Monthly Archives: June 2011

Claire Jones

The Fed has extended its dollar swap lines to the European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank for another year (though, as of last Wednesday, no-one was using them).

Bar a three-month hiatus between February and May 2010, the lines have been in place since December 2007. They are now due to expire in August 2012, just a few months’ shy of five years after their introduction. At the height of the crisis, more than 14 central banks had set up arrangements.

The lines, set up to counter a lack of dollar liquidity for foreign banks with no access to Fed support, highlighted the dollar funding gap.  Read more

Financial markets think Bank of England meetings on monetary policy will be a bore for almost another year. The minutes last week persuaded investors that the Monetary Policy Committee was unlikely to raise interest rates until mid 2012.

Economists are now following  in investors’ footsteps with Barclays Capital becoming the latest group of forecasters to push back their forecast of a rate rise from November 2011 to May 2012, arguing that “policy [is] paralysed by domestic double dip” fears.

As I argued in the Financial Times last week, investors have got ahead of themselves a little and the balance on the MPC is rather more delicate. It could easily tip towards a rate increase, particularly if Charlie Bean swung into that camp. Based on their recent words, here is my guide to the MPC members’ views, from the most dovish to the most hawkish.

As you can see, there is quite a delicate balance on the MPC. It could easily tip 5-4 to a rate rise. Getting a majority in favour of QE2 appears much more difficult at present. Read more

Claire Jones

The blueprint for Basel III is more than a year old. And there is consensus on its fundamental tenets – to hold more and better quality capital, for liquidity requirements, leverage ratios, and countercyclical buffers.

Yet the devil is in the detail. There remains disagreement on the calibration of countercyclical buffers, not to mention what form the leverage ratio and liquidity buffers should take.

So Sunday’s appointment of Riksbank governor Stefan Ingves to chair the Basel Committee is significant. Read more

Claire Jones

France’s tendency to hog the IMF managing directorship is well known. But (as this post by Chris Giles shows) the extent to which it has done so is staggering.

If Christine Lagarde was to complete her five-year term, then French nationals will have served as the Fund’s managing director for 41 years. By 2016, the Fund will be celebrating its 70th birthday, meaning that one out of a total of 187 members would have held the managing directorship for a whopping 59 per cent of the time. Read more

Claire Jones

The Bank of England’s governance structure has taken a bruising of late. The Treasury Committee has questioned whether its Court of Directors is up to the job, and has called for more external members of the Financial Policy Committee – hardly a ringing endorsement of Bank personnel.

So it was with more excitement than the subject of central bank governance usually commands that the Bank’s governor, flanked by four of his fellow interim FPC members, faced the committee this morning for an evidence session on its accountability.

But for those expecting a grilling it was rather a damp squib. With the exception of George Mudie MP, who told the Bank it was getting “great power” with very little in the way of accountability in return, the questioning of committee members appeared rather subdued. Perhaps because the Bank attempted to downplay any concerns the committee might have by heaping it with praise. Read more

Claire Jones

In justifying why the Bank of England’s policy rate remains on hold, Sir Mervyn King frequently notes that inflation of more than double the Bank’s target has yet to lead to higher wages.

Before at the Treasury Committee this morning, Sir Mervyn again indicated the avoidance of a wage-price spiral was playing a key role in the decision to keep bank rate at 0.5%.

The governor now appears to be publicising a new line of argument as well. The argument, first voiced at the May Inflation Report press conference, goes like this. Read more

Claire Jones

The Bank for International Settlements’ Annual Report, released Sunday, more than any other document influences the global central banking agenda. Reports have held more sway in recent years owing to the BIS both forecasting the crisis – well more so than others anyway – and highlighting the deficiencies of some of central banking’s then-sacred cows, notably inflation targeting.

The reports rarely shirk the big issues. And this year’s address head-on the rather awkward question of whether the crisis constitutes a negative supply shock. The BIS says yes. And what’s more, as there is far less slack than many policymakers are willing to admit, policy rates in not just emerging, but also advanced economies, must soon rise despite weak growth.

The BIS is probably right. But will the European Central Bank, the Fed and the Bank of England budge? That depends on two factors. Read more

Ralph Atkins

Bankers who re-package - or securitise - their loans and sell them on, not only contributed to the global economic crisis. They also disrupted the European Central Bank’s radar systems.

The ECB prides itself in its “monetary analysis” – the study of monetary aggregates and lending data for early signs of inflationary dangers, which is used when setting interest rates. But a new statistical database released by the ECB today shows how loan securitisation has confused the picture. Read more

Sir Mervyn King, as the Bank of England governor is now known, is a busy man. He runs the UK central bank and, insiders say, delegation is not his strongest characteristic.

In the reforms to the UK economic policy framework following the financial and economic crisis, the government will make Sir Mervyn busier still. On top of his duties as chief executive of the Bank, chairman of the Monetary Policy Committee and guardian of system-wide financial stability, he is geeting more duties to perform.

He now chairs the Financial Policy Committee, a body whose remit remains unclear but appears to add teeth to the financial stability role. He will also chair the board of the  Prudential Regulatory Authority, the bank supervisory arm which will come to the Bank from the Financial Services Authority. It is no wonder that parliamentarians are concerned about accountability at the Bank. Read more

In the publication of the interim Financial Policy Committee’s first minutes this morning, we were witness to the birth of the body the Treasury and the Bank of England want to be the glue that links monetary policy and banking supervision.

