Daily Archives: February 4, 2010

Simone Baribeau

I called the end too soon. The Argentine central bank fiasco has clearly outlived Martín Redrado stepping aside. In an unexpected twist, a presidential ally was chosen to head the country’s central bank.

From tomorrow’s paper… Read more

Click on the image to see (and hear) an audio slideshow on the effects of the government’s programme

When the FT’s economics team in London was musing about the best metaphor for monetary policy and quantitative easing today, we couldn’t get Toyota out of our heads.

Bank of England officials have consistently said that even if QE is suspended, the Bank’s monetary policy would still be the equivalent of a driver with her foot slammed on the accelerator pedal. The trouble is the economy does not seem to be responding rapidly. Read more

Local governments are almost certainly paying a premium when they raise debt by themselves – which they are doing in large and increasing volumes. Last year, Europe’s regional governmental (‘sub-sovereign’) debt stood at more than €1,200bn.

Particularly stung are Russia and France, which comprise between them the entire top 20 worst affected sub-sovereign debt holders. By contrast, two Spanish communities actually benefit – with better sovereign ratings than central government. Perhaps the Spanish government should be borrowing from themRead more

Ralph Atkins

Extreme summitry provokes extreme events – a less-than-serious comment from Jean-Claude Trichet, ECB president. He told today’s press conference was looking forward to travelling this weekend to Iqaluit, in frozen north Canada, for a gathering of G7 finance ministers and central bank governors. “We will have the right environment to be as cool as possible,” he said.

Ralph Atkins

European Central Bank’s scriptwriters had an easy day. The statement on monetary policy by Jean-Claude Trichet, president, at today’s press conference was virtually unchanged from January’s – another sign that official interest rates are firmly on hold. (Colleagues complain about Bank of England and US Federal Reserve meetings becoming boring. Us ECB watchers are used to this – remember the main ECB interest rate remained unchanged for more than two years up to December 2005)

However, when it came to the questions, Mr Trichet had a new argument about the way the eurozone operates. There was a “misunderstanding” about how help was given to weaker countries, he said. Rather that acting after the event, via bail-outs with conditions attached, eurozone membership helped “ex-ante”. Countries’ current account deficits were funded automatically as part of Europe’s monetary union, he explained, while “conditionality” came from the European Union’s “stability and growth pact,” which sets limits on public finances. Read more

The MPC voted to keep the overnight deposit rate and overnight lending rate unchanged at 8.25 per cent and
9.75 per cent, respectively. The discount rate was also kept unchanged at 8.5 per cent.

As expected, the key ECB rates were kept steady today: rates on the main refinancing operations, marginal lending facility and deposit facility are still 1 per cent, 1.75 per cent and 0.25 per cent, respectively.

“Euro area economic activity continued to expand around the turn of the year. Looking ahead, the Governing Council expects the euro area economy to grow at a moderate pace in 2010,” ECB President Jean-Claude Trichet told the news conference. “The recovery is likely to be uneven and the outlook subject to uncertainty,” he added.

Talk about rationalisation after the fact. The one thing consistent about the Bank of England’s communications over QE has been its inconsistency.  Officials always insist the policy has worked, but have repeatedly changed their stated intermediate objectives for QE and how they were judging its success. The Bank’s communication around QE has been a classic example of “policy-based evidence-making”. Gordon Brown, the master of the dark art, would approve.

Today, as the Monetary Policy Committee has just announced a pause in the creation of money and purchases of assets, it has said almost nothing about QE, except that £200bn was the “appropriate” amount to “to keep inflation on track to meet the 2 per cent inflation target over the medium term”. QE and low interest rates would, in any case, “continue to impart a substantial monetary stimulus to the economy for some time to come,” the MPC continued.

I am deeply indebted to Jessica Winch, who analysed all Bank communications over the past year for the Financial Times. She has compiled the following evidence on the QE and the Bank.

This first chart compiles the intermediate objectives for QE that the MPC  has declared are important in 2009 with colour coding to represent the proportion of the total times in a month a particular objective was aired. Red means that objective was not mentioned in the month and the proportion of mentions rises through orange, yellow and lime until bright green represents a reason that was used more than 30 per cent of times in a particular month.

Without getting bogged down with the precise figures – there was a dearth of statements for example in September and December so those months have been excluded – it is obvious the Bank has flipped and flopped over the intermediate objectives for QE last year. It was all about expanding the money supply and the price of corporate bonds until it wasn’t; it had little to do with Read more

After EC backing for Greek plan:

Other news: Read more

As expected, the Bank of England has held rates at 0.5 per cent, and voted against expanding its purchase of government and corporate debt. “The Committee noted that this stock of past purchases, together with the low level of Bank Rate, would continue to impart a substantial monetary stimulus to the economy for some time to come,” said the Bank.

As expected, and in order to keep inflation within its target range of 4 to 6 per cent.

The Dutch central bank president has just accused Iceland’s government of lying about the health of the country’s banks before their collapse in October 2008.

The Dutch and British governments are currently seeking to agree the terms of Iceland’s repayment. Read more

Irish economists are facing an expenses scandal, albeit smaller and less lurid than the British politicians’ equivalent. It seems spouses (spice?) have been travelling abroad with central bank staff.

The central bank confirmed to news agency RTE that there were 62 non-staff trips between 2007 and 2008. Of those, 52 related to spouses attending 49 international meetings. There will be further investigations by the chairman of the public accounts committee. Sadly, no sign of duck houses yet.

In a move that has surprised markets, Mercedes Marcó del Pont has been chosen as the new Argentinian central bank chief with immediate effect. Markets had expected the interim governor and former chief, Mario Blejer, to remain in office until September, when ousted chief Martin Redrado’s term was due to end.

The appointment heightens fears for central bank independence in the country. “Ms Marcó del Pont is seen as very close to the government, which means that the central bank will continue to be virtually subordinated, in terms of policy directives, to the government,” said Alberto Ramos, an economist at Goldman Sachs. Ms Marcó del Pont previously headed the state-run Banco de la Nación. (More from the paper)

Robin Harding

The Wall Street Journal’s editorial page has weighed in with its view on how to stop Japan’s deflation, and like the FT’s Lex, they are in sympathy with the Bank of Japan.

On the merits Mr. Shirakawa is basically right, even if the BOJ itself has been justifiably accused of tightness at times in the past. Its benchmark interest rate is likely to be set at 0.1% for the foreseeable future and at the politicians’ prodding it renewed quantitative easing in early December. As long as businesses and consumers expect continuing stagnation, they’ll be unlikely to spend or invest that extra liquidity to spur growth.

The WSJ’s solution is structural reform: Read more

Simone Baribeau

Not again.

The US government may be fueling another housing market bubble, according to a report released last week by the the Special Inspector General of the Troubled Asset Relief Programme (SigTarp).

To the extent that the crisis was fueled by a ‘bubble’ in the housing market, the Federal Government’s concerted efforts to support home prices…risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

And yesterday, Paul Volcker, the former Fed chief who is now proposing a ban on proprietary trading at deposit-holding banks, reiterated the risks of too much government backing for the mortgage market, Read more