ECB, BoT, BoK, BoE, BoJ; China; Mexico; Iceland
Co-written with other RGE Lead Analysts.
Today we look at events around the world.
Monetary Policy Decisions: ECB, BoT, BoK, BoE, BoJ
Monetary policies continued to diverge according to the balance of risks between inflation and recession. Inflation fighting ECB, Thailand and Korea opted to keep rates unchanged this week while, in the more crisis-affected UK, the BoE cut rates by another 25bps on recessionary risks from the financial market crisis. In Japan, the BoJ also stayed on hold, stuck between commodity-driven inflation and fragile growth prospects menaced by global financial turmoil. The central banks moved in line with expectations. BoE is expected to cut further this year and ECB is expected to join the easing in the secon half of 2008 to preempt a slowdown but HICP inflation may prove an insurmountable barrier this year.
China: Trade Imbalances
U.S. and Chinese trade data released today showed that the trade imbalance is narrowing slightly – U.S. exports to China are rising from a low base and Chinese exports to the U.S. are falling. The IMF expects that China’s surplus which reached a record $360 billion in 2007 will plateau this year before accelerating again. Yet, China still buys more U.S. assets than U.S. goods, likely accounting for a lot of China’s stunning reserve growth in January and February. Meanwhile China’s trade surplus with Europe is on the rise – perhaps the result of a RMB/EUR that has fallen along with the dollar. See: “Imbalances and US-China Codependency”, “Will China Keep Buying US Assets? Which Will It Buy?” and “China’s Trade Surplus Narrowing As Exports Slow: Still Large”
Mexico: Energy Reform
With high oil prices, Mexican Congress is trying to approve a comprehensive energy reform that would attract foreign companies to reverse the country’s slumping crude production. The government’s proposal includes more hiring of private companies across the oil industry through “incentive contracts” that offer bonuses for work well done. Take a look at: “Energy Reform in Mexico”
Iceland Declares War On Speculators
“They will not get away with it,” said Iceland’s central bank head David Oddsson, who believes Iceland is the victim of ‘unscrupulous’ speculators. Icelanders suspect speculators exerted pressure on the illiquid CDS market to stoke fear of a banking collapse that would contaminate the stock and currency markets. Similar to the Hong Kong Monetary Authority in 1998, Prime Minister Geir Haarde has threatened to use ‘bear traps’ – direct intervention in the currency and stock markets – to counter speculative attacks. But some analysts counter that Icelandic “bear traps” don’t look that fierce given its meager $2.8 billion in foreign reserves. Meanwhile, Icelandic authorities are actively investigating possible market manipulation. See “Bear Trap Time? Iceland’s Battle Against Speculators” and “Iceland’s Banking System: Victim of Speculation Or Real Troubles?”
Also in the Monitor:
*Lehman Liquidates 3 Money Market Funds: How Many More Funds at Risk of ‘Breaking the Buck’?
*U.S. Trade Deficit Widens in February on Higher Imports
*Unorthodox Alternative Tools to Expand the Fed’s Lending Power Considered
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