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:

 

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: 

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 

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). 

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 

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.

 

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). 

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.