Monthly Archives: April 2011

No-one can say they weren’t warned. In what must be the most trailed rate rise in history, the ECB has increased key rates in the eurozone by a quarter of one per cent. As of April 13, key rates will stand at:

  • Marginal lending facility – 2 per cent;
  • Main refinancing operations (fixed rate) – 1.25 per cent;
  • Deposit facility – 0.50 per cent.

Eurozone inflation rose to 2.6 per cent in the year to March, according to a flash estimate last week. This is up from 2.4 per cent in the year to February and 2.3 per cent in the year to January, against a target of “below but close” to 2 per cent. Read more

As expected, the UK’s central bank has kept the bank rate at 0.5 per cent and held the stock of assets at £200bn. The last change in the rate was a half point cut in on March 5, 2009, while the most recent change in the asset scheme was November 5, 2009. Consumer prices rose 4.4 per cent in the year to February, more than twice the Bank’s inflation target.

Banks in the quake-affected north-east of Japan will soon be able to borrow longer term from a new scheme worth ¥1,000bn ($11.7bn), offering one-year loans at 0.1 per cent.

The scheme comes on top of ¥21,800bn ($265bn) liquidity made available immediately after the quake and a doubling of the Bank’s asset purchase programme from ¥5,000bn to ¥10,000bn ($121bn). Tokyo has also been involved in an internationally co-ordinated effort to prevent the yen appreciating too sharply. So far, though, the BoJ remains unwilling to buy government bonds, a measure adopted in several other countries since the crisis.

In addition to such measures, at today’s meeting, the Bank judged it necessary to introduce a funds-supplying operation that provides financial institutions in disaster areas with longer-term funds in order to support their initial response efforts to meet the future demand for funds for restoration and rebuilding.

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“It is necessary to refer to available funding mechanisms in the European framework.” This, grimly, from Portugal’s finance minister Fernando Teixeira dos Santos, according to Portuguese paper Journal de Negocios. Portugal is also holding talks on a bridging loan with the EU.

The news follows a punitive auction of 6-month bills today, at which the cost of debt to the government rose to 5.11 per cent, up from 2.98 per cent a month ago for comparable debt. More than €4bn longer-term debt is due to expire in April, leaving the central bank with a significant shortfall if it cannot issue new bonds at manageable levels. Today’s auction strongly suggests this would not be possible.

Answering a set of questions in writing, the finance minister said, via Google Translate:

Business: Portugal must now ask for help as they appeal the bankers and economists in general? The debt that you have to pay in a year do not worry you?

Fernando Teixeira dos Santos: The country has irresponsibly pushed a very difficult situation in financial markets. Given this difficult situation, which could have been avoided, I think it is necessary to refer to available funding mechanisms in the European framework as appropriate to the current political situation. This will require also the involvement and commitment of major forces and political institutions.

JDN: How do you assess the results of the auction today, particularly with regard to interest rates?

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Irish central bank governor Patrick Honohan writes:

The focus should be increasingly on measures that can help unblock growth. One dimension which, in my personal view, has not yet received the attention it deserves is the potential for mutually beneficial risk-sharing mechanisms. A variety of financial engineering options could be considered going beyond the plain vanilla bonds currently employed. Read more

Another day, another sovereign downgrade, it seems. But is there a regional basis to recent downgrade activity?

In short, yes. Read more

Robin Harding

There are some extremely interesting points in today’s FOMC minutes which provide more forward-looking policy signals than any others I can remember recently.

No taper of QE2

The signal here could not be more clear. The New York Fed “indicated that the greater depth and liquidity of the Treasury securities market suggested that it would not be necessary to taper purchases in this market”.

Fed officials are not persuaded that there is any monetary policy value in sending a signal through a taper so a request from the markets desk was the only remaining uncertainty on this point.

“In light of the Manager’s report, almost all meeting participants indicated that they saw no need to taper the pace of the Committee’s purchases of Treasury securities when its current program of asset purchases approaches its end.” In other words, it’s not going to happen. Read more

The International Monetary Fund has proposed its first ever guidelines for using controls on flows of speculative capital, legitimising a controversial tool that it once campaigned against.

The guidelines – which are not yet official Fund policy – say that countries can control capital inflows when their currency is not undervalued, when they already have enough foreign exchange reserves, and when they are unable to use monetary or fiscal policy instead. Read more

Hawkish comments from Poland’s central bank have translated into a rate rise, a move largely expected by analysts. The quarter point rise leaves the key reference rate at 4 per cent.

