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.
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]
Rates are held, as expected, and QE2 is expected to continue till June. But all eyes will be on Bernanke for any signals of change at the new press conference (see video). For live blog commentary, see Gavyn Davies‘ real time post or his earlier thoughts.
Interest rates are likely to linger for longer at their current record low of 0.5 per cent, following today’s growth figures. With GDP numbers coming in at expectation, market expectations haven’t shifted that much since yesterday, but over the past two months, the change is dramatic (see chart).
Just two months ago, markets forecast three rate rises this year; now the base rate is not expected to reach 0.75 per cent until November. The data also belie an assumption that a rate rise is far likelier in a month following a GDP announcement (notice the jump in expectations for August, November and February). Read more
No-one could accuse Andrew Sentance of leaving the MPC without making his position clear. The Bank of England’s chief hawk has just laid bare four key differences between his rate-raising position and that of the rate-holding majority on the MPC.
Disagreements on the UK’s rate-setting committee are fundamental, he says first. In the past, they have been a matter of timing. “I acquired my hawkish mantle much earlier [than last year], when I voted in a minority on a number of occasions to raise interest rates in response to the relatively strong growth and rising inflation we were experiencing before the financial crisis,” he says. “Those minority votes, however, were the expression of modest differences in the timing of interest rate changes.”
This time, the differences are directional. At their root lie contrasting assumptions about the global economy, and disagreement over economic models. Mr Sentance is due to leave the Committee at the end of next month, but the differences he describes are likely to survive him.
In comparison with the rest of the committee, Mr Sentance seems more optimistic on the global recovery, more doubtful about the use of the output gap as a policy tool, and more flexible on sterling appreciating. He is also worried about inflation expectations. Read more
Owing to holidays and travel arrangements, Money Supply posts will be reduced between Friday April 15 and Tuesday May 3. There will also be no newsletter during this time.
Greek debt affordability is set to worsen considerably, according to the IMF’s Global Financial Stability Report. But in a series of charts comparing 11 countries, the striking thing is how exposed indebted economies are to rising interest rates or falling GDP.
These charts (a full set toward the end of this post) are a great way to depict several moving parts to get to the nub of the issue. The basic idea is: black line inside the green area – good; black line inside redder areas – bad. Dotted line (forecast) – likewise. (The black line, incidentally, is the historical interest rate on government debt.)
The country profiles, relative to each other, are much as you’d expect. Greece, Ireland and Portugal have less favourable interest burdens (in that order). The US, incidentally, is forecast to edge into the yellow. Japan is not. Read more
To discourage volatile short-term capital flows, the Bank of Indonesia will extend the minimum holding period of its bank certificates, SBIs, from one month to six months, effective May 13. This means traders holding the notes will not be able to sell them in the secondary market until they have held them for six months.
The unexpected news builds upon previous measures aimed at slowing down investment in very short-term debt. For example, the Bank of Indonesia has already all but stopped issuing 3- and 6-month SBIs. A key risk for countries receiving increased capital inflows is that they might reverse, which could have sudden and unpredictable consequences, as the Bank of Japan has pointed out. The Bank of Israel’s Stanley Fischer has made the same argument. Read more
Special coverage: IMF meetings
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
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
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