HSBC’s chief economist is calling for price-level targeting in a bid to avoid Japanese-style stagnation. Stephen King says central bankers have not been unconventional enough, and that with huge private sector debts, “the threat of a debt-deflation trap is on the rise”.
There is a strong case for abandoning inflation targets altogether and replacing them with price-level targets. Central bankers claim this reform would make little difference but, as we argue, at least it would force them to maintain zero rates well into the recovery, avoiding the exit strategy confusion seen in the first half of 2010. In a world of excessively low inflation, it is important to persuade the public that interest rates won’t rise until the spectre of deflation is completely eradicated.
- Stephen King in a research note entitled An unconventional truth
The normal laws of cause and effect, he argues, have been suspended: Read more
Another book is published on the economic crisis. This time it is Peer Steinbrück, the former German finance minister, who is promoting his memoirs, entitled “Unterm Strich” (“The bottom line”). Berlin had its fair share of nerve-wracking moments, especially after the collapse of Lehman Brothers in September 2008. Mr Steinbrück and Angela Merkel, chancellor, were forced into a joint statement guaranteeing bank savings accounts – even though they were in different parties – and had to deal with the near collapse of Hypo Real Estate.
The biggest revelations? Read more
UBS, one of Switzerland’s leading banks, has predicted the Swiss National Bank will deliver a 25 basis point rise in interest rates at its policy meeting on Thursday, contrary to a virtually unanimous consensus among other observers for unchanged rates. UBS expects the SNB to switch back to targeting the mid-point of a three-month Swiss franc interbank lending rate band of 0 per cent to 1 per cent, from the current target rate of 0.25 per cent.
The call came despite the Swiss franc hitting parity against the dollar for the first time in 10 months on Tuesday, and as the franc threatened to notch up a fresh record high against the euro after scaling a succession of all-time highs against the single currency in recent weeks. Read more
Martin Weale, the new boy on the Monetary Policy Committee, has just finished giving evidence to the Treasury Select Committee on his recent appointment. He was safe and boring. Bank of England officials appeared delighted with his performance.
Mr Weale said he was neither a hawk nor dove, but this was in the eye of the beholder. The austerity Budget did not have a major impact on the outlook. Monetary policy should be the first line of defence against a further weakening. In such circumstances it would be appropriate for the MPC to look at ways it could stimulate the economy further, such as more quantitative easing and some stuff on the boundary of monetary and fiscal policy. Read more
The ECB has stepped up its purchases of securities, but viewed in context it’s small fry. Last week, €237m was spent on “securities held for monetary purposes”; the week before it was €173m; the week prior, €142m. (They are the three barely discernible rightmost blue boxes on the chart.)
Confining ourselves to this three-week ‘trend’ is misleading, however. Low level purchases fluctuate. Four weeks ago, €337m were bought. Read more