Monthly Archives: September 2011

Claire Jones

Central banks are usually the most conservative of lenders, accepting only the safest assets in return for their cash.

However, many have been willing to lower their standards since the crisis began in order to counter liquidity shortages.

Even so, what the National Bank of Denmark has done today is drastic. Read more

Claire Jones

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Both the European Central Bank and the Bank of England will vote on monetary policy on Thursday.

The Monetary Policy Committee decision is out at noon local time (11.00 GMT). According to a Reuters poll, most expect the Bank to hold rates and maintain the stock of asset purchases at £200bn. However, a significant minority predict more QE, with most of these believing that £50bn is the amount that the MPC is most likely to plump for.

Though those expecting more QE in October are in the minority, the bulk of analysts do believe the Bank will expand its asset purchases at some point in the near future, with November considered the most likely option. The Bank also publishes the minutes of its FPC meeting on Monday at 09.30 local time (08.30 GMT), which may shed some light on the rather ambiguous statement that came out this week.   Read more

Claire Jones

Regulators on both sides of the Atlantic are calling on banks to strengthen their capital buffers by lowering dividends.

Britain’s Financial Policy Committee yesterday suggested as much. Today, Eric Rosengren, the president of the Federal Reserve Bank of Boston, was more explicit.

Mr Rosengren’s approach is also more interventionist. Read more

Claire Jones

Yesterday’s Financial Policy Committee statement well illustrated the bind officials find themselves in. On the one hand, they are calling on banks to build up their capital and liquidity buffers. On the other, they are desperate for them to prop up their ailing economies by lending to businesses and households.

If you look at today’s Bank of England data on broad money aggregates, then it’s easy to see why the FPC is so concerned.  Read more

Claire Jones

The Swiss National Bank’s forays into the foreign exchange markets have – along with the appreciation of the franc – led to spectacular losses, which in turn have provoked the ire of some of the country’s politicians.

One of the reasons why is that the central bank has traditionally paid out Sfr2.5bn each year to the Swiss confederation and the country’s cantons, which own the majority of the SNB.

The losses have thrown that into doubt. With the central bank announcing a paper loss of Sfr10.8bn for the first half of 2011, will it pay out? The message from Thomas Jordan, the SNB’s vice chair, today: don’t count on it.  Read more

Robin Harding

The launch of ‘Operation Twist’ last week has overshadowed a more modest kind of innovation by the Fed: it has become one of the first central banks to move into the iPad era with the launch of two separate apps for Apple’s tablet computer.

‘The Fed’, an app created by the Chicago Fed, is basically a tablet interface for the websites of all twelve regional banks and the Fed board in Washington. It pulls feeds of news and speeches from each website and presents them in the app.

 Read more

Claire Jones

The Bank of England’s Financial Policy Committee statement, out today, has left a lot of people scratching their heads.

The first of two recommendations calls on banks to “take any opportunity they had to strengthen their levels of capital and liquidity so as to increase their capacity to absorb flexibly any future shocks, without constraining lending to the wider economy”. The second warns that “some actions taken to raise capital or liquidity ratios could potentially worsen the feedback loop between the financial sector and the wider economy, and so should be avoided”.

At first glance, the recommendations appear contradictory. They are not. But they are conflicting.   Read more

Claire Jones

A lot has recently been written on the causes of banking crises. Central banks – many of which have taken on responsibility for macroprudential policy – have produced much of it.

This time it is the turn of Martin Weale, an external member of the Bank of England’s Monetary Policy Committee, and Matthew Corder, a Bank economist, who have published a paper on predicting crises and recessions.

Though the research points to three reasonable predictors of crises, none are perfect. The degree to which they are flawed offers some indication of just how tricky setting policy for financial stability will be.  Read more

Ralph Atkins

The European Central Bank favours the eurozone using as flexibly as possible its €440bn bail-out fund, the European Financial Stability Facility. But does that include giving the EFSF access to its liquidity?

The idea of making the EFSF an ECB “counterparty” – able to take part in its regular offers of unlimited liquidity – was proposed originally by Daniel Gros and Thomas Mayer in a Centre for European Policy Studies research paper. It gained ground last week as European leaders came under pressure in Washington from the rest of the world to come up with a more decisive response to the escalating eurozone debt crisis. With access to ECB liquidity, the EFSF’s firepower would be enormous. Read more

Robin Harding

Although it seems like a world away, the main economic policy argument in the early summer of 2010 was about the effectiveness of fiscal stimulus, in the wake of the Obama administration’s $787bn American Recovery and Reinvestment Act.

Now that the administration is asking for a new $447bn stimulus that question should be back at the top of the agenda – and thanks to two excellent new NBER papers it is going to be a lot harder for people to distort the economic argument.

