Europe - ECB & BOE 01 (May 08 - Nov 11)

[kennynah]

jumbo seafood off hong kong island...

*************

30 Jun 2008 09:57 GMT

BUNDS/TSYS: The 10-year UST/Bund yield spread widened to -61bps -- fresh historic levels -- in the wake of the strong eurzone HICP data to 4.00% in June, which is a fresh record high and also twice the European Central Bank's definition of price stability.

Traders talking about capitulation trades on break through -52bps level.

[winston]

Don't know which planet this guys are from

How can inflation be at 2% ? In the past, Eastern Europe has been helping them to lower cost. Nowadays, with higher commodities, how can inflation be at 2% ?

And the European unions are so strong. With those unions, is it possible to have inflation at 2% ?

I read somewhere that sooner or later, the European Union will disintegrate. The high Euro and high interest rates are already chocking some countries. If it gets too tough for these people, they will have a referendum and will then get out of the European Union.

Anyway, in certain parts of Northern Europe eg. Norway, Sweden and Denmark, the Euro cannot be used easily ..

[winston]

INTELLIGENCE: (USD) Paulson: Discussions with Trichet abt inflation

(USD) Trsy Scty Paulson says that he respects the independence of ECB and allc. banks. Discussions with Trichet about inflation led to food and oil prices.

The two also discussed the dollar, euro and other world currencies, including those in Asia. He declines to comment if more coordinated global monetary policy needed. He sees 'real cooperation' between global financial authorities on regulatory issues, markets. Comments actions to isolate Iran from global financial system should go beyond financial institutions.

[StephanieP]

I heard that the ECB is willing to increase interest rates to fight the inflation (which was up to 4%). Since my dad recommended this I was thinking about investing into some property in Germany but that's all I could find online. Is there anyone who could share his or her opinion if it would be a good idea to invest in Germany or not? Thank you very much in advance for your answers.

[millionairemind]

Hello StephanieP,

Welcome to Huatopedia!!! where everyday is a huat huat day!

cheers,
mm

[winston]

ECB's Trichet Sees Risk of `Exploding' Inflation (Update1)
By Gabi Thesing

July 2 (Bloomberg) -- European Central Bank President Jean- Claude Trichet, who may raise interest rates tomorrow, said there's a risk of inflation ``exploding'' if central banks don't act decisively.

``We central banks have a big responsibility,'' Trichet told Germany's Die Zeit newspaper. ``If we're not decisive, there's a risk of inflation exploding. If we act in a decisive way, we can master the situation.'' The ECB confirmed the comments, which were made on June 23 for an article to appear tomorrow.

Trichet on June 5 said the bank may raise its key rate by a quarter-point to 4.25 percent at its July 3 meeting to contain inflation even as economic growth slows. Since then, soaring food and energy prices pushed euro-area inflation to 4 percent, twice the ECB's limit. Policy makers are concerned that workers will demand wage increases to compensate for the higher cost of living, entrenching faster inflation.

``Trichet's comments reflect the ECB's position that it will counter any wage-inflation spiral emanating from current inflation rates,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. ``The ECB's thinking is that even though higher rates may hurt growth in the short term, the longer-term economic fallout would be much worse if it doesn't act now.''

The euro and yields on Eonia forward contracts rose after Trichet's remarks were published, as investors raised bets on higher ECB interest rates. They expect the ECB to increase its key rate to 4.5 percent by December, and some expect a further move by March, the contracts show.

Producer Prices

Adding to the ECB's concerns, European producer prices jumped a record 7.1 percent in May from a year earlier, the European Union statistics office in Luxembourg said today.

Still, politicians are concerned that higher interest rates will deepen Europe's economic downturn.

European companies are grappling with the euro's 16 percent appreciation against the dollar in the past year, which makes their exports less competitive, and record oil prices above $140 a barrel, which are sapping purchasing power.

Manufacturing and services industries contracted in June.

French President Nicolas Sarkozy told France 3 television yesterday that the ECB ``should ask itself the question about economic growth in Europe and not only inflation.''

France stepped up its campaign today, with an official saying a rate increase would put growth at risk without reducing inflation or the oil price.

