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European Central Bank and Rates - Global Economics Brief

European Central Bank and Rates

The European Central Bank (ECB) President warned that he would, and he took the plunge to raise rates by 25bps at the April ECB meeting.
His friends at the Bank of England were too worried about splashing cold water on the fragile recovery and want the UK’s economic climate to be a bit warmer before jumping in. Over the pond the Fed is keeping an eye on the economic temperature too. Signs of cooling in Q1 mean it is unlikely to jump in for a while, especially when squabbling between the political parties on fiscal matters almost led to a US government shut down. Portugal finally conceded that it needed bailout (first reported here in January 2008 that Portugal would be one of the many to request help). Fortunately, contagion to Spain looks unlikely so far. Watch this space!

The ECB raised rates but the Bank of England and the Fed are still waiting. The ECB raised interest rates by 25bps to 1.25%, the first hike since July 2008. Inflation, of course, was the reason. The flash estimate of eurozone inflation increased to 2.6% in March, up from 2.4%, prompting the ECB into action in order to anchor inflation expectations and prevent second round effects on wages. The move wasn’t a surprise as it was well signalled last month, but recent developments in Japan and the Middle East added a little suspense. There is inflation in the UK and rising by the day!

In the UK, there was no surprise at the Bank of England’s ‘hold’ decision. The MPC voted to keep UK rates steady at 0.5% for the 24th consecutive month at the April meeting. UK economic conditions are still fragile, especially for households. Their real disposable income shrank by 0.8%y/y in 2010 and changes to taxes and benefits will hit their pay packets later this month. But the same worries about consumers’ inflation expectations means the minutes will be combed for clues of when rates will start to rise. We think they will wait until August when the effect of the Budget should be clearer. Will it!

The Fed’s dual mandate is likely to delay a rise in US rates. Unlike the ECB and the Bank of England, the Fed has to look after both inflation and growth. At the March meeting there was unanimous support for the current policy, but disagreements on how soon to tighten it. Rising inflation strengthens the argument for an earlier rise in rates, but the Fed's dual mandate means the Fed will raise rates only when they are sure the recovery is secure. Business surveys suggest that Q1 was disappointing and most economists do not expect rate rises until next year. What will inflation be by 2012?

UK industrial production stumbled unexpectedly in February. UK industrial production fell by 1.2%m/m in January - the biggest monthly decline since August 2009. It was caused by a big fall in oil and gas production and flat manufacturing output. Although it’s best not to read too much into monthly data, these figures will cast doubts on the resilience of the recovery, especially as the industrial sector makes up around 18% of UK economic output.

UK service sector activity is growing strongly. The March UK services PMI index was good news. The index reached a thirteen month high at 57.1, up strongly from 52.6 in February. Demand for services from new businesses was the main driver, but there was also a small, but very welcome, increase in employment. Business confidence took a bit of a hit though as profit margins were squeezed by firms trying to avoid passing on higher fuel and energy costs. What is the `real` unemployment in the UK?

UK manufacturing output prices are rising quickly, but input prices are rising faster. The March producer price index rose by 5.4% over the past 12 months, the strongest growth in two and a half years. Rising energy and commodity prices are chiefly responsible and, because they are still in the pipeline, will pose further risks to consumer inflation in the coming months. Input prices rose more than twice as quickly as output prices at 14.6%y/y, squeezing margins in this sector too.

Eurozone service sector activity is mixed. The eurozone service PMI index reached a three and a half year high in March, rising to 57.2, from 56.8 in February. But this disguises big national differences. Strong domestic demand in France and Germany led to the fastest rate of expansion since June 2006. But Irish service growth declined sharply, while activity fell in Spain. Will Spain be next for a `bail-out`?

Portugal becomes the third euro nation to ask for help. Portugal finally had to concede that its economy needs a bail out. After parliament voted down austerity measures there was no obvious Plan B. €9bn bond maturities are approaching and borrowing rates increased sharply as markets lost confidence and Portugal’s sovereign debt rating was downgraded. The next step for the caretaker government is to negotiate a favourable interest rate on the bailout loans in order to avoid stifling future growth. Fortunately, so far, contagion to Spain looks unlikely.

Are the banks bigger than governments? The banks certainly do not listen to governments globally! European Central Bank and Rates

Banks cash in on borrowers` and savers` pain

Banker breaks UK record with £21 million pension pot

The new CEO, Ana Patricia Botin of Santander UK has amazed a pension pot worth more than £21 million. This pension pot will give her a pension of about £750,000 per year - this is 32 times Britain`s average wage. Plus, her present salary is £2.7 million per year plus other benefits.

Ana Botin is the eldest daughter of the Chairman of Banco Santander. Also, Alfredo Saenz CEO of Santander global has a pension pot of £72 million. In most cases these people retire with 90% of their final salary. Nepotism is still growing globally!

What do other Banks pay their people? If you look closely at the other banks globally they pay very high salaries, bonuses and pensions too.

Banks to hand out more bonuses (these are only a few, there are other banks paying BIG bonuses)

Bob Diamond CEO Barclays - £9 million
Eric Daniels CEO Lloyds TSB - £2 million
Stephen Hester CEO RBS - £2 million
Stuart Gulliver CEO HSBC - £8 million

Most of the above also have salaries of millions of £`s plus pension pots of many millions.

Whatever happened to the UK government`s pledge to tackle these bonuses? Look at the connections these people have with UK government officers! No different in the USA and Europe. Do bankers have more power than governments?

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Portugal faces calls to seek an EU bailout - Portugal is coming under rapid pressure to follow in the footsteps of Greece and Ireland and seek a European Union and International Monetary Fund bailout immediately. There is so much pressure in Portugal, but will they be like Greece and Ireland and be in denial?

The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? What future as the Euro? Watch this space!

Without `continuous quantitative easing` where would the world be? Yes, there is still more to come!
Spending our way out of worldwide recession will take years to pay back--and create a lot of pain.
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European Central Bank and Rates

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