Monthly Archives: May 2011

Ralph Atkins

Is Mario Draghi leading an insurrection at the European Central Bank?

Speaking this morning to Banca d’Italia shareholders, Italy’s central bank governor identified ”a greater need to proceed with monetary policy normalisation so as to prevent expectations of higher inflation from becoming entrenched”.

That might have seemed a unsurprising nod towards another ECB interest rate increase by the man expected to take over as ECB president on November 1. But the term “normalisation” has become loaded in ECB policy-making circles.  Read more

Ralph Atkins

Lorenzo Bini Smaghi, European Central Bank executive board member, used an interview in today’s Financial Times to explain in detail just why the ECB is so opposed to any kind of Greek debt restructuring. In doing so, he took on directly those such as Nouriel Roubini and Deutsche Bank’s Thomas Mayer, who have called for an “orderly” restructuring, drawing on lessons learnt from the Latin American experience in the 1980s.

His messages, based on extensive scenario analysis by ECB economists, were that an “orderly” restructuring was a “fairytale,” there was no such thing as a “soft” restructuring, and the consequences of default would be catastrophic.

There were other highlights of from the interview - Read more

The UK’s economic performance over the past year is no surprise. When you tighten fiscal policy significantly after a major financial crisis, both history and mainstream economics would tell you to expect what we have now : no growth in broad money or credit, persistently high interest spreads for small businesses and households, flat or contracting private consumption and retail sales, a dearth of construction and declining real wages – all only partially offset by some expansion in exports. In such a situation, you should expect little domestically generated inflation, and that is also just what the UK has.

Ralph Atkins

Greece is “not just illiquid, it is insolvent,” Otmar Issing, the European Central Bank’s former chief economist, declared at a press conference in Copenhagen today – thus contradicting completely the ECB’s official position. There were serious doubts about whether it would ever honour its debt obligations, Mr Issing added.

His comments  will no doubt be seen as unhelpful in Frankfurt. Mr Issing, 75, still commands much respect in central bank circles and, as a former Bundesbanker, was the intellectual heart of the ECB from its creation in 1998 until he stepped down in 2006. His comments will fuel financial market speculation that a Greek debt scheduling is inevitable, whatever the ECB says.

Still, Mr Issing’s comments also highlight the dilemma facing the ECBRead more

Christine Lagarde, France’s finance minister, launched her campaign to become the next managing director of the International Monetary Fund on Wednesday. Read more

I once described Paul Fisher, the head of markets at the Bank of England, as having his swagger back once the recovery started, only to be reprimanded by the Bank. It was impossible to use the words “Paul Fisher” and “swagger” in the same sentence, I was told.

That view was clearly correct, judging by his latest speech. Mr Fisher is so rooted to the fence, he is unable to express a judgement on almost anything. Everything on one hand is precisely balanced by things on his other hand. With such equivocation, Mr Fisher is not the most interesting Monetary Policy Committee member. He seems destined to follow where others lead and does not appear a swing voter on the delicately balanced Committee.

Mr Fisher’s discussion of the amount of spare capacity in the economy is a good example of how loathed he is to make any judgements. Read more

Ralph Atkins

Following my last post, Jens Weidmann, has offered a further insight on his thinking as Germany’s new Bundesbank president. His predecessor, Axel Weber, famously opposed in public the European Central Bank’s government bond purchasing scheme.

Mr Weidmann has not - so far - repeated that opposition outright. But hidden carefully in a speech on payment systems (in German) he delivered in Frankfurt this morning, was a reference to how the Bundesbank had repeatedly warned of the need to distinguish clearly between fiscal and monetary policies. Read more

Robin Harding

Brian Madigan, the Fed’s top monetary policy staffer throughout the recession and financial crisis, is joining Barclays Capital as a policy adviser according to an internal memo obtained by the FT.

According to the memo, sent by Larry Kantor, head of research at Barclays today: Read more

Ralph Atkins

Jens Weidmann, Germany’s new Bundesbank president, appears keen to demonstrate his independence. He has just used a speech in Hamburg to warn of the consequences of a “soft” Greek debt restructuring – an option the government in Berlin is pursuing. Such a move would oblige the European Central Bank to cut Greek banks off from its liquidity, he said. Read more

Emma Saunders leaves the FT on Friday to return to banking.

We thank her for her contributions and wish her all the best in her new role.

Charlie Bean, deputy governor of the Bank of England, has been seen as one of the swing voters on the Monetary Policy Committee. If he is one of the people who would have to vote for a rate rise, he does not seem like he is itching to pull the trigger any time soon.

In the speech he has just delivered in Northern Ireland, he thinks the signs of limited supply capacity and poor productivity is nothing more worrying than “puzzling”, he notes that there are persistent output losses after banking crises, is not too concerned about inflation or inflation expectations, but sounds most upset about the weakness in demand at the moment.

Worries about demand weakness with puzzlement about supply is not what constitutes a rate hiker. That rate rise might be on hold a bit longer. Read more

Everyone knows that the head of the International Monetary Fund has ususally been a French man.

But this chart from Ousmène Mandeng, former IMF staffer and now at Ashmore Investment Management, brings the point home. Since Christine Lagarde, the French finance minister, is currently the bookies’ favourite, that blue line might just get longer. Read more

Robin Harding

Today’s FOMC minutes suggest that the detailed record of meetings will still be interesting even after the Fed chairman has given a press conference and the best bit – the economic forecasts – have been released.

