Monthly Archives: July 2011

Robin Harding

The recession of 2008-09 keeps getting worse, even now. For the second time, the annual benchmark revisions to the GDP data have shown that the recession was deeper than previously thought. The decline in GDP is now put at 5.1 per cent rather than 4.1 per cent.

By the magic of FRED, here it is in levels (green is before the 2010 revisions, blue before the 2011 revisions, red is today): Read more

This week, a cacophonous hubbub is overwhelming America’s airwaves. For with the debt ceiling deadline approaching, almost every pundit and politician worth their salt has been expressing views on what could – or should – happen next.

There is, however, one notable exception: the mighty Federal Reserve and Treasury. In recent weeks, senior officials at both institutions have warned in general terms about the risks of failing to raise the debt ceiling. They have also tried to reassure investors that this risk is small.

 Read more

Claire Jones

Credit rating agencies haven’t had a good crisis. But central bankers’ and regulators’ frequent barbs seem a touch hypocritical when one considers how much they rely on them.

Both in determining which assets are eligible as collateral for open-market operations, and the risk weights for regulations, the big-three rating agencies play a fundamental role.

In the United States, that’s set to change. Under Dodd-Frank, the US authorities must remove credit rating references and requirements from their regulations.

The Securities and Exchange Commission has now done so. And on Wednesday, the Federal Reserve’s Mark van der Weide said the central bank was examining three possible alternatives to replace the use of ratings in its risk-based capital rules. Read more

Claire Jones

A familiar consequence of crises is a flight to quality. This crisis is no exception, with gold soaring to nominal highs and the Swiss franc appreciating against pretty much every other currency on the planet.

However, owing to two decades’ worth of financial globalisation, a trend more pronounced during this crisis than any other was that this shift to safe-haven assets was coupled with a flight of capital across borders. As European Central Bank research, out on Wednesday, notes, investors were not only risk averse, but also fearful of uncertainty. And this so-called “uncertainty aversion” fed home bias.

The capital flight threatened financial stability and hindered economic growth. So what to do? For the ECB, there are two things: better analysis and more regulation.  Read more

Claire Jones

The Bank of England is expected to announce in the coming weeks where it is to house the staff of the new Prudential Regulation Authority.

Though it is far from the only cause of the banking crisis, a lack of communication between banking regulators and those responsible for financial stability was far from ideal. Recognising this, the Bank has been looking for space for the PRA a short walk from Threadneedle Street, rather than out in Canary Wharf, where regulators are now based as part of the Financial Services Authority, which is a 12 minute train ride away.

Whether or not this will lead to regulators and economists spotting the next crisis over the water cooler, it is difficult to say. There were, after all, crises when both were housed in Threadneedle Street. Still you can’t imagine it doing much harm. Read more

Claire Jones

From a monetary policy perspective, what’s interesting about today’s preliminary GDP figure is that both hawks and doves believe it supports their arguments.

GDP coming in at 0.2 per cent for the second quarter means the UK economy has barely grown over the past nine months, which adds weight to doves’ calls for further easing if the economy does not pick up in the three months to September.

This from Gavyn Davies, writing for the FT:  Read more

Claire Jones

Christine Lagarde

Christine Lagarde. Image by Getty.

The Federal Reserve is too often seen as a panacea for the US’s economic ills. This no doubt owes much to its dual mandate to both maintain price stability and promote employment, despite there being little monetary policy can do to influence structural unemployment.

And so Christine Lagarde’s comments today that there has been a rise in structural unemployment in the US – and that, by implication, fiscal policy should shoulder more of the burden for creating jobs – is to be welcomed. Read more

Claire Jones

This from the FT’s Rahul Jacob in New Delhi and James Fontanella-Khan in Mumbai:

India’s central bank has raised interest rates by a higher than expected 50 basis points, signalling its determination to battle persistent high inflationRead more

Ralph Atkins

Christian Noyer, Banque de France governor, has created confusion after apparently signalling another European Central Bank interest rate rise is in the pipeline. In an interview published on Tuesday, he told Financial Times Deutschland – the German language newspaper - that the ECB was exercising “strong vigilance” - code used in Frankfurt to signal a rise in official borrowing costs is a month away.

Or did he? Mr Noyer may have been a victim of the eurozone’s linguistic diversity. Read more

Claire Jones

There are two questions worth asking about Vince Cable’s call for a second round of quantitative easing.

Was it appropriate? And, more to the point, was he right?

The first is easier to answer than the second. It was in no way appropriate for him to make the call. And, as this post on the FT’s Westminster blog notes, it is something of a reverse ferret.

The timing of the comments is cunning. Read more

Claire Jones

Coverage of Bank of Japan governor Masaaki Shirakawa’s speech earlier today focused on his warning on the dangers of a strong yen.

