerity. Private sector growth should be given a boost in 21 low-tax enterprise zones set in urban areas. Meanwhile, state workers are set to pay more on their pensions as the government quietly drops claims that the Budget is progressive. Overall, Osborne has made the best of a bad hand, barring a poor decision on housing finance. The real challenge, though, is to lift the UK’s productivity growth, and it is unclear that a Budget – especially one deemed “forgettable” – is a suitable vehicle for achieving this. For more, see this Q&A.

The Bank of England’s chief economist has warned that UK inflation could remain high for some time, and called for a rise in interest rates to avoid the risk of cost pressures becoming entrenched.

Spencer Dale, who joined two external members of the monetary policy committee in voting for a rate hike in February, admitted that the Bank had got its forecasts for inflation badly wrong in part because it had massively underestimated how much the weakness of the pound would be passed through to consumers via higher inflation. Instead of a 40 per cent pass through of higher import prices to consumer prices, he said, the UK had seen something closer to a 100 per cent pass through of the price rises. Read more

Manila has raised its key policy rates quarter of a point – as signalled – to combat rising prices and manage inflation expectations. The overnight borrowing rate now stands at 4.25 per cent and the overnight lending rate at 6.25 per cent. The interest rates on term repos, reverse repos, and special deposit accounts were also raised accordingly.

Inflation is running at the high end of the 3-5 per cent target range, and deputy governor Diwa Guinigundo said it would have averaged 5.2 per cent this year without today’s interest rate move. The central bank indicated further upward inflation pressure lay ahead, and that appropriate policy action would be taken. Analysts expect another one or two such rate rises this year, though some observed that domestic interest rate rises would have limited impact on imported global food and energy inflation.