Daily Archives: July 12, 2011

Claire Jones

Regulators’ fondness for sovereign debt is looking odder by the day.

The eurozone crisis and the Congressional impasse over the US debt ceiling have put paid to any notion of government bonds as risk free. What’s more, a Committee on the Global Financial System paper suggests that encouraging banks to up their holdings might in fact do more to endanger stability than promote it.

The paper, published Monday, identifies a “vicious circle between the conditions of public finances and those of banks”. As banks’ funding costs worsen, so does the creditworthiness of the sovereign, which in turn heightens funding costs. If such a vicious circle does indeed exist, then incentivising banks to hold more sovereign debt in order to fulfil regulatory requirements would only compound the problem. Read more

The first six  months of 2011 have been most uncomfortable for the Bank of England. The combination of overshooting of inflation and weakness of growth really brings out the inner-hawks and inner-doves on the Monetary Policy Committee.

Do they react to the rise in price pressures seeming to come from weakness in supply? Do they assume price rises are temporary and respond to what they see as a shortfall in demand? Or do they sit on the fence?

The fence sitters have won the day so far on the MPC. But today’s inflation figures give some ammunition to the doves. The fall in CPI inflation to 4.2 per cent in June (from 4.5 per cent) ensures there was no overshoot in inflation in the second quarter relative to the Bank’s may inflation report.

Much of inflation’s still high level reflects price rises quite a long time ago, so it makes sense to look (below) at a chart of annualised quarter-on-quarter inflation with rudimentary seasonal ajustment to see whether the inflation scare is past.

I drew this chart so blame me if it makes no sense, but it also gives some succour to doves. Read more