Alongside the Bank’s financial stability report, which the FPC rubber-stamped, the new committee without powers produced an interesting analysis of the financial scene containing few surprises. Its main conclusion – that peripheral eurozone sovereign debt is the biggest risk to financial stability – is hardly new.

The really fascinating aspect of the FPC minutes and the news conference was the insight they gave into the new super-powerful Bank and the personalities involved. Read more

Ralph Atkins

This time the European Central Bank blinked first. A week ago, Berlin caved into ECB pressure and agreed that private sector involvement in a fresh Greek bail-out would be voluntary. On Friday, it was the ECB that backed down in the face of government demands.

Nicolas Sarkozy, France’s president, successfully argued that Italy’s Mario Draghi’s appointment as the ECB’s new head would mean too many Italians on its six-man executive board – and not enough Frenchmen. He threatened to hold up Mr Draghi’s appointment if Lorenzo Bini Smaghi, the other Italian on the board, did not agree to go. Today, Mr Bini Smaghi gave assurances that he indeed expects to have gone by the end of the year.

In many eurozone quarters, this will be seen as a worrying development.  Read more

Draghi confirmed as next ECB chief – FT

Profile of Mario Draghi – FT Read more

Day two of the European Union summit is already underway, and among the issues we will be watching closely is the nomination of Mario Draghi to become head of the European Central Bank, which even at this late date appears not entirely a done deal. Read more

Imagine you were a central bank with a legal duty to promote financial stability. In addition to that onerous task, things haven’t gone very well for you in the financial stability department in recent years. You consider some changes to formal structures and to communication. At the time of publication of a periodic financial stability document, do you:

A) Make a big show about transparency and publish the report at a specific moment, simultaneously holding a flagship press conference with the head of the central bank?

B) Make a big show about transparency, publish the report at a specific moment, allow journalists a controlled preview of the document to aide understanding, then hold a flagship press conference with the head of the central bank and those in change of financial stability?

C) Make much less of a show about transparency, allow a rather uncontrolled preview of the document under embargo, hold a background unattributable press briefing of the report with those in charge of financial stability and set a time under which the embargo is lifted and the document is published?

D) Do a  combination of the above options?

E) Do something else? Read more

Robin Harding

The one question to earn a wry smile from Fed chairman Ben Bernanke today was on whether the Fed will adopt an explicit inflation target.

His answer was one of his most informative. In essence, he said that: (a) he wants one; (b) it’s not imminent; (c) there’s no need for a change in the law; and (d) there would have to be consultation and communication with both Congress and the public. Read more

Ralph Atkins

By continuing to provide eurozone banks with as much liquidity as they want, the European Central Bank is financing the massive current account deficits of crisis-hit  countries such as Greece. Its actions have been akin to issuing “eurobonds” – without politicians having realised. Credit markets in other eurozone countries have been squeezed as a result.

Hans Werner Sinn, president of the Munich-based Ifo economic institute, has become a thorn in the side of the ECB by making such arguments. In Frankfurt today he spent more than two hours explaining his case to journalists – a clear sign that he is not going to give up anytime soon. Read more

All eyes were on the Bank of England minutes of the June Monetary Policy Committee to see whether the replacement of Andrew Sentance with Ben Broadbent would change the balance on the Committee. It did.

Mr Broadbent voted with the majority not to tighten monetary policy, removing one hawkish voice. The Committee is now broadly split 7-2 against tighter monetary policy. Mr Broadbent’s vote was the first dovish tilt apparent in the minutes. Compared with the harsh Mr Sentance, who voted vehemently for rate rises every month most recently seeking a 0.5 percentage point rise, Mr Broadbent is very cuddly indeed.

The second dovish tilt came in paragraph 25Read more

Ralph Atkins

What will happen to Italy’s Lorenzo Bini Smaghi, the European Central Bank executive board member?

Last week, Nicolas Sarkozy, France’s president, and Silvio Berlusconi, Italy’s prime minister, called for him to resign. They have found no fault with Mr Bini Smaghi – except his nationality. Once Mario Draghi, Italy’s central bank governor, takes over from Jean-Claude Trichet, ECB president,  there will be two Italians on the ECB’s six-man executive board. That, argued Mr Sarkzoy, would “not be very European” (especially as there would no longer be a French member of the board).

   Unsurprisingly, Mr Bini Smaghi, urged on by colleagues at the ECB, has stood firm. For the fiercely-independent ECB this is a matter of great principle; it cannot be seen to be swaying to political interference and Mr Bini Smaghi has stayed put. As such, the ECB has found itself in yet another standoff with eurozone governments. Read more

Robin Harding

The question often arises of which monetary policy rule the Fed uses in its analysis (I’m going to avoid the much more involved question of which monetary policy rule it should use).

In their latest commentary, the economics team at MF Global note:

“We realize Fed officials do not mechanically follow a Taylor Rule in setting monetary policy, and expectations for growth are being pared a little, but, based on the original Taylor Rule and adjusting for stimulus from balance sheet expansion, we calculate that the last set of Fed projections was consistent with about a 3% funds rate at the end of 2012.”

 Read more

Ralph Atkins

Nout Wellink, the Dutch central bank governor, was in rumbustious form in an Financial Times interview this morning. For him, the European Central Bank was at the end of the road in terms of the help it could offer Greece (even if it agrees on fresh reform efforts). Instead, eurozone governments should double the size of Europe’s rescue funds in an attempt to convince financial markets of their commitment to shoring-up the eurozone.

    I also asked him about the race to head the International Monetary Fund. Mr Wellink had a reason to be aggrieved.  Read more