Don’t stop fighting inflation, banks tell Brazil policymakers

Brazil's Central Bank President Tombini reacts during a ceremony to announce Measures of Consumer Protection at the Planalto Palace in Brasilia

A small piece of good news on Brazil’s inflation rate last week probably gave the central bank its best pretext yet to finally stop raising interest rates after more than one year of non-stop increases. But economists still think it’s too early to proclaim “mission accomplished”.

Keeping interest rates at the current 11 percent will do little to reduce inflation in the months ahead, economists at Itau Unibanco, Santander and Bank of America Merrill Lynch said, despite a smaller-than-expected increase in consumer prices last month.

Their pessimistic outlook contrasts with the central bank’s, which has signaled it is willing to stop raising rates soon by saying that the 375-point increase since April last year was “sizable” and is yet to have a meaningful effect.

Behind the divergence are their opposing views on Brazil’s fiscal policy. They differ on how President Dilma Rousseff should be treating federal money on the run-up for a re-election campaign later this year.

The central bank says Brazil’s fiscal policy is moving towards neutrality. That is, it is boosting inflation at a slower pace than before, and will soon stop being an obstacle to monetary policy.

Euro zone inflation falls again; economists base ECB rate cut calls on deja vu

Euro zone inflation has dipped again and some forecasters are hedging their bets on the policy response by saying the European Central Bank could either cut rates this week or sometime in the next two months.

That lack of conviction, although not a recent phenomenon, is driven by memory of the ECB’s surprise cut in November after a similar drop in inflation and a nagging belief that things have not worsened enough in the interim to warrant another.

Only two of 76 analysts - Barclays and IFR Markets – in a Reuters poll conducted before news on Friday that January euro zone inflation fell to 0.7 percent said the ECB would trim its refinancing rate below 0.25 percent this week.

Ker-pow! Turkey leaps to lira’s defence


Turkey’s central bank bit the bullet last night, despite Prime Minister Tayyip Erdogan calling for it to hold firm just hours beforehand, and what a bite it was.

After months trying to avoid a rate rise it put 4.25 full percentage points on the overnight lending rate, taking it to 12 percent. No one can accuse Governor Basci of being under the government’s thumb now. The move vaulted expectations.

The big questions for Turkey are what such a magnitude of tightening, which the central bank said would persist, does to a faltering economy and how Erdogan, who is on a two-day trip to Iran, reacts.

The Bank of Canada is probably not ready to seriously consider cutting rates — yet

With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.

But that doesn’t mean Governor Stephen Poloz is ready to signal on Wednesday that his rate shears are about to get hauled out of the shed.

Yes, economic growth is expected to be restrained over the next couple of quarters, the long-awaited pick up in exports and business investment still seems elusive and inflation continues to remain undesirably weak.

Why should the Bank of England hike rates when it can baby-step?

When the Bank of England decides to start hiking interest rates, it may find that its standard 25 and 50 basis point interest rate moves of old are too blunt a tool for Britain’s delicately-poised economic recovery.

Instead, UBS economist Amit Kara suggests the Bank should “test the waters” with rate hikes of 5 to 10 basis points:

After many years of an aggressive ‘shock and awe’ approach, one can reasonably say gradualism is back. To be clear, gradualism in monetary policy setting is not new. Ben Bernanke offered a strong justification for gradualism in a speech in 2004, essentially advocating an incremental approach to rate setting in the face of uncertainty. Another good example, also from the US, is the Fed decision last month to dial back its QE programme. The market was looking for an explicit tapering path, but the FOMC instead delivered a small step and a promise to take further action after one month depending on the data. Our prescription of a 5 basis point rate hike in the UK is analogous to the gradualism delivered by the FOMC.

Turkey and Hungary – tales of unorthodoxy

A big moment for Turkey. After desperate attempts to shore up the lira by burning through its reserves, the central bank must decide whether to raise interest rates instead.

