liquidity

Robin Harding

I’m pretty sure that the answer is ‘No’, at least for now. For background, the effective Fed Funds rate has been falling steadily for the last couple of months:

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On top of the $265bn being made available to banks, the Bank of Japan has decided to double its asset purchase scheme to $122bn (¥10,000bn). The decision was made at the Bank’s scheduled monetary policy meeting, at which rates were kept at 0-0.1 per cent.

Liquidity
Of the $265bn (¥21,800bn) being made available to financial institutions, $182.3bn (¥15,000) is available immediately, and $82.6 (¥6,800) over the coming days.

Asset purchases
The Bank’s current Asset Purchase Programme is subject to a ceiling of $427bn (¥35,000bn). This splits into a maximum of $366bn (¥30,000bn) in loans, and a maximum of $61bn (¥5,000bn) stock of outstanding financial assets. It is this latter limit that is to be doubled to $122bn (¥10,000bn), effective today, with assets being bought by the end of June 2012.

Specific details are as follows: Read more

India historical interest rate graphicIndia’s Reserve Bank has raised rates to tackle inflation, while extending bank liquidity measures due to expire next week. The repo and reverse repo rates stand 25bp higher at 6.5 and 5.5 per cent, respectively, while easing measures are extended to April 8.

Indian wholesale price inflation historical seriesThe rate rise was prompted by recent price rises. “Inflationary tendencies are clearly visible,” said governor Duvvuri Subbarao in the statement. “Inflation is the dominant concern… the reversal in [its] direction is striking.” The strength of his words make a 25bp rate rise seem insignificant.

But given global inflationary pressures from food and fuel, India’s December figure was not so dramatic. Viewed historically, annual wholesale price rises of 8.4 per cent still fit into the downward trend seen since April of last year, when inflation was running at 11 per cent. It is too early to say whether December’s figure is the start of a sharp increase in inflation – and today’s decision should make that a little less likely.

Despite the tightening measure, the RBI also announced today that it would alter and extend easing measures Read more

Every two weeks, on average. That’s how often China is introducing some form of tightening at the moment. The People’s Bank has just increased the reserve ratio again, by 50 basis points, or a half of one percentage point. This increases the amount of cash banks have to keep with the central bank, thus reducing the amount available to lend. Our calculations suggest rural and small-medium sized banks will have to keep 15.5 per cent of their deposits with the central bank, while larger banks will need to keep 19 per cent. In October of last year, PBoC introduced a further division between banks, increasing the reserve requirements of the six largest banks temporarily, keeping the ratio of other large financial institutions on hold. If that division has now expired, the ratio for the six largest banks is now also 19 per cent. The move will be effective January 20.

Mopping up liquidity in this way is one tool to combat inflation. Another is to let one’s currency appreciate. Signals have been sent today from a senior central bank official that China will allow further flexibility in the yuan. “Flexibility” is a one-way bet in the markets at the moment, and the State Administration of Foreign Exchange today set the central parity rate of the yuan at 6.5896 against the dollar, a new record.

Merry Christmas, banks. If you start running low on dollars in the new year, your central bank will now be able to access the greenback via currency swaps just extended by the Federal Reserve. For several countries, anyway.

Temporary swap agreements, set up most recently in May with the ECB, BoE, BoJ, SNB and Bank of Canada, were due to expire in January but have now been extended to August 1, 2011. These agreements allow a central bank to receive dollars in return for their own currency, which are then converted back at the same exchange rate at a later day (be it overnight or up to about three months). It’s a liquidity-providing, cash-crunch-prevention measure.

The swap lines are essentially unused at present. Only $60m is outstanding. So why extend? Robin, who’s writing on this for the paper as I type, says the move clearly reflects concerns about Europe. That would explain the curious coincidence of a BoE-ECB swap being set up on Friday (specifically to provide sterling to Ireland). Read more

The ECB and Bank of England have announced a temporary liquidity swap agreement in which the UK central bank may provide up to GBP10bn to the ECB in exchange for euro. The agreement allows sterling to be made available to the Central Bank of Ireland as a precautionary measure.