German Finance Minister Peer Steinbrueck said today the ECB should consider the effects on economic growth of an increase in rates. Inflation itself will damp economic growth, he said.

Higher interest rates ``mean credit will become more expensive, damping investment growth and consumer spending,'' said Dieter Hundt, president of Germany's BDA employers federation. ``It will act as a brake on economic growth.''

[millionairemind]

Will Trichet drive the world over a cliff?
Wednesday, July 2, 2008, 04:41 PM GMT [General]

Sadly, we are witnessing the sort of strategic errors that turned the recession of 1930 into a global catastrophe.

The European Central Bank is now hell-bent on a course of action that will have a knock-on effect across the world and risk a dangerous implosion of the credit system.

The ECB's Jean-Claude Trichet told Die Zeit today that "there is a risk of inflation exploding."

Let me put it differently: there is a grave risk of social and political disorder "exploding" if the logic of his argument is followed to its grim conclusion, that is to say if the ECB charges ahead with a string of rate rises through the autumn after its near certain move to 4.25 per cent on Thursday.

The ECB mantra is that Europe and the world is on the cusp of a wage-price spiral along the lines of the 1970s. This directly contradicts Ben Bernanke at the Fed, who insists -- correctly -- that today's conditions are not remotely like the 1970s.

(Perhaps this is uncivil, but I might add that Bernanke is one of the greatest economists of our age. Trichet studied political administration at ENA. He is a fine and honourable man, but he is a politician, not an economic historian)

By taking this militant 1970s line, he is in effect kicking Bernanke in the teeth. Or put another way, the ECB is trying to pressure America into a tighter monetary stance. Regrettably, this has in part succeeded. The Fed badly needs to cut rates further -- probably to 1per cent. It cannot do so because the ECB keeps threatening to pull the plug on the dollar.

This is madness. It is the mirror image of the early 1930s, when the Federal Reserve (cowed by the Chicago liquidationists) precipitated the collapse of 4,000 banks, and transmitted their fervour to rest of the world through the Gold Standard. This time there is no Gold Standard. But the globalised capital and currency markets -- egged on by Trichet -- are playing much the same role.

Yes, eurozone inflation reached 4 per cent in June. But what on earth does that tell us, unless you are an inflation-target totemist? It takes two years or so for the full effects of monetary policy to work through the economy, and by then Europe will be an entirely different place.

The ECB was too loose in the early part of this decade (in order to help Germany), keeping rates at 2 per cent until December 2005. That is the underlying cause of the rapid credit growth in the eurozone up to the onset of the credit crunch, and a key cause of silly property bubbles in Club Med and Ireland. The ECB was negligent in 2004, 2005, and 2006, (as were the US Federal Reserve and the Bank of England -- this is not to absolve Anglo-Saxon central banks at all. They all botched royally.)

We are now in the eye of the post-bubble, debt-deleveraging, deflation storm. The ECB's rate rise tomorrow will do nothing whatever to deal with the current oil and food spike, which is in any case causing a dramatic squeeze in real wages. It will merely make the downturn worse. I suspect that the ECB will be cutting frantically to undo the damage from its own ideological excesses soon enough, just as the Fed had to do after its fatal rate rise to 5.25 per cent last year.

For once I find myself in total agreement with France's Nicolas Sarkozy, who said the EBC rise was "at best pointless, at worst counter-productive." This is now plain to anybody who steps outside the Frankfurt Eurotower and takes the pulse of the -- collapsing -- credit and equity markets.

If the rate rise pushes the euro higher against the dollar, it will merely push oil higher as well -- since oil is trading as inverse dollar with seven times leverage. Eurozone "inflation" -- that treacherous term -- will get worse. Brilliant.

Ben Bernanke -- despite his own "helicopter" baggage -- has had the courage to ignore the shrieking punditocracy and slash rates by 325 basis points, looking beyond the oil spike to the deflationary risks that lie beyond. This is statesmanship of the first order.

The ECB is showing the signs of its immaturity. Still an untested institution -- determined to prove itself the worthy successor of the Bundesbank -- it seems to lack the self-confidence to think outside the box and respond creatively to a fast-changing world. It is playing rigidly by a rule-book written long ago, for a provincial bank, in a world that has disappeared.

