Monthly Archives: May 2011

In doing the usual due diligence on the Bank of England’s pictorial forecasts – blowing up the images on screen, getting out a ruler, measuring the YoY growth rates, estimating the skew that represents a risk-adjusted forecast and shoving all the results into a pre-prepared spreasdsheet – you can produced this horrible chart of successive Bank of England growth forecasts.

All it really shows, in the grand scheme of things, is that the Bank’s growth forecasts were pretty good before the crisis and spectacularly awful more recently.

If you strip out a lot of irrelevant information, you get the following, which I think is pretty amazing. Read more

Mervyn King was in typically subdued form, presenting yet another inflation report in which the Bank of England has revised higher its forecast for inflation and revised lower its forecast for growth.

As I will go on to explain, the Bank has significantly revised its growth forecasts lower – losing about 1 year of growth at current rates since February’s forecast – but the Bank governor was rather reticent to spell this out.

The “big picture”, he said, is that the Monetary Policy Committee’s “medium term judgment is broadly the same” as it was in February. I will come back to this, but the governor was looking at a particular way of reading the Bank’s forecast growth rates in 2013, not the level of output. As he is the first to assert, it’s the levels that matter, stupid, not the growth rates.

The level of output the Bank believes is sustainable has declined a lot in the latest forecast. I have a pretty good record of decoding the Bank’s pictorial forecasts and I estimate the Bank has reduced its central forecast for the level of output in Q1 2014 by 1.7 per cent. At current growth rates, we seem to have lost a year of growth in forecast revisions.

Before I show some forecast charts, here are the answers to my questions from last week we learnt from the governor this morning.

1) How permanent does the MPC judge the winter slowdown to be? Read more

Ralph Atkins

Another barrage of warnings this morning from European Central Bank policymakers about the dangers of a Greek debt restructuring. Jürgen Stark, executive board member, told Bavarian radio that Greece was “not insolvent” and that a restructuring “wouldn’t be a solution to the problems that Greece needs to overcome”. But Athens should not assume international bail outs were a “bottomless well” he warned.

A different – and novel - argument was made by Lorenzo Bini Smaghi, his board colleague, the gist of which was that eurozone governments should not allow themselves to be pushed around by financial markets. Read more

Robin Harding

The New York Fed’s latest quarterly report on household credit conditions is quite upbeat and somewhat at odds with the latest senior lending officers survey.

Especially interesting are the data on ‘transitions’, which show fewer new mortgages going bad, and some bad mortgages getting better.

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Robin Harding

It is early days but the Fed’s first press conference seems to have done its job: speeches by regional Fed presidents last week caused little market reaction after chairman Ben Bernanke set out a view for the FOMC on 27th April.

The sample is hardly big enough for statistical significance and recent economic data hardly supported the outspokenly hawkish views from the regional banks that often perturb markets.

But even if the press conferences do improve how the Fed communicates, and dampen the volatility of market responses, the real problem is what the Fed communicates. The Fed still does not communicate two things: (1) a clear numerical objective for policy; and (2) any idea of the monetary policy path it expects to use to get to its objective. Read more

Yesterday’s decision to keep monetary policy on hold in the UK was such a foregone conclusion that it barely made ripples. But predictability does not mean the Bank and economists are equally calm beneath the surface. Rather, they are furiously paddling to try to work out what on earth is going on with the British economy.

Here, I will try and present a pretty neutral post on the current outlook, against which to judge next week’s Bank of England Inflation Report.

Why was the rate decision so predictable?
Compared with April, the latest data showed a small and possibly temporary drop in inflation, weak first quarter growth figures and no let-up in uncertainty.

In these circumstances, any converts to tighter monetary policy would find it tricky, to say the least, to justify their new hawk status. Read more

Ralph Atkins

It is a brave luncheon speaker who chooses Finnish monetary policy between the first and second world wars as his subject. But Mervyn King, Bank of England governor, just pulled it off at a conference in Helsinki, marking the 200th anniversary of the country’s central bank. (Read the speech here.)

King may have selected his off-beat subject to avoid generating unwanted headlines – there was a strong media presence following the European Central Bank’s meeting here on Thursday. But it was also a subject close to his heart – and is more compelling than you might thing. Read more

The European Central Bank has left its main interest rate unchanged at 1.25 per cent but is expected to confirm a bias towards another increase in coming months as it combats surging eurozone inflation.

The decision to hold fire on Thursday was expected. Jean-Claude Trichet, president, prefers not to surprise financial markets. However, at its meeting in Helsinki, Finland – one of two occasions each year when it gathers outside its Frankfurt home – the ECB’s 23-strong governing council is thought to have plotted the timing of its next move. Read more

The odds were firmly in favour of a rate hold, and the Bank of England has not disappointed us. More interesting will be the voting pattern, when it is released on May 18.

Annual inflation in the UK is running at 4 per cent, a welcome fall from 4.4 per cent earlier this year. Read more

Rate normalisation continues in the Philippines, despite the Japanese earthquake. Key rates have been increased by a quarter of one per cent, with the overnight lending (repo) and borrowing (reverse repo) rates standing at 6.5 and 4.5 per cent, respectively. Manila started raising rates only recently: the last rate rise – a quarter point in March – was the first since 2008.

“In deciding to increase policy rates anew, the Monetary Board noted that the latest baseline inflation forecasts continue to suggest that the 3-5 percent inflation target for 2011 remains at risk, mainly as a result of expected pressures from oil prices,” said the Bank. Annual inflation in the year to April edged up to 4.5 per cent, within the government target but at the upper end.

Robin Harding

John Williams, the new president of the San Francisco Fed, has delivered his first speech. It wasn’t a thriller but I guess his term will be long enough that he need not hurry to excite the markets.

Mr Williams stuck to mainstream Fed thinking but he did set down a few markers. He forecast that growth will bounce back to above 3 per cent for Q2, that total growth for 2011 will be about 3.25 per cent, and that unemployment will end the year at 8.5 per cent. He also sets out his preferred inflation objective of 2 per cent – putting him with the large majority of the FOMC. Read more

With inflation reaching 17.5 per cent in the year to April, Vietnam’s central bank has again raised interest rates: one lending rate, the reverse repo rate, was raised today by a percentage point to stand at 14 per cent.

Two other rates, the refinancing and discount rates, were both raised by a percentage point on Friday, to stand at 14 and 13 per cent, respectively. Vietnamese authorities have raised several rates multiple times since the start of the year, which have also seen substantial devaluations of the country’s currency, the dong. Read more

India’s central bank has upped its campaign against inflation, raising rates by half a percentage point, twice previous rate rises. This is the first half point rate rise since 2008 (see chart).

The move comes despite “signs of moderating growth” in the economy, which shows how worried the Bank is about inflation. Strong consumer demand in the country has aggravated the global issue of rising commodity prices, adding to domestic inflationary pressures. That strong demand, in turn, has probably been encouraged by relatively low rates. Indeed, according to the Bank:

…demand has been strong enough to allow significant pass-through of input price increases.  Importantly, this is happening even as there are visible signs of moderating growth, particularly in capital goods production and investment spending, suggesting that cumulative monetary actions are beginning to have an impact on demand [emphasis ours]

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