Monthly Archives: August 2011

Ralph Atkins

The European Central Bank is taking “seriously” the surge in funds eurozone banks are parking with it overnight, rather than lending to other banks, Jürgen Stark, the ECB executive board member has told Handelsblatt in an interview. The rise is an indication of tensions, he admitted. “We take the signal seriously.”

But Mr Stark went on: “The situation is, however, not comparable with that at the outbreak of the financial crisis in autumn 2008, after the collapse of Lehman Brothers.” The ECB had already actd by announcing earlier this month, an exceptional offer of six-month liquidity. Currently, that offer was seen as a “one-off action,” Mr Stark said. Read more

Robin Harding

It’s interesting to note how much of decline in the Cleveland Fed’s measure of inflation expectations came before the latest round of market turmoil.

 Read more

Claire Jones

Two of the three FOMC dissenters on Wednesday said why they broke ranks at last week’s meeting.

Aside from their view that the conditional commitment to keep rates on hold until 2013 looked suspiciously like the Fed was trying to buoy financial markets, there was another common strand to their discord.

Both Mr Fisher and Mr Plosser claimed monetary policy was limited in what it could do to spur growth. This is becoming a popular argument among senior central bankers. Read more

Ralph Atkins

Gloom about eurozone economic prospects has reached the European Central Bank, with a governing council member warning of a possible “Japanese-style” period of weak growth – but also low inflation.

Comments by Ewald Nowotny, Austria’s central bank governor, in an interview with his country’s Wirtschaftsblatt, suggested that this week’s weak growth data could change the thinking at the ECB, making further interest rate rises less likely. They may fuel speculation that a cut in official borrowing costs might even become possible.  Read more

Claire Jones

The Bank of England’s minutes for its August meeting surprised analysts, with all nine monetary policy committee members voting for bank rate to be kept at 0.5 per cent.

Expectations were for the committee to remain split, with seven in favour of keeping rates on hold and two backing a quarter-point hike (though a minority had forecast a shift owing to the dovish tone of last Wednesday’s inflation report press conference).

Adam Posen again remained the only member calling for more QE, advocating an additional £50bn in asset purchases. However, the minutes’ dovish tone has inevitably stoked expectations others could soon join him.

But another four members still need to change their minds before the Bank can begin a second round of asset purchases. What will that take?  Read more

Claire Jones

When confidence is shot, policy must get ahead of the curve if it is to count. Do less than markets expect, and there is a decent chance that measures will have the opposite impact to what policymakers were hoping for.

Which is one of two reasons why the Swiss National Bank’s latest move to counter the franc’s appreciation has backfired. This from the FT’s Peter Garnham:

The Swiss franc rose sharply on Wednesday after the Swiss National Bank’s latest attempts to stem strength in its currency disappointed investors.

The Swiss franc climbed 1.4 per cent to SFr1.1318 against the euro, added 1.5 per cent to SFr0.7848 against the dollar and gained 1.7 per cent to SFr1.2886 against the pound.

 Read more

Ralph Atkins

Evidence mounts of eurozone bank tensions. The European Central Bank reports its dollar facility (operated in conjunction with the US Federal Reserve) has been tapped for the first time since February. One bank borrowed $500m. In line with usual ECB discretion, there are no details on exactly which bank it was.

Part of its crisis-fighting instruments, the ECB left the dollar facility in place even when demand fell to zero – banks were able to get the dollars they wanted more cheaply in commercial markets. For at least one bank, that is obviously no longer the case. Read more

Claire Jones

Fed chairman Ben Bernanke has again found himself on the receiving end of flack from a Republican. This from Texas governor Rick Perry:

If [Bernanke] prints more money between now and the election, I don’t know what you would do with him…We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous in my opinion.

The implications of the barbs are potentially more serious than those the Fed chairman has received from Ron Paul – author of End the Fed, a frequent thorn in Mr Bernanke’s side and the man the Republicans appointed to chair the House Committee that oversees the central bank.

And not because of Mr Perry’s loutish, implied threat of violence if Mr Bernanke were ever to visit the governor’s home state. Read more

Claire Jones

As the IMF knows only too well, groupthink played a key role in policymakers’ inability to spot the risk of a major financial crisis. Could it be that globalisation contributed to this rise of groupthink? Central Bank of Ireland governor Patrick Honohan thinks so.

Since the era of David Ricardo, most – though not all – economists have extolled the virtues of global trade.

Mr Honohan’s comments are far from a damning critique. But the central bank governor points out that globalisation can “turbo charge” booms and busts in small open economies such as Ireland’s. Why? Read more

Claire Jones

The European Central Bank bought €22bn-worth of government debt early last week and in the latter half of the previous week, taking its total purchases through the securities markets programme to €96bn.

€22bn was the largest-ever amount bought in a single seven-day period, which is no great surprise given that the ECB was buying Spanish and Italian debt for the first time (along with Portuguese and Irish government bonds). But it is higher than market expectations of €15bn.

What did the ECB get for its money? Read more

Claire Jones

FOMC speak
Three Federal Open Market Committee members give their take on the US economic outlook following Tuesday’s pledge to keep rates at record lows for almost another two years.

William Dudley, the New York Fed president and the only voting member of the three, offers his thoughts on Thursday. He follows the Atlanta Fed’s Dennis Lockhart, who is set to talk on the US economy on Monday at 17.00 GMT. This post, from the Atlanta Fed’s research director Dave Altig and economist Mike Bryan, signals that Mr Lockhart is likely to be in the wait-and-see camp on QE3. The Cleveland Fed’s Sandra Pianalto covers the evolving financial services industry along with the economic outlook when she speaks on Friday at 17.45 GMT. Read more

Claire Jones

Last month, a Committee on the Global Financial System paper identified “a vicious circle between the conditions of the public finances and those of banks”.

