The Great Debate UK
Chastened ECB wary of premature monetary tightening
–Darren Williams is European Economist at AllianceBernstein. The opinions expressed are his own.–
Cyclical indicators have improved, but the economic and financial backdrop in the euro area remains fragile. The ECB has clearly learned from past mistakes and is keen to avoid a premature tightening of monetary conditions.
Recent survey data suggest that business conditions in the euro-area economy are starting to improve after a steep contraction at the end of 2012. In January, the composite Purchasing Managers’ Index (PMI) for manufacturing and services rose by over one point to 48.6, the highest reading for 10 months. This and other recent data are broadly consistent with our central forecast, which is for a stabilization of the euro area economy in the early part of 2013, followed by a modest recovery thereafter. But there are also a number of reasons for caution.
First, there is an unusually wide divergence in the PMI data between Germany, which appears to be recovering strongly, and France, which seems to be headed for deep recession. The unprecedented size of this gap suggests that the signal from survey data may not be as robust as usual. Second, recent unsettling political developments in Italy and Spain mean that we should not yet rule out a return of financial-market stress. Third, there is still no evidence that the improvement in financial conditions is feeding through to an increase in credit availability. Fourth, the appreciation of the euro represents an important headwind which, if extended, could choke off the nascent recovery.
Economic quagmire adds pressure for monetary policy change
–Darren Williams is Senior European Economist at AllianceBernstein. The opinions expressed are his own.–
Bank of England governor-elect, Mark Carney, has raised hopes that the central bank may soon switch to a nominal GDP target. Although the costs seem to outweigh the benefits, the attractions of a radical new approach will grow if the economy remains stuck in the doldrums.
from MacroScope:
Could Turkey’s central bank surprise markets this month?
This Thursday, Turkey's new central bank governor Erdem Basci will chair his first monetary policy meeting. What can we expect from the man who is seen now as the architect of the country's novel monetary policy? Most analysts predict there will be no change this month to interest rates and banks' reserve requirement ratios. But could the bank, which shocked markets with an out-of-the-blue rate cut in December and a big further rise in short-term RRRs last month, throw another curveball?
ING Bank is among those which believes the central bank could again surprise markets this week. Using Turkish banks' net off-balance sheet currency positions as a proxy, ING analyst Sengul Dagdeviren reckons short-term capital inflows are on the rise again. Banks' net off-balance sheet FX positions had halved between Nov 5 to March 4 to just over $12 billion, as the central bank drastically widened the gap between the overnight borrowing and lending rates -- a move that discouraged short-term swap positions. But these positions have risen back over $21 billion in the month to 8 April, Dagdeviren says, noting this coincides with a 5 percent gain in the Turkish lira against the dollar.
Two very different inflation problems
-Kathleen Brooks is research director at forex.com. The opinions expressed are her own.-
There was more evidence in February that the world economy is re-flating; both China and the UK released inflation data that showed prices running above 4 percent. Authorities in these economies have a difficult few months ahead, if prices continue to rise at this clip then they may have an economic crisis on their hands.
from MacroScope:
The perils of predicting BoE policy
As we’ve noted extensively, economists often get it wrong. Leaving aside their collective failure to recognise an impending global recession, you might recall a shock interest rate hike from the Bank of England in January 2007.
This was another event that almost every economist polled by Reuters failed to spot, and there are signs that four years on, economists might be setting themselves up for a similar shock.
from Breakingviews:
China’s tweaks won’t cure financial excess
A month before China ushers in the year of the Tiger, its central bank has begun to address the effects of its roaring liquidity boom. It is encouraging that the authorities in Beijing are alert to the threat of an overheating financial system. But with so many countervailing forces, the liquidity tiger will not be tamed so easily.
Markets yelped Tuesday after the central bank raised the minimum ratio of capital to loans at banks by half a percentage point. But this amounts to little more than scooping water out of the sea. Some 1 trillion yuan ($146 billion) of government bills mature in the next two weeks. If they are not rolled over, three times more money would flow into the system than the reserve hike will leech out. Then there are foreign speculative flows - an estimated 378 billion yuan in the fourth quarter of 2009.
2010: the year of fiscal clean up
- Jane Foley is research director at Forex.com. The opinions expressed are her own. -
At the height of the financial crisis few argued against the need for a huge fiscal and monetary policy response. As a result the global economy has moved away from the precipice. For many governments 2010 will bring a different kind of precipice, this will be the year in which many electorates will be made to start paying for their governments’ huge fiscal binges.
from Commentaries:
Trichet points to possible double-dip recession in Europe
In his cautious Franglais central-bank speak, Jean-Claude Trichet has pointed to the strong possibility that the euro zone may face a double-dip or W-shaped recession.
Of course, that's not exactly what the European Central Bank president said. But how else are we to interpret his repeated references to a "bumpy road" ahead, and his comment that we are likely to see quarters with positive growth and other quarters with "less flattering" figures? All this was illustrated with a hand gesture that drew a W (or a corrugated iron washboard) rather than a V or a U.
from The Great Debate:
BoE extends QE, fears 1930s re-run
-- John Kemp is a Reuters columnist. The views expressed are his own --
The Bank of England's decision to continue with its asset purchase programme, or quantitative easing (QE), at the rate of 50 billion pounds per quarter in Oct-Dec, unchanged from Jul-Sep, shows bank officials are more worried about ending support for the recovery too soon than about risking inflation by leaving it too late.
The problem with QE is that you have to keep buying the same amount of assets each month to maintain the same monetary stance. With interest rates, the Bank can cut them and they stay cut. If asset prices drop with QE, it represents a tightening of monetary policy.
Hike in interest rates a step closer
- Edward Menashy is chief economist at Charles Stanley. The opinions expressed are his own. -
The Monetary Policy Committee of the Bank of England has kept its key lending rate at a record low of 0.5 percent, last reduced in March 2009 when it indicated that conventional policy had reached its limit and unorthodox measures such as quantitative easing were to be used.