Prime Minister Tayyip Erdogan, fearing an economic slowdown ahead of elections next year, will not want to see a sharp tightening of policy. Instead, he is blaming shadowy forces for his country’s plight.
But a rate rise might be what is required to prevent a full run on the currency and if that is the case, the earlier it is done the better to calm investor nerves. The central bank sent a strong signal last week that it was minded to push up at least some of its key rates regardless of the political pressure.

The odds are on it raising the overnight lending rate by something between 50 and 150 basis points even though testimony by Federal Reserve chairman Ben Bernanke last week has calmed markets about the speed and scale of U.S. withdrawal of stimulus and allowed emerging markets, including Turkey’s, to settle down somewhat.

from Jeremy Gaunt:

Why is the euro still strong?

One of the more bizarre aspects of the euro zone crisis is that the currency in question -- the euro -- has actually not had that bad a year, certainly against the dollar. Even with Greece on the brink and Italy sending ripples of fear across financial markets, the single currency is still up  1.4 percent against the greenback for the year to date.

There are lots of reasons for this. The dollar is subject to its country's own debt crisis, negligible interest rates and various forms of quantitative easing money printing -- all of which weaken FX demand. There is also some evidence that euro investors are bring their money home, as the super-low yields on 10-year German bonds attest.

Finally -- and this is a bit of a stretch -- some investors reckon that if a hard core euro emerges from the current debacle, it could be a buy. Thanos Papasavvas, head of currency management at Investec Asset Management, says:

ECB has to cut rates to stop jump in real borrowing costs

The European Central Bank has to cut official interest rates by at least another percentage point to stop the real cost of borrowing for households and firms jumping in the summer as inflation plummets.

That’s the logical conclusion of comments in recent weeks made by ECB policymakers including Italy’s Mario Draghi and Germany’s Axel Weber, who are watching inflation-adjusted borrowing costs closely to gauge the impact of cuts in official interest rates on the real economy.

One key factor in the euro zone’s economic recovery will be the real cost of borrowing, the interest rate paid on credit after adjusting for inflation, or any loss of purchasing power.

ECB to cut rates, but by how much?

Economists are now certain the European Central Bank will cut interest rates again at its next meeting, the only question is how much.
ECB chief Jean-Claude Trichet’s blunt hint that a rate cut is possible, although not certain, at the next rate meeting on November 6 cemented expectations that the central bank is readying more ammunition to fire at the financial crisis.
Although Trichet would not be drawn on the size of the possible cut, using the past as a guide suggests it could be a repeat of Oct. 8′s half a percentage point reduction.
In June, Trichet flagged a quarter-point rate hike by saying that it was possible, although not certain that the ECB “could decide to move our rates by a small amount” — a qualification that was missing from Monday’s announcement.
   ”The absence of this language in today’s speech, suggests that the ECB President is leaving the door open to a bigger reduction,” Fortis Bank economist Nick Kounis said, tipping a half a percentage point cut to 3.25 percent.
Although the majority of its 25 rate changes have been by only 25 basis points, the pattern shows the ECB is more likely to be bold when cutting rates than when raising them.
Six of the nine rate cuts the ECB has undertaken since 1999 have been of 50 basis points, compared to only two of the 16 rate hikes.
The last two rate cuts, on Oct. 8 and before then in June 2003, were both 50 basis point moves — so the ECB could well go for three in a row.
Some have speculated that the ECB may even cut rates by 75 basis points, although it has never made such a large leap in its 10-year history, either up or down.

The code of silence…

It was a routine press conference given by Canada’s Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney on the results of Friday’s G7 meeting.

After reassuring Canadian’s that they “probably have the most efficient, effective financial system in the world”, Carney was asked how Wednesday’s coordinated interest rate cut came together and who drove the process.

His answer revealed not only a “code of silence” among Central Bank leaders, but also hinted that those same leaders might have some special powers — at least if we are to believe they all independently decided an interest rate cut was a good idea at the exact same time.