Strong stuff from Lorenzo Bini Smaghi today, speaking in Abu Dhabi. The ECB executive board member has spoken out on the watered-down EU agreement, saying:
The Heads of State and Government of the European Union … wanted to retain the ability to decide on budgetary matters, in particular concerning the imposition of sanctions on countries not respecting the rules. They did not want to deprive themselves of their powers in favour of the European Commission, nor to bind themselves with a rules-based approach.
Mr Bini Smaghi points out that the EU’s chosen route does not solve a key problem inherent in the Stability and Growth Pact, namely that ‘when potential future sinners have to judge current sinners, the tendency for forgiveness prevails’. This would be solved by automatic sanctions backed by the ECB and backed in part by the EC proposal, he points out, asking:
Why should the Eurogroup be expected to behave in the future any differently than in the past? The question remains unanswered. The discussion is not over yet…
Temporary measures designed to ease a cash crunch in the banking sector over the weekend have been extended to run till Thursday. Additional liquidity will be provided to banks through an extra daily auction, since the Bank’s “liquidity adjustment facility window … has been in … deficit … recent[ly]“. Extra auctions were initially set for October 29, 30 and November 1. Now, auctions will also take place on November 2, 3 and 4.
Banks can also avail themselves of a temporary reduction in the statutory liquidity ratio: they will be allowed to hold 24 per cent rather than 25 per cent with the central bank. By one estimate, this small reduction is equivalent to an additional $10bn liquidity. Read more
Tomorrow, Australia kicks off a bumper week for monetary policy. The much-anticipated Fed decision follows on Wednesday. Less-anticipated Bank of England and European Central Bank follow on Thursday, and the Bank of Japan, which brought forward its meeting date, rounds off the week on Friday.
Expectations are as follows:-
- Australia (Nov 2): Last month’s rate hold caused surprise, but subsequent minutes were quite hawkish, suggesting the Reserve Bank might resume its rate rises from the current 4.5 per cent;
- United States (Nov 3): Resumption of quantitative easing expected (see Robin’s forward guidance on likely speed and size of QE2). No change in fed funds rate expected.
- Bank of England (Nov 4): No change expected.
- European Central Bank (Nov 4): No change expected.
- Bank of Japan (Nov 5): Unclear; possible further QE to be announced.