This is odd, as currency intervention is likely to come at the behest not of the Bank of Japan but of the finance ministry. Besides, as Mr Shirakawa notes elsewhere in the speech, Japanese manufacturers are hedged against a rising yen owing to their recent spate of acquisitions of overseas firms.

Of more interest is his warning that the impasse over the US debt ceiling and the eurozone debt crisis could trigger a rise in government bond yields the world over. Read more

Claire Jones

Events in the eurozone and the US are at the forefront of central bankers’ thoughts, in some cases eclipsing domestic factors in setting policy rates.

So it proved in South Africa today, as the central bank opted to hold rates at a 30-year low of 5.5 per cent, as expected.

The South African Reserve Bank appeared unconcerned about striking fuel workers’ calls for a 13 per cent pay rise, or the recent spike in inflation to 5 per cent from 4.6 per cent in May, arguing that expectations remained well anchored within its 3-6 per cent target range. Instead, its policy statement focused on the global outlook. Read more

Robin Harding

I did a piece for today’s paper on what would happen if the debt ceiling was not raised on time. Here are a few extra points arising from the reporting for that piece:

(1) The Treasury becomes constrained by the debt ceiling at the point when its account with the Federal Reserve is forecast to be overdrawn at the end of the day. The August 2nd date cited by the Treasury is the last day that it expects to undertake normal operations and end below the limit. So the constraint would most likely bite, and the chaos start, on the 3rdRead more

Claire Jones

This from the FT’s Joe Leahy and Samantha Pearson in São Paulo:

Brazil’s central bank has raised interest rates for the fifth time this year as the country battles inflation above official target levels. Read more

Claire Jones

The European Union today became the first jurisdiction to unveil proposals on how it intends to beef up its banks’ capital and liquidity buffers.

In terms of capital, the measures put European banks in line with Basel III in requiring them to hold common equity tier 1 capital of 4.5 per cent and total tier 1 capital of 6 per cent, up from 2 per cent and 4 per cent under the current regulatory regime.

That means the continent’s banks must raise a whopping €460bn in capital by 2019. Either that or shrink their balance sheets and shed risky assets.

But hold the applause. According to the IMF, this might not be enough.   Read more

The Bank of England’s latest minutes, out today, were more dovish than the previous month’s. So why did the pound climb against the dollar following their release? In all likelihood, as FT Alphaville’s Neil Hume writes, this was because the minutes failed to mention any additional support for QE2, reversing expectations among some investors that a second round of asset purchases was imminent.

The post is below.

 Read more

Claire Jones

ECB president Jean-Claude Trichet may be unwilling to cede to Angela Merkel’s calls to overrule ratings’ agencies judgement on a Greek default – selective or otherwise. However, Mr Trichet’s position on the big three’s dominance of the industry is in line with that of the eurozone’s political masters.

At both this month’s press conference and in an interview published Tuesday, Mr Trichet made it clear he agreed with German finance minister Wolfgang Schäuble’s point that the oligopolistic structure of the industry was far from ideal.

When asked whether he would favour the creation of a European rating agency – something which Ms Merkel has backed since before Lehman Brothers’ collapse – Mr Trichet was more oblique. Read more

Claire Jones

Nobody is quite sure yet what does and doesn’t count as macroprudential policy. But, given it’s seen as a force for good, central bankers are keen to pin the tag on as much of what they do as possible. Once the hype fades, though, it is unlikely to displace interest rates as their most important tool.

A key, perhaps even the question for policymakers, then, is how monetary policy and macroprudential policy can best interact.

According to research from Standard Chartered’s Natalia Lechmanova, which looks at the lessons that can be learnt from how Asian policymakers have used macroprudential tools such as loan-to-value ratios, the two policy strands are most effective when they are combined. Read more

Claire Jones

It is oft remarked that when the US sneezes, the rest of the world catches a cold. Given the slew of poor data in recent months, then, the risk of a double dip in the world’s largest economy is of mounting concern to policymakers around the globe.

Central bankers from Sweden and Japan have both touched on the issue in recent weeks.

This from the Bank of Japan’s minutes for its mid-June policy meeting, released Friday: Read more

Claire Jones

Minutes of the Riksbank’s July 4 policy meeting, published today, see deputy governor Lars Nyberg become the latest central banker to lambast the eurozone authorities over their handling of the Greek crisis. From the minutes:

Economically it would have paid off to find a solution to the Greek crisis a long time ago, given the costs in the form of less efficient markets and falling stock markets that the uncertainty has led to. However, Greece is now part of the euro area and this means that the crisis must be resolved politically and at the European level. Mr Nyberg noted that the European mechanisms for resolving crises do not appear to work particularly well.

Financial market investors are wondering, and justifiably so, how a crisis in a larger country could possibly be managed if it is not even possible to reach agreement on how to deal with Greece.

Quite. Because of this, he says, “a relatively minor economic crisis may quickly become a major political crisis”. (Note that this was before events in Italy took a turn for the worse.) Read more