Minutes just out show that South Korea’s last rate rise decision was unanimous as central bankers worried about inflation gathering pace. The country is rumoured to be buying dollars to weaken the won, which reached a two-month high yesterday.
Upward pressure on the won came courtesy of “offshore players”, the WSJ reports. Could these be the same foreigners Chile has blamed for its appreciating peso? The country’s finance minister said openly yesterday that the Fed’s $600bn stimulus programme was strengthening the peso, as he welcomed central bank intervention to try to weaken it.
China has openly and repeatedly made the same accusation, warning of QE2-fuelled asset bubbles. Thailand is rumoured to be intervening to weaken the baht, and Venezuela and Viet Nam have both recently devalued their currencies. Read more
The bond markets might be overdoing it a bit at the moment, Guy Quaden has acknowledged. Asked whether bondholders were wrong to fear deflation, the ECB governing council member told Belgian business dailies L’Echo and De Tijd:
“You cannot rule out that the bond markets are overdoing it at the moment… But deflation is as unlikely as strong inflation. Central banks will do anything to avoid deflation. They do not tolerate high inflation.“
Asked why the ECB had decided to extend to Q4 its offer of unlimited short-term credit to banks, Mr Quaden said that the money market was often more nervous toward the end of the year, and that certain longer-term refinancing operations were due to expire in the period. He underlined, however, the temporary nature of the help: “The banking industry,” he said, “cannot depend forever on the exceptional credit of the ECB.”
On the subject of fiscal austerity, he said neither he nor Jean-Claude Trichet would argue for brutal and immediate austerity, except in Greece. Read more
Central banks are debating whether they should extend their remit to spot asset price bubbles – but research from the Bank for International Settlements has just found that the ageing population will depress, if not reverse, price rises in future.
“In English speaking countries it seems that baby boomer purchases drove up house prices in the past, while their sales will drive real house prices down in the future,” writes author Előd Takáts. The US has apparently enjoyed an 80 basis point per annum (bppa) boost to date, but is facing a negative impact of 80bppa in future. Read more
What’s causing the foreclosure crisis? Is it the correction in home prices across the US from bubble-induced highs or is it, as many claim, a result of lax lending standards and predatory subprime loans?
The distinction isn’t just splitting hairs. Governors of the Federal Reserve and other policy makers have put quite a bit of effort into blaming failures of mortgage regulation (rather than market failures) for the crisis. But are no-income McMansion moms really the ones feeding the foreclosures? Or are otherwise credit-worthy homebuyers defaulting as they realise they owe hundreds of thousands more than their home is worth? After all – I can afford to pay back a loan of $500, but if I’ve used it to buy a tulip bulb that’s now worth $1.50, I might just decide to cut my losses and give it to the bank to garden.
Crunching the numbers leads to some interesting, if inconclusive, results. Read more
In which US cities are home prices likely to fall?
One measure is to look at the amount home prices have fallen, relative to the increases in their rental prices. Moves in rental prices tend to represent fundamental changes in the value of a property (people are paying only what it’s worth to stay there) rather than bubble-induced speculation about the future value of the property. In markets where there are bubbles, eventually, home prices should fall back in line with rental prices. Read more
We already know the Riksbank is planning to raise its key rate from a record low of 0.25 per cent this summer or early autumn, because the Swedish central bank has a policy of forecasting its rate path. But that hasn’t stopped the guessing games in the market as analysts try to decipher whether the move will come at the next meeting on June 30 or at the one after in September.
Bank governor Stefan Ingves wouldn’t give any clues when he spoke to the Financial Times today but his warnings on rising household indebtedness will only fuel expectations of a July hike, following the meeting on June 30. Sweden would become only the second western European country to tighten monetary policy since the financial crisis, after neighbouring Norway.
Low rates have encouraged a surge in mortgage lending that has Read more
The Chicago Fed today put out a rather unusual paper discussing the art and science of risk management. It concludes that too much focus was put on the science of risk management, rather than the art.
More and more, the ‘art’ of using informed intuition to navigate complicated risk landscapes was giving way to the ‘science’ of statistical models. Read more
The Federal Reserve today released the transcripts from its 2004 FOMC meetings. Here’s a prescient comment, if ever there was one, from Cathy Minehan, president of the Boston Fed:
I remain concerned that the current very accommodative stance of monetary policy and the assureances that markets seem to have that we are on hold has increased leverage across all markets. When rates return to a more neutral place, as they ultimately will, this could create a burst of financial instability. Read more
Who’s afraid of depressing asset prices by raising overnight rates?
Alan Greenspan has repeatedly said that raising overnight rates wouldn’t have been effective in mitigating the housing bubble. But it turns out that at least one member of the FOMC worried in a 2003 meeting that that was exactly what would happen should the Fed raise rates too quickly. Read more
The Bank of Japan is not going to let the government foist an explicit inflation target on it without a fight. In a fascinating speech given in New York yesterday BoJ governor Masaaki Shirakawa argues that inflation targets are one reason that central banks allowed asset price bubbles to develop. For good measure he suggests that the world learned the wrong lessons from Japan’s deflation – and implies that US monetary policy in the 2000s was too loose as a result.
Mr Shirakawa’s argument:
Second, some political, economic and social dynamics influenced central bankers, and it became difficult for them to conduct monetary policy based on factors other than the inflation rate. This mechanism is quite subtle. The logic that price stability is a precondition for economic stability and that the independence of the central bank is necessary for price stability, became gradually but firmly established in the 1990s. At the same time, the granting of independence naturally called for the strengthening of accountability. An easily identifiable benchmark was desired. The framework which best fulfilled such needs was inflation targeting. However, under an inflation targeting regime, the debate tends to center on the relationship between the target inflation rate and the actual or expected inflation rate.
As a result, the cost of justifying adjustments in monetary policy becomes quite high in the eyes of central bankers, when such adjustments are aimed to deal with imbalances which appear in forms other than price indices. Economists focused their attention to the linkage between the output gap and the inflation rate, while awareness toward financial imbalances was limited.