Monthly Archives: April 2011

Chris Giles

Although the IMF is super-orthodox and Anglo Saxon, when it comes to advanced economy monetary policy, even with a French managing director and chief economist, there are some signs of a softer IMF this spring.

Capital controls
Most attention has focused on capital controls, on which the Fund has issued its first ever guidelines on their use. This is seen as the IMF giving ground to countries, such as China, seeking to build foreign exchange reserves for currency management rather than expose itself to volatile capital inflows. This is a misreading of the IMF’s intentions.

The Fund could not have been clearer that capital controls are only a valid part of the macroeconomic toolkit if a country’s currency is not undervalued, it has sufficient foreign exchange reserves and it is unable to use monetary or fiscal policy. Only one  - foreign exchange reserves – of these three criteria apply to China.

In contrast, in the World Economic Outlook, the Fund complains repeatedly about China’s exchange rate Read more

The US lacks a “credible strategy” to stabilise its mounting public debt, posing a small but significant risk of a new global economic crisis, says the International Monetary Fund.

In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011, at a time when its economy was growing fast enough to reduce borrowing. The latest warning on the deficit was delivered as Barack Obama, the US president, is becoming increasingly engaged in the debate over ways to curb America’s mounting debt.  Read more

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

The ECB denies nudging Portugal towards its bail-out, but data just released suggest otherwise. Despite growing problems in the eurozone the ECB bought no government bonds last week. Buying government bonds either at auction or through the secondary market is a practice employed heavily in the past but frugally of late to suppress the cost of debt in vulnerable economies and shore up market confidence.

It also means the ECB did not buy any bonds in Portugal’s punitive bill auction last week. The prohibitive cost of debt at that auction is likely to have influenced Portuguese policymakers in seeking a bail-out. Lisbon is facing the expiry – and therefore the refinancing – of nearly €4.4bn debt in mid April and the bill auction gave an indication of the market’s likely price. Read more

Ralph Atkins

The competition to succeed Jean-Claude Trichet, who steps down as European Central Bank president at the end of October, was a big story in February - when Axel Weber, Germany’s Bundesbank president, withdrew from the race. Since then it has gone quiet.

Now news agency reports from the European Union finance ministers’ meeting near Budapest, Hungary, at the weekend suggest a decision may not be taken until an EU summit at the end of June. Germany’s government “has decided to form its opinion close to that date,” Bloomberg reported Wolfgang Schäuble, the country’s finance minister as saying.

That sounds plausible. Read more

More-hawkish-than-expected noises from the ECB have led analysts at Citibank to revise their rate forecasts upwards. They now think there will be two rate rises instead of one in 2011, with the key marginal lending rate ending the year at 1.75 per cent, with an outside chance of 2 per cent. Analysts expect the next, quarter point, rate rise in July.

Evidence of hawkishness is cited as follows. (1) The governing council said that even after the April rate hike, “interest rates across the entire maturity spectrum remain low”, adding that the policy stance remained “accommodative”. (2)  President Trichet also said the ECB would continue to ”monitor very closely“, a phrase typically associated with a further rate rise within two meetings. Read more

A senior Portuguese banker has said that the European Central Bank pressed the country’s lenders to stop increasing their use of its liquidity – setting in train events that led Lisbon to ask for a bail-out this week.

António de Sousa, head of the Portuguese Banking Association, said that the message from the ECB and Portugal’s central bank not to expand their exposure to ECB funding further came a month ago. Read more

Robin Harding

I’m pretty sure that the answer is ‘No’, at least for now. For background, the effective Fed Funds rate has been falling steadily for the last couple of months:

 Read more

Ralph Atkins

The interest rate increase delivered by the European Central Bank this week was exactly as expected. But Jean-Claude Trichet, president, left observers scratching their heads over other items on Thursday’s ECB governing council’s agenda.

First, were plans to deal with the problem of ”addicted banks” – those banks which have become dependent on ECB liquidity. Several council members (including Italy’s Mario Draghi) had spoken publicly about proposals to limit the use of ECB operations by individual banks. The assumption was that some kind of penalties would be imposed.

Mr Trichet noted on Thursday, however, that the problem had changed “in nature over time”. Read more

The ECB decision to raise its policy rate by 0.25 per cent to 1.25 per cent is a seminal moment for the global economy. Not only is this the first of the leading central banks to raise rates, it is the first time for decades that Europe has initiated a rate rising cycle ahead of its counterparts at the Fed. I believe that it is wrong to view this as an isolated occurrence: economic fundamentals are far more supportive of rate rises in the eurozone than they are in the US, and that will remain the case for some time to come. And the ECB is deliberately sending a very strong message to member states that they have not gone far enough to fix the sovereign debt problem. Although the markets have already to some extent anticipated the front-loading of ECB rates, relative to those set by the Fed, they may not yet have moved far enough in that direction.

The main reason for today’s rate rise is of course entirely obvious. Eurozone inflation has persistently come in higher than expected in recent months, and the headline CPI rate reached 2.6 per cent in March, mainly because of higher oil prices. Since the ECB tends to be more influenced by the headline inflation rate, while the Fed places more emphasis on the (much lower) core rate, it was always likely that the two central banks would react in different ways to a commodity price shock.

However, this is not the only reason for the ECB’s greater hawkishness. The Fed (rightly in my view) is convinced that there is still plenty of spare capacity left in the US economy, because the unemployment rate remains far above the equilibrium or structural rate of unemployment. By contrast, the ECB is less confident about the margin of spare capacity in the European economy.

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Cyprus is showing signs of stress. Credit ratings, yields, the banking sector and sentiment are all signalling distress. This tiny island economy, roughly a tenth the size of Portugal, might defy the PIIGS acronym by needing help sooner than its eurozone peers Spain or Italy.

Redrawing the sovereign ratings map clearly showed what the ratings agencies thought. See the blue circle on the map, right. This heatmap colours countries that have been heavily downgraded since the start of the year more red, and those that have been more heavily upgraded, green. Spain and Ireland are reddish. But Cyprus is clearly in the Portugal-and-Greece camp of dark red (high downgrades).

Next, yields. Bond yields are the cost of debt to the government, so rising yields are bad news. And they are certainly rising in Cyprus. Compare two auctions of six-month debt, one in January and the other in March. Yields rose from 2.02 per cent to 2.74 per cent in those two months. This level is higher than yields on the last two-year debt offering in January of 2010. Read more

In order to maintain its currency peg, Denmark’s central bank has raised rates 0.25 per cent, matching the earlier increase from the ECB. Danish monetary policy is aimed at keeping the krone pegged to the euro. All four key rates were raised, now standing as follows:

Serbia also raised rates today, taking the highest rate in Europe 25bp higher to 12.5 per cent. The quarter point increase, announced before the ECB’s announcement, is the third this year, but represents a slowdown in tightening. Serbia has been raising rates since mid-2010, typically by half a point or a full percentage point, while the most recent two raises are smaller and follow a long pause.

Portugal’s bail-out

Other news Read more