The Bundesbank evolved in the 1950s and 1960s to serve a corporatist economy that bears no resemblance to today's Europe. It made plenty of mistakes along the way, not least by getting into a pitched-battle with the Fed and raising rates in October 1987, precipitating the global stock market crash. It then had to slash rates three times in short order to cope with consequences.

Perhaps Germany now needs higher rates as unemployment tumbles to a 16-year low. It has gained 30 per cent to 40 per cent in unit labour competitiveness against Italy and Spain since the currencies were fixed, and 20 per cent against France.

It is conquering market share across Club Med. As chief supplier to booming Russia, it is enjoying a (positive) asymmetric shock. But Germany is not the euro-zone.

The unspoken truth -- and now the source of so much poisonous policy-making -- is that Europe signed an implicit political contract with Germany in the 1990s that monetary union should never lead to a recurrence of German inflation. The euro must be as hard as the old D-Mark, and not a Lira-Peseta.

The system is now being bent to comply with this contract. Indeed, one senses that Buba chief Axel Weber has a near maniacal urge to press the point, like Shylock cutting his `Pound of Flesh', -- even if such a course of action has become inherently destructive, especially for Germany's strategic interests.

Let him read `Nathan Der Weise' by his great countryman Gotthold Ephraim Lessing, set in the Third Crusade.

As the BIS and others have warned, the eurozone is already in the grip of an incipient credit crunch. Distressed companies are drawing down existing loans from banks because the securitisation market is shut.

The result of monetary overkill is already evident in parts of system. Ireland's GDP contracted at an annual rate of 1.5 per cent in the first quarter. It will get a lot worse. Investment fell 19.1 per cent. House prices have fallen for fifteen months in a row.

Spain's house prices have fallen 6.2 per cent since July (4.3 per cent this year alone) according to Facilisimo.com. This hardly surprising. Euribor used to price floating rate mortgages (98 per cent of the total in Spain) has risen 120 basis points since the crunch began.

Unemployment has risen by 425,000 over the last year, a faster rate of increase than during the recession of the early 1990s. Monetary policy has been tightened into a severe downturn.

HSBC expects French house prices to fall 10 per cent over the course of this year and next.

Yes, inflation has run amok in Asia, the Mid-East, and Russia. They will have to slam on the brakes. Some are doing so already. This will hit just as the effects of the ECB's squeeze bites harder.

It has become fashionable to talk of "global inflation". There is no such thing. A large number of countries have let their money supplies surge out control by refusing to let their currencies revalue against the dollar. They are now paying the price.

The Western states with collapsing property and asset markets (the Anglo-Saxons, Club Med) or demographic implosions (Germany) have the opposite problem. Confusing one with the other will take us straight into a slump.

[millionairemind]

As expected.... lets see how the mkt takes it tonight

ECB raises interest rates to 4.25%
By Ralph Atkins in Frankfurt

Published: July 3 2008 12:45 | Last updated: July 3 2008 12:59

The European Central Bank raised interest rates in the eurozone for the first time in more than a year on Thursday as it stepped up efforts to control mounting inflation pressures.

As expected, the ECB lifted its main interest rate by a quarter percentage point to 4.25 per cent – the first rise in eurozone borrowing costs since June last year.

The increase comes just days after official figures showed eurozone inflation had hit 4 per cent, the highest since the launch of the euro in 1999 and more than double the ECB’s target of an annual rate “below but close” to 2 per cent.

Based on reconstructed-historic data, eurozone inflation was last higher in May 1992.

Jean-Claude Trichet, ECB president, is expected at a press conference on Thursday to stress the central bank’s hawkish credentials and determination to prevent the inflation surge caused by high oil prices feeding through into wage settlements and other costs.

Financial markets will scrutinise his comments for signals on whether further interest rate increases are likely. With oil prices soaring to fresh highs, eurozone inflation rates are expected to rise still higher in coming months.

The euro was little changed ahead of Mr Trichet’s press conference at $1.5876 against the dollar as investors also awaited a key employment report from the US.

Mr Trichet’s shock announcement last month that the Frankfurt-based central bank was mulling an interest rate increase highlighted the change in mood among global policymakers away from concerns about the impact of the financial market crisis on growth to focus more on rising inflation risks.

