Monthly Archives: March 2011

Minutes just released show that all members of the monetary policy committee maintained their vote from the previous month. Andrew Sentance voted against the motion to hold rates, preferring a half point rise; Martin Weale and Spencer Dale preferred a quarter point rise; and the remaining six members voted in favour of holding rates. Adam Posen, as before, voted against maintaining the Bank’s asset purchase programme at £200bn, preferring a £50bn increase.

Some of those voting to hold rates acknowledged that “the case for an increase in the base rate had strengthened in recent months,” but preferred to wait for clarity on several uncertainties. Many think MPC opinions will be greatly influenced by the second quarter growth estimate, due out before the May meeting. On the “key question” of growth, the Bank seemed optimistic. “The most recent indicators of output had tended to support the view that growth had resumed in the first quarter,” read the minutes, citing surveys and indices of business output and sentiment.

Indicators of consumer spending were “much weaker”, however. Read more

It would be better for sizable eurozone bail-outs to occur after July 2013. This is the implication of a strange state of affairs in Brussels: namely that policymakers have agreed how to fund the future ESM to its full value, but not its predecessor, the EFSF.

Only about €250bn of the existing €440bn European Financial Stability Facility is available to bail out beleaguered eurozone sovereigns. This is because the fund wants to lend with an AAA rating, but several contributing eurozone sovereigns are rated lower. Increasing the rating is achieved, in effect, by overcollateralising each loan. Now it has been agreed to increase the lending capacity of the EFSF, but no word yet as to how. Apparently, further overcollateralisation has been ruled out: according to Citi’s Jurgen Michels, the lending capacity of the eurozone’s transitional measures (currently the EFSF and EFSM) shall never exceed €500bn.

The ban on further overcollateralising the rescue fund might seem odd, since that is partly the solution agreed for the European Stability Mechanism. Read more

Hong Kong’s yuan market is set to receive a boost from China’s central bank. The People’s Bank of China plans to raise the territory’s yuan clearing rate and is considering an increase in deposit rate, too, Reuters reports. Rates in Hong Kong are significantly lower than they are on the mainland, and unnamed sources quoted by the news agency say the planned moves are unlikely to align rates in one step. 

An increase in deposit rates would encourage companies to leave yuan in Hong Kong rather than sending them back to the mainland. Analysts also expect an increase in the supply of yuan bonds as investors hope for higher yields on forthcoming issues. From Reuters: Read more

Ralph Atkins

The “Will-they? Won’t they?” debate continues… On Monday, Jean-Claude Trichet, European Central Bank president, gave a pretty big hint that a quarter percentage point interest rate rise was still on the cards for April, in spite of events in Japan and Libya. He had “nothing to add” to his comments on the matter earlier this month, he told the European Parliament.

In an interview just released by Japan’s Nikkei newspaper, Jürgen Stark, ECB executive board member, has added quite a lot - but not necessarily provided further clarification. Read more

We all know that the Bank of England and other authorities have persistently been surprised by the strength of UK inflation and this chart shows just how extensive the surprise has been. As inflation hit 4.4 per cent in February, again above expectations, the chart shows the price level and successive Bank forecasts of the price level. As you can see, except for the unexpected cut in value added tax in 2009, since 2007, the Bank has persistently believed prices would be lower in the future than they have turned out to be.

The Bank of England’s dilemma just got worse. The ONS has announced annual prices rose 4.4 per cent in the year to February, up from 4 per cent in the year to January and considerably above the Bank’s 2 per cent target.

The 0.7 per cent month-on-month rise takes UK inflation to its highest level for nearly two and a half years. Read more

There is often a trade-off in practical economics between getting the answer to big questions roughly right and being precise with answers to more limited questions but getting the big picture wrong.

“Roughly right” always wins in my book.

When the Treasury claimed its tax and benefit measures were “progressive”, that result came because it omitted difficult to assess changes such as cuts to housing benefit. Any fool knows that changes to these hit lower income families. By answering a limited but precise question accurately and passing it off as an assessment of the full Budget effects, George Osborne, the chancellor had actually assumed that housing benefit changes have no effect on anything except the exchequer. That was nonsense and soon exposed by a “roughly right” analysis by the Institute for Fiscal Studies.

Today, two news organisations have had a go at answering questions about household income prospects. Read more

White collar workers face triple hit – FT

UK economy: in search of shoots – FT Read more

No stress tests for ages, then they all come along at once.

Some banks are set to raise their dividends imminently in the US, once the Fed gives them the green light ahead of detailed stress test results released in secret next month. Another practice put on hold in 2009 – share buybacks – will also be back on the menu for some of the 19 large banks. Only those groups that wanted to increase dividends or share buy-backs, or repay government capital, received a call from the Fed on Friday. Those receiving good news will no doubt act swiftly: any of these activities will presumably be seen as a public badge of honour, in the absence of results publication.

Europe, meanwhile, does intend to publish results. Arguably the target audience for Europe’s stress tests is investors and markets rather than the banks themselves. This might give the unfortunate impression that policymakers are aiming for the appearance of a healthy banking sector rather than the real thing. Read more

What constitutes success for the world’s one-day yen policy? To minimise “excess volatility and disorderly movements in exchange rates,” if the G7 statement is anything to go by.

