The inevitable happens – ECB preannounces rate rise in July
Readers of Eurointelligence are among the few who are probably not surprised. In our ECB Watch have been saying for some time now that euro area interest rates are more likely to go up than down – as the ECB realises that the present monetary stance is insufficient to bring inflation down to the target. Yesterday, Jean-Claude Trichet duly pre-announced a 25bp rate hike in July, as the ECB’s staff projections produced an inflation forecast in the range of 3.2% and 3.6% for this year, and 1.8% and 3% for next year – and this on the very optimistic assumption of zero second-round effects, according to Frankfurter Allgemeine. The news came as a total shock to financial markets, with European stocks down, and oil up, and also to many newspaper readers. It also came as a shock to journalists, and many analysts. FT Deutschland wrote in its front page story that the news came totally unexpected.
The ECB also projects a weakening of economic growth, but the projections assume that the low point will already be reached this year, as growth rates will go up again in 2009. In response to Mr Trichet’s warning, the euro rose by 0.7% both against the dollar and sterling.
An alternative view
A very different growth forecast – at least in respect to Germany - was produced by the Institute for World Economics in Kiel, which raised its growth forecast in 2008 to 2.1%, but lowered it for 2009 to 1%. The reason is that export demand is falling, and inflation is rising, Frankfurter Allgemeine reports.
Some comments
The pre-announced rate rise led to predictably different reactions. FT Deutschland made the point the preannouncing rate increases is always a bad idea. Secondly, it disputes the necessity, as the recent rise in inflation is not a monetary phenomenon, but the result purely of rising commodity prices, with no evidence of second-round effect. Frankfurter Allgemeine, by contrast, welcomes the announcement in an editorial, arguing that higher headline inflation rates have translated into a rise in inflationary expectations.
Crisis in Ireland as ‘No’ vote on the Lisbon Treaty surges
Ahead of the referendum next Thursday, the 'No' vote is ahead of the 'Yes' vote for the first time by five points according to a poll for the Irish Times. The 'No' vote has nearly doubled in the past three weeks, jumping dramatically to 35% from the previous 18%. There are still 28% undecided voters and 7% who won't vote. But this is even more worrying notes Jean Quatremer in his blog. 30% of those ‘No’ voters gave as a reason that they do not understand what they vote for thus chose to vote 'No'. The Irish Independent also warns that in previous referendums there has been a tendency for the undecided to either to abstain or to vote ‘No’. In an interview with the Irish Independent, the Taoiseach Brian Cowen who announced that he will accept full responsibility for the outcome of the Lisbon Treaty referendum. He passionately appeals to voters not to put the economy at risk.
Meanwhile, the European Commission and the EU presidency kept a low profile on issues that might disturb the Irish, reports Le Monde. There are no declarations and formal discussions on tax harmonization, defense or agriculture. Difficult subjects have been postponed to dates after the referendum. There are exceptions though. French finance minister Christine Lagarde hit the headlines in Ireland when she said that the French presidency is determined to push the subject of tax harmonization.
European banks suffer more subprime losses than US bank
Now here is an interesting statistic from the Institute of International Finance in Washington, relayed by FT Alphaville. Of the total of $387bn in bank writeoffs due to the crisis, about $200bn were accounted for by European banks, and only $166bn by US banks. This is Europe in the wider sense, including the UK and Switzerland, where many of the losses were concentrated. We still suspect that the euro area is less hit than other regions.
Krugman on the Polish plumber
Paul Krugman believes that the euro area suffers from a lack of natural cohesion, a region divided by language, culture, even food. But there is salvation in the form of the Polish plumber, who provides the necessary cohesion kit. “Eastern Europeans have become the marginal workers in Western Europe — moving to booming economies but not to slumping economies. They help provide the de factor mobility the euro needs. And they even return home when times are good there.”
Buiter on Bernanke
Willem Buiter takes a look at Ben Bernanke’s recent attempt to boost the dollar, making the point it that this sort of verbal intervention is cheap but of limited usefulness unless accompanied by policy action. He also makes the point that the Fed is emphasising headline inflation more than it used, recognise that a persitent rise in headline inflation could alter inflationary expectations, even when core inflation appears contained. He interprets the statement as a sign that the Fed is now reluctant to cut rates further.
The Financial Times, in an editorial, also made the point that Bernanke’s words, while giving a possible hint about future monetary policy, are unlikely to have much effect on the dollar. Action is needed, not words.
Plosser on moral hazard
The Wall Street Journal economics block has an interesting entry about a speech by Charles Plosser, head of the Philadelphia Fed, who said that central banks’ attempts to safeguard financial stability could bring moral hazard if the policies prevent adjustments in asset prices (for example through extremely low interest rates, or taking on junk securities as collateral). Another interesting point he makes is that the central bank should figure out a way to make financial stability policies as rule-based as monetary policy. Discretion, as it is currently practices, brings about moral hazard in the long run.
Lord Desai on oil speculators
Writing in the FT, Lord Desai notes that the daily futures contracts in the oil market constitute a large multiple of daily oil consumption, evidence of hightened speculation. He proposes that the G8 act immediately by forcing Nymex to impose higher margin requirements for speculators, an increase from a current 7% to about 50%.
Gillian Tett on the future of securitisation
Writing in the FT, Gillian Tett has an interesting article on the future of securitisation. Securitisation itself is not dead, but it will no longer offer the great profits. One problem, as supervisors have discovered when scouring through banks’ trading books, is that banks have created securitised structures with the sole purpose of circumventing regulation. All this is likely to go. What remains are more straight-forward securitisations structures, but not the kind that produced mega-profits for banks.
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