Ahead of the ECB announcement, the Riksbank in Sweden – which is not part of the eurozone - had said it was increasing its main interest rate by a quarter percentage point to 4.5 per cent, adding that it expected to tighten monetary policy twice more during the year.

Still, eurozone growth is showing clear signs of slowing, especially in member states such as Spain and Ireland, hit by property market corrections. Although slower growth could reduce inflationary tensions, the eurozone economy appears to be slipping towards “stagflation” – high inflation rates combined with low growth.

In the latest example of such trends, the German chemicals association said it expected chemicals prices to rise by 3.5 per cent this year, rather than the 2 per cent it had previous expected. At the same time it revised down its forecast for growth in production – to just 2.5 per cent, compared with the 3 per cent it had previously expected.

[millionairemind]

And across the Alantic, adding fuel to the fire that is slowing cooking the European markets...

Mortgage defaults rising, Bank of England warns
By Myra Butterworth
Last Updated: 12:56am BST 04/07/2008

More and more homeowners are defaulting on their mortgage repayments and credit conditions are likely to tighten further, the Bank of England has warned.

The number of lenders reporting missed payments has jumped by 50pc since the beginning of the year.

Earlier this week, it emerged that the number of mortgages being accepted by banks and building societies has plummetted to the lowest level since records began.

Ed Stansfield, property economist at Capital Economics said: “The report shows sentiment has turned decisively...

“The concern is that interest rates are still rising and the tightening in credit conditions is still on-going and we are not at the bottom of this yet.”

Adding to the grim news for consumers, US Treasury Secretary Hank Paulson, in a Britain to meet Gordon Brown, cautioned that surging fuel prices risk prolonging the global economic downturn. Crude oil hit new records yesterday as exporters warn prices show no sign of dropping.

The Bank of England's deputy governor, Charlie Bean, has admitted there was "not very much" the country could do in the face of global financial turmoil.

The boom era of the late 1990s and the early 2000s was over, he told the Commons Treasury committee.

"Real living standards will have to grow less rapidly this year, and possibly part of next year, than was the case in the late 1990s and early 2000s," said Mr Bean, formerly the Bank's chief economist.

"There is not very much that we can do about that as a nation unless we improve our productivity to offset it."

His comments came as the Organisation for Economic Co-operation and Development, the world's club of richest nations, predicted that UK unemployment would rise by 100,000 over the coming two years to reach 1.8 million.

Liberal Democrat Treasury spokesman Vince Cable said: "The OECD is rightly pointing out the economic reality that Gordon Brown and Alistair Darling refuse to acknowledge.

"It is painful but almost inevitable that the perfect storm of rising prices, over-indebtedness and the credit crunch will lead to higher unemployment."

[millionairemind]

Bank of England's MPC holds interest rates
By Angela Monaghan
Last Updated: 12:04pm BST 10/07/2008

The Bank of England’s Monetary Policy Committee has voted to hold interest rates at 5pc, as it grapples with soaring inflation coupled with an economic downturn.

BoE, led by Governor Mervyn King, is keeping rates at 5pc

At the same time consumer confidence has dropped to a new low, according to the latest survey by Nationwide, and house prices continue to fall. Halifax, the UK’s biggest mortgage lender, said today that average house prices in June fell by 2pc, and are now 6.1pc lower than a year ago.

While Britons are facing a fall in their living standards as disposable incomes are squeezed by higher food and fuel bills and rising mortgage repayments, they are also fearful of a UK recession and rising unemployment.

The MPC’s decision to leave rates unchanged today was widely predicted by economists. The Consumer Price Index reached 3.3pc last month, way above the Bank of England’s target level of 2pc, and a level which required Mervyn King, the Bank’s Governor, to write a letter of explanation to the Chancellor Alistair Darling.

Addressing the Treasury Select Committee two weeks ago, Mr King warned that inflation is likely to move beyond 4pc later this year, but added that a series of rapid rate rises risked a “deep recession” in the UK.

Howard Archer, chief economist at Global Insight, said that the Bank would be “in no hurry at this stage” to move rates from 5pc.

The last time that interest rates changed was in April, when the MPC voted to cut interest rates by 0.25pc to 5pc.