But then “volatility” is all a matter of time period. For instance, it has gone up over the one-day time horizon, with the very sharp weakening of the yen since central bank intervention began this morning. “Disorder” gives a little more wiggle room because it is defined by its effects. It might include, for instance, exchange rate movements that lead to a credit crunch. (One wonders, though, whether a rapid weakening of the yen would also have been classed as “disorderly”.)

Some pundits are saying the G7 action is at least partly self-interested. Certainly their participation is likely to cost them: their domestic currencies will appreciate, and the trades themselves are very likely to lose money as the yen eventually rebounds. Perhaps the tumbling Nikkei – and stocks elsewhere following – made these costs seem smaller. Success in these terms has been achieved – for today. American, European and British equities have gained today.

Other commentators suggest the moves are about defeating the speculators. If we could Read more


Other news

Large Chinese lenders will need to keep a fifth of their deposits with the central bank from March 25, after the People’s Bank of China announced an increase in reserve requirements. Individual banks that are lending too much might be targeted with further specific measures. Small-medium banks are probably now required to hold 16.5 per cent of loans, though, as ever, this is unclear from the Bank’s statement.

Tightening was expected – even overdue – but comments from the PBoC had suggested it might be a rate rise. This is the third rise in reserve requirements this year and follows a rate rise in February. The last raise in reserve requirements was also half a percentage point, and was announced a month ago, on February 18. Consumer price inflation held at 4.9 per cent in the year to February – the same as January, but above 4.6 per cent in December and also above forecasters’ February expectations of about 4.7 per cent. Read more

The Group of Seven industrialised nations have agreed to co-ordinated currency intervention for the first time in a decade to help Japan recover from its devastating earthquake, tsunami and nuclear crisis.

Authorities in Japan, the eurozone, the UK, Canada and the US agreed on Friday to help weaken the yen in a rolling intervention that began at 9am in Tokyo, which immediately pushed the yen down from above Y79 against the US dollar to below Y81. Read more

Import prices in February climbed much faster than expected, as did producer prices, and the Federal Reserve adjusted the language in its latest FOMC statement to reflect the “upward pressure” on inflation from higher commodities prices.

But today’s CPI release showed that inflation in February was only slightly higher than consensus, so there probably won’t be any market surprises based on this — not with the extraordinary events happening elsewhere in the world. The headline number was up 0.5 per cent last month, and core grew by 0.2 per cent.

Still, the year-over-year gap between headline and core inflation continues to widen impressively. These are still low levels for both, but it’s worth mentioning that February was also the second straight month in which core inflation grew at 0.2 per cent — after not having exceeded 0.1 per cent since last June.

 Read more

A rate rise was a serious option at the last meeting of Poland’s monetary policy committee. Minutes reveal that policymakers held a vote on a quarter point rate rise, but that the majority voted against it because of heightened doubt over growth, coupled with low drivers of aggregate demand (such as high unemployment and low wage pressure):

The majority … represented the view that recent data increased the uncertainty regarding economic growth… Further arguments in favour of this decision included the persistently high unemployment rate and modest wage pressures in the enterprise sector, both reducing the risk that heightened inflation, which up to now has resulted from factors beyond the direct influence of monetary policy, should persist. Furthermore, in the opinion of some Council members, NBP decisions on interest rates should take into account the monetary policy pursued by major central banks, in particular the European Central Bank.

 Read more

Turkey’s central bank stepped in again this week to clear confusion over the effects of its unorthodox monetary policy, after the release of data that appeared to contradict comments made by officials. The trouble was caused by balance of payments data: it showed portfolio inflows of $2.3bn in January, higher than a year earlier and at odds with official claims that some $10bn of “hot money” had left the country since December, when the central bank began “quantitative tightening” to deal with macroeconomic imbalances.

Two clarifications from the central bank have cleared up the discrepancy. The balance of payments data showed foreign investors had sold out of Turkish equities since November, while increasing their exposure to debt instruments. But the figures did not include money market transactions, mainly in the form of swap operations. Here, the central bank said, there had indeed been an outflow of $11.5bn since November. Read more

Nobody knows how much of Mrs Watanabe’s foreign stash she intends to bring home. But the choices made by this mythical Japanese housewife – astute, and hunting for a better return than she can find at home – could help to explain the rapidly strengthening yen.

It makes sense that the average Japanese investor would want to repatriate their money at the moment. The average Japanese investor, after all, lives in Tokyo. Many have lost homes and possessions, with 430,000 estimated to be living in temporary accommodation (and it is winter). Others will be trying to move away from the Fukushima atomic power station. Still more are facing food shortages or rationing. In all these cases, cash is king. Read more

There are numerous reasons to discount household survey measures of inflation expectations. Surveyed households want to let off steam about rising prices, they naively expect recent trends to continue and they have no expertise in predicting inflation. That said, the Bank has been rather bad at such predictions too!

Two measures of UK inflation expectations are out today – the Bank of England’s own survey and the long-running Barclays survey – and both will increase discomfort levels of most of the MPC members who do not entirely ignore these surveys.

It is not the short-term inflation expectations that will be a worry. On the Bank’s survey, the median expectation for inflation over the coming year is 4 per cent. That is a reflection of the Bank’s own forecasts for the annual inflation rate over the coming year. (Technical note: of course from today onward, the rise in the price level expected by the Bank is much lower as this post explained, but this is far too much detail for an expectations survey.) Read more