Our week ahead email helps you to track the most important events in central banking. To see all of our emails and alerts visit www.ft.com/nbe
With the summer break upon us, central bankers are taking it pretty easy next week.
However, Sir Mervyn King, the governor of the Bank of England, will Read more
Davos is not as important an event on the calendars of central bankers as the IMF/World Bank meetings or the Bank for International Settlements Annual General Meeting. Neither the Bank of England nor the Federal Reserve will be bothering to send anyone, for instance.
But there are still plenty of Davos men (and one woman) among the senior ranks of the profession. Read more
The Bank of Israel – one of the first to raise rates following Lehman Brothers’ failure – on Monday became the latest to override domestic price pressures and cut on the back of concern over the global outlook.
Following the lead of the central banks of Turkey and Brazil before him, Stanley Fischer, the Bank’s governor and sole rate-setter, shaved a quarter point off Israel’s benchmark interest rate to leave it at 3 per cent, despite inflation rising by half a percentage point to 3.4 per cent last month, above the 3 per cent upper limit of the inflation target range.
Public outcry at high inflation – particularly food price pressures – has inspired Facebook groups that have attracted over 100,000 members. And rising house prices have prompted more than a quarter of a million Israelis to take to the streets. (The central bank maintains that its measures, along with more house building, will slow the pace of house-price inflation).
Growth – at 2.4 per cent in the second quarter (annualised) – is relatively high, and unemployment – at 5.5 per cent – low.
All of which has meant that analysts – the vast majority of which had forecast a rate hold – were taken aback.
So why has Mr Fischer cut rates? Read more
Our new week ahead email will help you to track the most important events in the central banking world. To see all of our email and alerts visit www.ft.com/nbe
A busy week is in store for Jean-Claude Trichet.
On Saturday, the ECB president will speak at Jackson Hole at 17:00 GMT. On Monday, Mr Trichet travels to Brussels, where he will field questions from the European parliament on how to restore market confidence (some suggestions from Ralph Atkins and Chris Giles).
The president will be joined by Jean-Claude Juncker, Eurogroup president, Jacek Rostowski, Poland’s finance minister and Olli Rehn, the European commissioner for economic and monetary affairs. The hearing takes place at 13.00 GMT.
On Thursday, ECB executive board member Jürgen Stark is a participant in a panel on Europe and global competition. Read more
Israel has raised its key interest rate for April by half of one per cent – the largest rate rise since before the financial crisis. Bank of Israel was one of the first central banks to begin raising rates, starting in September 2009 with a quarter point rise from a record low of 0.5 per cent. Since then, there have been eight quarter-point rises, but this is the first half-point rise. In April, the Bank’s rate will be 3 per cent.
The move is an attempt to slow the economy and housing market, and rein in inflation. Israel’s economy is expanding, “converging towards a situation of full utilization of the factors of production”. The stats would send most Western central bankers green with envy. Last year, the economy grew by 4.6 per cent, rising to an annualised rate of 7.7 per cent in the last quarter. Unemployment is about 6.6 per cent and improving. But there is concern over inflation and housing. Consumer prices are rising 4.2 per cent annually, against a target of 1-3 per cent. Even stripping out house prices, inflation is 3.5 per cent annually. And there is evidence that inflation expectations and real wages are beginning to rise, too. Meanwhile the housing market continues to boom, with prices rising 16.3 per cent in the year to February and no decline evident in the appetite for new mortgages. Read more
Fighting currency appreciation is an expensive business. It cost the Swiss SFr 21bn ($23bn) before they gave up and let the franc rise. New figures out from the Bank of Israel show it cost them NIS 17.6bn ($4.8bn). The Bank’s overall loss was NIS 17.9, of which 98 per cent can be attributed to exchange rate moves.
Israel’s foreign exchange stockpile has been growing – but the governor says these reserves might prove useful if there is a reversal of capital flows. Israel has been raising rates to contain inflation and dampen the too-buoyant housing market. The governor has called for international rules on foreign exchange markets and capital flows, just as exist currently for trade.
The Bank of Israel has raised its March interest rate by a quarter of one per cent, prompted by higher than expected inflation, strong economic activity and continued fears about an overheating housing market.
Israel’s central bank also said “the expected timing of an increase in the Fed interest rate has been brought forward”. Read more
There are international rules to govern global trade, but none to oversee foreign exchange markets or capital movements, Israel’s central bank governor has observed.
Stanley Fischer said standards for capital movements were needed, even though it was not possible to govern how much central banks could intervene in markets. Reuters news wire reports: “It is important that the IMF is now trying to develop such rules, to figure out what works and what doesn’t work when the exchange rate starts to appreciate and … what measures they can take that are acceptable from the viewpoint of managing the international economy,” he told a conference. “Those are rules we have to develop just as we developed rules gradually in the years since the 1950s that produced a global trading system,” he added.
Many countries grappling with “hot money” blame the US openly and directly, but Professor Fischer did not join them. “I believe the US is doing what needs to be done for growth. Read more
Israeli foreign currency reserves rose to $73.4bn by the end of January as the country’s central bank bought foreign currency to dampen the shekel. The Bank bought $2.09bn and benefitted from an upward revaluation of its reserves by $628m, reports Bloomberg news wire.
Since the start of the year, the shekel weakened against the dollar, from 3.51421 to 3.712 per dollar, which explains the upward revision. Last time there was a net weakening in the currency over the month, it was followed by a net reserve reduction the month after (October-November last year). By that logic we could expect Israel’s foreign exchange purchases to fall during February. Read more
Israel’s foreign currency reserves stood at $70.9bn at the end of December, according to Bloomberg – but they may well be needed.
Central bank governor Stanley Fischer has warned that capital inflows could reverse sharply, leading the Bank to sell its reserves to try to slow any sudden weakening of the shekel. “One of the things that does concern us is that we have a lot of money coming in,” Mr Fischer told Bloomberg Radio in Davos. “If opinions change quickly money goes right back out and it could go out very fast.” Read more
“Monetary policy is still expansionary”, says the central bank, but will be a little less expansionary from February 1 when the base rate rises from 2 to 2.25 per cent. It will be the first rate rise in four months and it is likely more will follow*. The tightening move follows the introduction of a 10 per cent reserve requirement on foreign derivatives, effective January 27.
House prices have risen 17.3 per cent in the past year in Israel, a trend that accelerated last month. “The volume of new housing loans increased steeply in December,” adds the Bank. “The outstanding balance of housing loans at the end of 2010 was 14.7 percent higher than that at the end of 2009.”
It is likely the fear of a housing bubble has prompted the timing of Israel’s rate hike. Read more
Reserve requirements are so in vogue. Israel’s central bank is the latest to adjust their ratio, bringing in a 10 per cent requirement for non-residents dealing in foreign exchange derivatives, specifically FX swaps and forwards. The move will be effective January 27. The bank said:
In the last few months the volume of foreign exchange derivative transactions by nonresidents has increased markedly. A significant part of the increase in nonresidents’ transactions is in short term instruments. This measure will strengthen the Bank of Israel’s ability to achieve the objectives of its monetary, foreign exchange and financial stability policies. Read more