This sounds a lot like what is going on in France.

From Tuesday’s  Read more

Claire Jones

The Bank of England’s reluctance to include the risks from the eurozone crisis in the inflation report fan charts suggests one or more members of the MPC may have changed their minds on how to vote in recent days, according to RBS’s Richard Barwell.

At the Bank’s press briefing on Wednesday, the governor said while the greatest risks to global demand came from the eurozone, a worsening of the debt crisis could not be captured in its fan charts for growth and inflation:

The greatest risks to the prospects for global demand come from the euro area……To the extent that those risks are already reflected in asset prices, bank funding costs and survey measures of confidence, they will be captured in the MPC’s projections.  But beyond that, we see no meaningful way to quantify such risks and they are therefore excluded from the fan charts.

So the fan charts did not reflect the possibility of a worsening of the eurozone crisis other than what is “already reflected” in prices and attitudes.

But, as Mr Barwell notes, this appears at odds with a box on page 38 of the report which says that, as monetary policy is forward looking, “the MPC needs to consider all the possible risks affecting the UK economy including all of those from the euro area, when forming its policy judgement.”

If MPC members must consider all possible risks, then – given the fan charts’ role is to communicate the committee’s forecasts for growth and inflation – it surely makes sense to include some indication of what members believe a worsening of the eurozone crisis would do to the UK economy. Read more

Claire Jones

A week is a long time in currency markets. Seven days after the Swiss National Bank announced a set of measures to curb the franc’s rise, it is at it again.

Analysts were unconvinced last week’s measures would work. They are sceptical this time around too. It is also unclear what other policy options the central bank has.

The SNB said this morning that it was injecting another Sfr40bn-worth of liquidity by expanding banks’ deposits held at the central bank. It would also conduct foreign-exchange swap transactions in a further bid to increase Swiss franc liquidity. The move came after the franc shot up by – at one point – more than 6 per cent on Tuesday after the Federal Reserve’s committed to keep rates on hold for the next two years, though the Swiss authorities were already considering actionRead more

Claire Jones

Welcome to the live blog where we will cover the Bank of England’s Inflation Report press conference.

All times are London time; By Claire Jones in London.

This post should update automatically every three minutes, although it may take longer on mobile devices.

12.25 The live blog will now close. But continue to follow for further news and analysis of the inflation report and the governor’s comments.

12.21 The global outlook dominated proceedings at the press conference.

The governor was surprisingly outspoken about the ECB’s decision to buy Italian and Spanish debt, saying that this meant it was now at the “outer limits” of what a central bank can do.

Sir Mervyn also mentioned several times that global imbalances were behind recent events and that there needed to be structural adjustments made around the world.

In such a climate, it is wise for the governor to emphasise the limits to what the Bank’s monetary policy can do to cure the UK’s economic ills.

It is now abundantly clear that the Bank believes there has been as a supply shock. If this is the case, then the trade-off between inflation and growth will have changed. Read more

Robin Harding

A few thoughts on today’s FOMC. What an August this is turning out to be.

How conditional is the two-year commitment?

Pretty conditional. I wondered initially because, in typical Fed fashion, it doesn’t say “conditional”. But what it does say is: Read more

Claire Jones

This from the

The US Federal Reserve attempted to tackle a rapidly weakening economy on Tuesday by freezing short-term interest rates for two years and opening the door to more quantitative easing, in a move that sent the dollar and Treasury yields sharply lower.

Here is the FOMC’s conditional commitment to keep rates on hold for almost two more years: Read more

Claire Jones

The European Central Bank has insisted that its bond buying will have no impact on inflation.  But, given that the securities market programme now looks set to increase significantly in size, will it manage to keep its bond purchases ‘sterile’?

Since the programme began last May, the ECB maintained that an amount equal to the money it uses to buy the bonds would be withdrawn through the central bank paying lenders to hold more cash on deposit at the central bank.

Bar a few instances in which a spike in interbank rates impacted demand, sterilisation – as the technique is known – has worked well.

And why wouldn’t it? So long as the rate that the ECB pays is higher than interbank rates, then why would a lender not want to park their funds at the central bank?

In theory, there is no reason why this should change regardless of the size of the programme. Read more

Robin Harding

Ten days ago I would have said that the FOMC – which is holding its August monetary policy meeting right now – was a mile away from any move towards easing. Policymakers repeatedly and firmly said that inflation is higher and rising than it was last year, policy is already easier, and that’s the end of the story. Show us the deflation risks.

Today, I just don’t know. A lot has happened since the Fed went into blackout on 2nd August. Certain officials didn’t get much rest this weekend. Read more

Claire Jones

The Swiss authorities are considering several options to curb the franc’s appreciation. Among them negative nominal interest rates. This from the FT’s Haig Simonian in Zurich:

The Swiss government met for a third unscheduled session in short succession on Monday as ministers grappled with curbing the surging Swiss franc.

No details on any potential measures were expected until Tuesday, but Switzerland’s leaders have been bombarded by suggestions ranging from central bank intervention, negative interest rates, capital controls and even emergency tax cuts to help beleaguered exporters.


Three-month interbank futures contracts for December were trading at a high of 100.01 as of Thursday, meaning that some are now predicting Swiss rates will turn negative. Read more