Liquidity measures are given their own paragraph in today’s monetary policy announcement from the Reserve Bank of India, as tempering inflation allowed the central bank to hold rates. The (temporary) end to the Bank’s rate normalisation programme was expected after the governor gave a strong hint last month.

“The extent of [liquidity] tightness has been beyond the comfort level of the Reserve Bank,” said the statement, which announced two liquidity injection measures. There has been a cash crunch in the banking sector since at least early November, when the RBI extended temporary easing measures.

The first measure, which has been used temporarily before, is to reduce the amount banks have to keep with the central bank. The statutory liquidity ratio will be permanently reduced from 25 to 24 per cent with effect from December 18. The last time this was done, one estimate equated the reduction to an additional 45,000 crore Rs ($10bn) liquidity.

The second measure Read more

Chris Giles

In today’s forecasts for the  2011 UK housing market, the Council of Mortgage Lenders worries that banks and building societies will not be able to lend much next year, partly because they will have to refinance large amounts of wholesale lending and pay back £130bn to the Bank of England in respect of the 2008 Special Liquidity Scheme which will expire in January 2012.

It says prospects have improved, but still implies that borrowers will be the main losers of the Bank’s demands to be repaid:

“The big issue for lenders next year will be to re-finance existing wholesale borrowing and begin to pay back the very large amounts of funding advanced through official support schemes. However, the prospects of them being able to do this without adversely affecting the market have improved. The amount due to be repaid under the special liquidity scheme by January 2012 has declined from about £180 billion to around £130 billion currently.

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Monetary tightening in China just sped up. The Chinese central bank has just announced another 50bp increase in the deposit reserve ratio – which will happen at the end of November. The previous hike on November 10 was also 50bp and was expected to remove about $45bn liquidity from the Chinese economy.

Presumably – though this is not detailed in the release – the new reserve ratios will be: 18.5 per cent for six largest banks; 18 per cent for other large banks; and 16 per cent for small- and medium- sized banks. China is also raising rates – a 25bp hike took place a month ago and there have been further rumours since then and today in the markets (though perhaps the reserve increase will substitute). Read more

Rumour has it that certain European investors are no longer willing to provide Irish banks with overnight funding. If true, this could trigger the much-discussed bail-out (for it’s unlikely to end in default). A bail-out might still impose losses on bondholders, though, after recent discussions at the EU.

Until now, Ireland didn’t need any extra funding till mid-2011. Shenanigans in the secondary (resale) bond market were troubling, then, but did not need to affect the country’s cost of debt. Just as long as debt auctions took place once things had calmed down. Read more

More on that China rumour (which is no longer a rumour). The People’s Bank does plan to raise the deposit reserve requirement by 50bp, broadening and making permanent a temporary measure introduced almost exactly a month ago. The move, which takes effect on November 16, is expected to reduce liquidity by $45bn.

Back then, the measure affected six large commercial banks for two months. Four of those six banks will now see their deposit reserve requirement ratio (ratio) rise to 18 per cent. Other large deposit-taking institutions will see their ratio rise to 17.5 per cent, while small- and medium- sized banks will have a ratio of 15.5 per cent. Read more

Markets anticipate further easing from the Reserve Bank of India. Twelve-year bond prices are climbing, apparently on speculation that the central bank will intervene to buy the securities to ease the cash crunch facing banks. Bloomberg reports:

The yield on the most-traded 2022 note fell after the Reserve Bank of India last week bought bonds through an open- market auction for the first time since September 2009. The central bank on Nov. 4 bought back 83.5 billion rupees ($1.9 billion) of debt, after offering to purchase as much as 120 billion rupees. Read more

Temporary measures designed to ease a cash crunch in the banking sector over the weekend have been extended to run till Thursday. Additional liquidity will be provided to banks through an extra daily auction, since the Bank’s “liquidity adjustment facility window … has been in … deficit … recent[ly]“. Extra auctions were initially set for October 29, 30 and November 1. Now, auctions will also take place on November 2, 3 and 4.