Annual inflation was running at 3.3 per cent in the year to February, down from 3.5 per cent in the year to January but still above the Bank’s 2.5 per cent target. After many rumours to the contrary, rates were kept on hold at the last meeting though members did vote on a rate rise. Read more

For the fourth time in less than six months, China has raised rates. The quarter point increase leaves the one-year  deposit rate at 3.25 per cent and the one-year lending rate at 6.31 per cent, each a percentage point higher than October of last year. Inflation rose to 4.9 per cent in the year to February, driven higher by food price inflation.

Other tightening measures are being gradually but regularly applied, notably the reserve requirement, which has been raised seven times since October and now stands at 20 per cent for large banks, following the most recent increase in mid-MarchRead more

Moody’s expects the next Portuguese government, due to be elected on June 5, to seek a bail-out as “a matter of urgency”, and as a result, the agency has again downgraded the sovereign’s rating. The rating now stands one notch lower at Baa1, and remains on watch for further downgrade. The rating is still two notches higher than peers S&P and Fitch, both rating the sovereign BBB-.

Portuguese sovereign ratings, which had been falling, entered a downward spiral once the government stepped down. Moody’s, which has just cut by one notch, previously cut by two on March 16. S&P downgraded Portugal two notches on March 25 and a further notch on March 29. Fitch downgraded by two notches on March 24 and a further three notches on April 1. Overall, about five notches have been taken off the rating since the start of the year. Read more

The State Bank of Vietnam has raised two key rates by a full percentage point – a significant increase but still a slower pace than very large rate raises in February and March. The most recent move affects the refinancing and repurchase rates, taking both to 13 per cent.

The move comes less than a month after a five percentage point increase in the discount rate. In February, when the central bank added to inflationary pressure with a 9.3 per cent devaluation of the dong. Since then, the central bank has raised the refinancing rate by 2 percentage points and raised the reverse repo rate by a percentage point. Read more

The Mafia and the fiscal multiplier – VoxEU

Now for an Arab economic revolution – Project Syndicate Read more

Increasingly hawkish statements from Poland’s interest rate-setting Monetary Policy Council have analysts convinced that Poland is in for another rate hike on Tuesday as the central bank resumes its tightening policy.

The expectation is that the council will increase its policy rate by a quarter point to 4 per cent a year – with analysts at Danske Bank predicting that rates will continue their upward climb, hitting 5 per cent within 12 months.

Inflation expectations are on the rise. According to Citi Handlowy bank, they reached 3.9 per cent a year in March. The central bank has also expressed concern about the lacklustre performance of the zloty, which has been sagging on worries over Poland’s budget and the government’s unenthusiastic fiscal tightening programme.

 Read more

Plans by the ECB to tighten monetary policy before the US Federal Reserve and Bank of England were criticised at the weekend as premature and potentially dangerous by economists.

But in a Financial Times video interview, Gerard Lyons, Standard Chartered’s chief economist, warned: “The challenge in Europe is that ‘one size’ does not fit all.” Higher official borrowing costs would be “the wrong policy, for the wrong reason at the wrong time”, he said. Read more

Ralph Atkins

Nout Wellink, Dutch central bank governor, has outed himself as an opponent of the European Central Bank’s bond purchasing programme. At least, he is now. Whether he voted against the plan last May, when it was agreed by the ECB’s governing council, is still not known.

“We have to stop the current policy because the risks are becoming too big,” Mr Wellink said in an interview with Het Financieele Dagblad. “We are buying paper from banks, from the private sector, and from governments. That is not what we are on earth for. If things turn bad the value decline is for our account.”

His comments suggest the mood on the governing council is turning increasingly hostile towards the programme. Read more

Ralph Atkins

Dublin probably pushed too hard – and too publicly – for a special European Central Bank liquidity facility to help its struggling banks. The Financial Times reported last Saturday that Enda Kenny, the new Irish prime minister, was asking for medium term funding as an alternative to dependence on regular ECB monetary operations and emergency liquidity assistance from the Irish central bank.

But it was clear that the ECB’s priority all along would be to see Dublin taking action to recapitalise Ireland’s banks – and it did not want to be seen as responding to political pressure. There were almost certainly legal and technical issues that would also have hindered any such plan from being rolled out this week.

So there was no announcement on Thursday. I don’t think the idea is dead. Read more


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