MacroScope

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.

“Given the (central bank’s) strong stance against short-term inflows and strong lira, the chances of seeing CBT action on the FX side in the 21 April meeting have increased,” ING tells clients, suggesting the bank could choose to apply reserve requirements on short-term swap transactions or raise the RRRs on banks’ hard currency reserves.

If that happens, it will enrage the banking sector further.  Count stocks, FX and bonds to start  move south again.

The European Central Bank is off and running with its tightening cycle -- raising by 25 basis points last week and talking in tongues enough to persuade markets that another hike is coming by July.  At the same time, the Fed -- despite some hawkish comments recently about QE -- isn't seen actually tightening for some time. Next year, actually.

Bank of America-Merrill Lynch is now wondering whether there is something wrong with this. " Surely one of these central banks is heading to a painful policy mistake? " it says.

Key to the question is the fact that U.S. and euro zone economics are not as far apart normally as one might think. Take growth, where there is a 0.6 positive correlation between the two across business cycles. Or inflation. The correlation there is even greater at a positive 0.75 over a whole economic cycle.

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.

The consensus from the last Reuters BoE poll last week showed interest rates would stay on hold into the fourth quarter, even though UK money markets have priced in a 100 percent chance of a rate hike by May. Since the January meeting, some of the bank’s Monetary Policy Committee members have publicly stated their determination to fight strong inflation.

The Dutch public’s knowledge about the European Central Bank is as holey as the some of the country’s infamous cheeses, a new ECB survey has shown.

 When asked about the ECB’s main objective and being given the option to mark statements as true or false, more than 60 percent of Dutch respondents knew the ECB strives for price stability, but close to half of those surveyed also believed it tries to keep unemployment below five percent and more than a third think its primary objective is high economic growth.

    “Knowledge about the ECB’s main policy objective is far from perfect,” the study which was carried out last year said.”The average number of correct answers to our eleven statements is less than five.” 

The outlook for the UK housing market has darkened again. The usually optimistic bunch of property market watchers polled by Reuters, who have tended to predict ever-rising property prices no matter what the season or financial climate, now say the market will move sideways for the next two years.

They say that in the next few months, the small double-dip in prices that has begun will continue. Modest gains predicted less than three months ago for this year and next essentially have been wiped away.

No one should be surprised by this.  It smacks of an awakening to reality more than a slight change to a few variables in the statistical model. What’s perhaps most striking about these new poll results is that economists think houses are even more overvalued now than they were in July even after a few straight months of falls.

European Central Bank Governing Council member and Cyprus Central Bank Governor Athanasios Orphanides addresses parliament in Nicosia, November 27, 2009. REUTERS/Andreas Manolis

It is three years to the day since the European Central Bank first threw unlimited amounts of cheap cash at banks in a bid to ease liquidity logjams, and at least one  of its 22 policymakers sees no reason to rush for the exit yet.

 ”We remain sensitive to the liquidity needs in the banking sector and, as we have been doing since the beginning of the crisis, we will continue to provide liquidity as necessary,” Cyprus central bank governor Athanasios Orphanides said in an interview with Reuters.

European banks must pay back almost half a trillion euros to the European Central Bank on July 1 as the ECB’s first-ever one-year loans fall due, potentially putting pressure on banks’ ability to refinance and on money market interest rates.

But the ECB is confident it has put the necessary crash protection in place, with offers of unlimited three-month and six-day funds on the menu next week to make sure banks are not starved for funds.

 ”We have taken all precautions,” Austrian central bank governor Ewald Nowotny assured journalists on Friday. “We are confident that this will all occur without tensions.”

U.S.  and Japanese monetary policy does not always move hand in glove, but meetings of  the countries’ respective central banks in the next few days are likely to spell out the same thing — that the job of economic recovery is by no means over.

It is almost a dead cert that the Federal Reserve will keep interest rates where they are and a high probability that it will renew its view that we can expect an “extended period” of  ”exceptionally low” rates. It is likely to stick to its plan to end purchases of around $1.7 trillion in assets. But it could well leave the door open for a renewal of purchases at a later date should economic expansion fall back.

The message: Mission not yet accomplished.

The Bank of Japan may prove even more dovish. It is under pressure to get even looser than it already is, most likely by increasing funds offered under its lending operation.  This is partly because of weakening price trends and worse fourth quarter growth than expected.

Greece announced a 4.8 bln euros extra austerity programme on Wednesday in a bid to secure European aid to tackle its cripling debt problem.

But few people think this is the end of the story. Two German MPS have said Greece should consider selling some of its islands as one option to reduce debt. Fancy turning Santorini into a luxurious private resort, anyone?

On a serious note however, Stephen Jen, head of macroeconomics at London-based hedge fund BlueGold, says Greece needs a “Thatcher-like” wholesale restructuring of the economy to fully exterminate default risks and deep fiscal cuts alone might not be sufficient to calm bond markets in the long term.

The European Central Bank’s normally loquacious policymakers have been struck dumb over the last month.

The ECB’s 22 rate-setters generated just 14 Reuters news stories in February, much lower than January’s total of 24 and the 27 stories I count in December.  Even the core Executive Board members have managed only four speeches between the six of them, compared to a flurry of 10 speeches and interviews in the previous two weeks after policymakers returned to work from their end-of-year break.

Even the U.S. Federal Reserve, playing two team members short with just 17 policymakers at the moment, has out-talked the ECB with a rough tally of 26 news stories generated so far this month, a 30 percent increase on January.