Daily Archives: April 12, 2011

Chris Giles

If the International Monetary Fund is very hawkish about emerging economy monetary policy, it is super-dovish about the same policies in developed economies. This will please the Fed, many in the Bank of England, but make difficult reading for the European Central Bank.

Fed
The Fund is very relaxed about the recent upturn in inflation and thinks the Fed and its advanced economy counterparts can “accommodate hikes in food and energy prices mainly because the weight of food and energy in the consumer basket is relatively small, people have learned from experience that such hikes do not set off a cycle of inflation, and excess capacity will exert downward pressure on wages”. The Fed will be pleased with its assessment from the Fund.

“With output still significantly below potential, inflation persistently low, and the unemployment rate stubbornly high, continued monetary accommodation is warranted.”

ECB
Jean-Claude Trichet is likely to be irritated by the IMF’s typically Anglo Saxon view that its rise in interest rates when the European economy is still weak was wrong. But the IMF did not try to hide its view Read more

Chris Giles

Here in Washington, rather low-key International Monetary Fund/World Bank spring meetings are getting underway. The Group of 20 is likely to have another squabble and then paper over the cracks with lots of effort spent in talking about measuring trade imbalances rather than doing anything about them. But the April 2011 Fund World Economic Outlook is rather good. I will bring you some of the more interesting themes here to supplement the news we published yesterday. First out of the traps is the Fund’s real concern about overheating in emerging economies.

The IMF points out that most emerging markets have exceeded the level of output from the pre-crisis peak and have rising levels of headline and core inflation, “suggesting that inflation pressure is broadening”.

“The issue is whether they [emerging economies] are experiencing the kind of credit boom that inevitably ends with a bust. Evidence is not reassuring in this regard”.

 Read more

Turkey’s banking industry could be damaged unless the central bank reverses last year’s decision to stop paying interest on required reserves, the head of one of the country’s biggest lenders claims.

Suzan Sabanci, chairman of Akbank, told the Financial Times that new rules requiring banks to lodge 15 per cent of short-term lira deposits with the central bank risked fundamentally weakening banks unless they received interest in compensation. “The government is trying to be cautious that the economy doesn’t grow too fast. And I agree with that,” she said. “But we need to be recompensed. They should start paying interest in six months’ time.” Read more

Consumer price inflation has fallen back to 4 per cent in the UK, against expectations that the rate would hold steady at 4.4 per cent. Month-on-month, prices rose by 0.3 per cent.

Food and non-alcoholic beverage prices drove the reduction. Supermarket-led sales helped to temper price rises across a broad range of foodstuffs. Fruit, bread and cereals were particularly affected. Overall, the change in food and beverage prices contribued -0.2 toward the -0.4 percentage point change between February and March, though the category as a whole still rose 4.5 per cent y-o-y. Read more

Reading the commentary, one would think the Bank of Korea had raised rates, but in fact they held, as expected.

Inflation was 4.7 per cent in the year to March, against the Bank’s target of 4 per cent, “due mostly to the rises in prices of petroleum products and personal services.” More than this, swift price rises are set to continue and inflation expectations are growing. The Bank said: “There is a growing possibility of this high rising price trend persisting in the coming months, driven largely by increased demand pressures from the economic upswing, by instability of international commodity prices, and by elevated inflation expectations.”

Typically, high and rising inflation would prompt a rate hike. Particularly since strong growth continues, and is expected to continue. “The committee Read more