The minutes of the April meeting are notable for a detailed discussion of exit strategy. Much of this is familiar: it reaffirms the rough ordering of: (1) Stop reinvestments; (2) Change forward guidance; (3) Drain reserves; (4) Raise short-term rates; (5) Sell assets. Read more

In the past week, the Bank of England’s new forecasts marked the moment it judged the damage from the recession was permanent. This showed up in quite an amazing chart.

I noted that Britain’s fiscal authorities had not yet given a forecast with a similar profile and “continue to predict growth of roughly 3 per cent a year as far as their eyes can see (and further)”.

The smart people at the OBR were quick to point out that I was wrong. As this chart shows, the fiscal watchdogs are more pessimistic about the level of output than the Bank. This is not because the Bank has higher forecasts for growth (its are lower), but because the Bank assumes the past official data will be revised higher while the OBR does not. Note how the gap between the OBR and Bank lines are widest apart now.

With both the Bank and the OBR having a similar profile for future UK economic output, the big question is what level of output can the UK economy produce without generating inflation. What is  the supply capacity of the UK economy that accompanies these forecasts? Read more

Ralph Atkins

Will the European Central Bank change when Mario Draghi becomes its president in November? In comments today, Lorenzo Bini Smaghi, ECB executive board member, suggested there would be no revolution. “The agenda won’t be much different from that of the last few months,” he told a conference in Milan.

Certainly, Mr Draghi has so far shown no signs of wanting to rock the boat. Wisely, the Italian central bank governor kept a low profile during the drawn-out race to take over from Jean-Claude Trichet, whose non-renewable eight-year mandate expires on October 31. We have not, for instance, had public comments from him on a possible Greek debt restructuring. Read more

Don Kohn, former vice chairman of the Federal Reserve, has just apologised for his errors in the financial crisis in front of the UK Treasury Select Committee, the equivalent of a Congressional committee.

He said he had “learnt quite a few lessons – unfortunately” from the financial crisis, including that people in markets can get excessively relaxed about risk, that risks are not distributed evenly throughout the financial system, that incentives matter even more than he thought and  transparency is more important than he thought. Similar to Alan Greenspan’s mea culpa of 2008:

“I made a mistake in presuming that the self interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders”.

Mr Kohn told MPs Read more

Ben Broadbent will be confirmed as an MPC member, I am sure,  after an assured performance played with a very straight bat in front of the Treasury Committee. A little like when Martin Weale appeared before the Committee, MPs got rather irritated with Mr Broadbent’s refusal to say how he would have voted at the May meeting. This is a structural difficulty of these hearings.

Asking how you would have voted is a perfectly reasonable question; avoiding giving a straight answer is also understandable so as to avoid prejudicing your time on the MPC.

The solution has to be more, rather than less, openness from the candidates, since they can always change their minds and explain changes. MPC members have to do that in any case, so evading such questions does appear shifty and does not make any material difference to an MPC stint.

The main things we learnt about Mr Broadbents views were the following:

1) He is bound to be less hawkish than Andrew Sentance, whom he replaces. He refused to say the MPC was in the wrong place at the moment, unlike Mr Sentance. That does not mean Mr Broadbent would vote for no change, but he is not as hawkish as Mr Sentance. Read more

Ben Broadbent, the new member of the Bank of England’s Monetary Policy Committee, is just about to start his confirmation hearing in Parliament (more later). But he will have to deal with today’s inflation figures for April, which have pushed CPI inflation up to 4.5 per cent from 4 per cent in March as shown in the picture.

But though Mr Broadbent did not know the following, he had little need to worry. The April CPI is heavily distorted by the timing of Easter and its effects on air fare prices. Some 0.36 percentage points of the 0.5 percentage point rise in inflation has come from air fares. Read more

Ralph Atkins

The European Central Bank’s fears about inflation appear to be materialising. Eurozone “core,” or underlying, inflation has reached the highest level in more than two years, according to Eurostat, the European Union’s statistical office. Excluding volatile energy and unprocessed foods, consumer prices rose at an annual rate of 1.8 per cent in April – up from 1.5 per cent in March and the highest since January 2009. The surge suggests higher headline inflation rates caused by commodity prices are feeding through into broader price pressures.

The late timing of Easter might have distorted the figures by delaying usual price-cutting offers. The ECB is also not a big fan of “core” measures, which it sees lagging indicators of underlying trends. Jürgen Stark, executive board member, once described them as “well suited for central bankers who don’t eat or drive”. Read more

Late in the day, the Bank of England has just slipped out a press release revealing that one member of the new Financial Policy Committee has decided not to take the job.

Richard Lambert, former head of the CBI employers’ organisation and editor of the Financial Times, says the post would cramp his stlye:

“Since leaving the CBI I have spent a period away from work and on reflection I have decided, with great regret, that I do not wish to take up my position as an external member of the Bank of England’s interim Financial Policy Committee. I wish to devote my time to a wider range of aspects of public policy. And membership of the committee could place constraints on my ability to do so. Mervyn King, the Governor ofthe Bank, has been very understanding about my change of plans. I wish the committee every success inthe important work which lies ahead of it.”

I have just spoken to Mr Lambert Read more