Banks can also avail themselves of a temporary reduction in the statutory liquidity ratio: they will be allowed to hold 24 per cent rather than 25 per cent with the central bank. By one estimate, this small reduction is equivalent to an additional $10bn liquidity. Read more

China has temporarily increased the reserve ratio required from six large commercial banks banks. For two months, the banks will need to keep 17.5 per cent of depositors’ balances on hand, instead of 17 per cent. With banks hoarding more cash, money supply and credit availability will fall in China. In two months’ time, the reserve ratio is expected to return to 17 per cent.

The surprise move, reported by Reuters from four unnamed sources, may be a response to rising capital flows, rather than a prelude to monetary tightening. It could also be intended as a warning to banks rumoured to have stepped up their lending in September, above government targets. Read more

Ralph Atkins

As eurozone leaders cheered Ireland’s attempts to bring its crisis under control, banks across the 16-country region provided a separate display of reviving financial market confidence. The European Central Bank reported it had rolled over much less than expected of €225bn in three-to-12 month loans to banks that expired on Thursday.

The news was a boost for the ECB, marking a significantly reduced reliance on the unlimited liquidity it has been pumping into the banking system since the collapse two years ago of Lehman Brothers investment bank. Read more

Ralph Atkins

The health of eurozone banks faces a fresh test this week when they are due to roll over €225bn in loans, the largest amount at the ECB since early July, when €442bn of one-year loans matured.

The return of liquidity could put upward pressure on market interest rates, while the volumes that are converted into new loans will be an important guide to levels of financial market confidence within Europe’s monetary union. The results could help determine the pace at which the ECB pursues its “exit strategy” to unwind exceptional measures. Read more

Ralph Atkins

Jean-Claude Trichet, European Central Bank president, said yesterday’s decisions on future liquidity operations had been reached by “consensus”. To some ears, that might sound like there was a big split. In an Anglo-Saxon context, a consensus might be seen as simply “more than half”.

I think that is wrong. When Mr Trichet talks about a decision being made by “consensus,” my understanding is that that means there was some initial resistance but in the end everyone was able to support the final decision. It is a notch or two weaker than a decision agreed “unanimously”. Read more

Central banks in the east Asia Pacific region are planning closer co-operation managing their liquidity requirements, as each bank’s ability to provide liquidity “may be limited”. Some banks lack confidence that their liquidity management procedures could cope with renewed stress in the money markets. This from a study presented at last week’s EMEAP meeting, which ended on Friday.

That some of the 11 central banks lack confidence in their liquidity management is implied in the study’s executive summary: Read more

Ralph Atkins

The European Central Bank will be back in the spotlight tomorrow (Thursday), when Jean-Claude Trichet, president, gives his regular post-council meeting press conference. But what will he have new to say?

The central bank’s main interest rate seems firmly stuck at 1 per cent, and the global economic outlook has changed little since June’s meeting (Germany doing better, China perhaps worse). There will be questions about European bank stress tests, but these are primary the responsibility of bank regulators (which don’t include the ECB). Greece’s rehabilitation efforts have been given an official thumbs up today.

The action recently has been on the ECB’s open market operations. The euro’s monetary guardian was pleased with its success last week in withdrawing, without upset, some €442bn in one year loans. With the amount of excess liquidity it has pumped into the financial system falling further this week, market interest rates have risen – in effect, tightening monetary policy.

That has prompted speculation Mr Trichet might announce further offers, perhaps for six month liquidity. But Read more

Ralph Atkins

European Central Bank hopes of a smooth return of €442bn of emergency loans it made to banks a year ago have been boosted after demand for three-month liquidity offered as an alternative fell far short of expectations.

Just €131.9bn in three-month liquidity was taken by 171 banks, the ECB reported on Wednesday. Analysts had feared that banks would demand €250bn or more. The low figure suggested banks’ nervousness about their future funding and inability to tap commercial markets might have been overdone. Read more