Most of the new evidence suggests that in today’s specific circumstances – where the zero lower limit means that monetary policy is not as loose as the Fed would like – then fiscal stimulus could be very effective indeed. Read more

Claire Jones

The Bank of Israel – one of the first to raise rates following Lehman Brothers’ failure – on Monday became the latest to override domestic price pressures and cut on the back of concern over the global outlook.

Following the lead of the central banks of Turkey and Brazil before him, Stanley Fischer, the Bank’s governor and  sole rate-setter, shaved a quarter point off Israel’s benchmark interest rate to leave it at 3 per cent, despite inflation rising by half a percentage point to 3.4 per cent last month, above the 3 per cent upper limit of the inflation target range.

Public outcry at high inflation – particularly food price pressures – has inspired Facebook groups that have attracted over 100,000 members. And rising house prices have prompted more than a quarter of a million Israelis to take to the streets. (The central bank maintains that its measures, along with more house building, will slow the pace of house-price inflation).

Growth – at 2.4 per cent in the second quarter (annualised) – is relatively high, and unemployment – at 5.5 per cent – low.

All of which has meant that analysts – the vast majority of which had forecast a rate hold – were taken aback.

So why has Mr Fischer cut rates?  Read more

Claire Jones

The need for a second round of quantitative easing, which now appears likely, highlights the Bank of England’s misplaced faith in the stimulative power of a falling pound.

Ben Broadbent, an external member of the Monetary Policy Committee, this morning blamed the “sclerotic” banking industry for the failure of the pound’s depreciation to deliver the impact Threadneedle Street was hoping for.

If Mr Broadbent is right, then the economy’s woes are more serious than previously thought, which makes the case for further QE all the more compelling. Read more

Claire Jones

That the strong Swiss franc was hurting the country’s exporters has been well documented.

But an article in the Swiss National Bank’s quarterly bulletin, out today, offers further evidence of why the central bank felt compelled to “go nuclear” and announce a cap on the franc’s appreciation against the euro.  Read more

Ralph Atkins

Klaas Knot, the Dutch central banker, has said what eurozone policymakers must be thinking – but dare not say: Greece might have to default. He was not suggesting the country would or should go bankrupt, he reassured Het Financieele Dagblad, the Dutch newspaper. “All efforts are aimed at preventing this, but I am less certain in excluding a bankruptcy that I was a few months ago.”

     His comments may not go down well in Frankfurt. The official ECB ”working assumption” is that Greece sticks to its bail-out programme and speculating about other scenarios is seen as unhelpful. But Mr Knot, 44, a newcomer to the ECB’s governing council, is gaining a reputation as a conservative, or “hawk” – and ally of Jens Weidmann, the German Bundesbank’s similarly-youthful president.  Both are thought to have opposed the ECB’s bond buying programme.

     Their agenda is much broader, however.  Read more

Claire Jones

Our week ahead email will help you to track the most important events in the central banking world. To see all of our emails and alerts visit

The majority of the world’s central bank governors and finance ministers are in Washington, DC this weekend for the IMF/ World Bank Annual Meetings.

Will there be any more policy coordination following the G-20 communiqué released late Thursday? Read more

Claire Jones

When the Federal Reserve began its second round of quantitative easing, it was roundly criticised by emerging markets for the impact it would have on their economies.

Those officials’ concerns have now been acknowledged by some of the world’s most prominent economists. This from a pamphlet released by the Brookings Institution, Rethinking Central Banking:

The world today is more connected than ever by cross-border financial flows. The policy choices of individual countries, especially those of large, systemically significant countries, can have a substantial impact on their neighbours. When governments and central banks change their macroeconomic policy stance dramatically – as they did in the recent world financial crisis – the spillovers on other nations can be sizeable.

All of which means the major central banks must pay more attention to the global implications of their actions through the set-up of a group, which they suggest calling the International Monetary Policy Committee. Read more

Robin Harding

My fretting about the possible size of a Twist turned out to be pointless. A few thoughts:

This is consistent with a very bleak economic outlook and short-term rates on hold for a very long time. That is reflected in the statement with the reference to “significant downside risks”. There is a sense that the Fed has rethought the nature of the recovery and concluded that a rapid return to full employment is just not going to happen. Read more

Claire Jones

From the FOMC statement:

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

 Read more

Claire Jones

The European Systemic Risk Board, the European Union’s macroprudential authority, has this evening called for the region’s supervisors to cooperate on efforts to strengthen bank capital.

The move comes less than a month after Christine Lagarde, the IMF’s managing director, was panned by many for calling for a recapitalisation of European banks.

This from the statement: Read more

Ralph Atkins

Is Jens Weidmann, Germany’s Bundesbank president, rallying opponents of the European Central Bank’s government bond purchasing scheme? The Frankfurter Allgemeine Zeitung reports he hosted a secret meeting on Tuesday in the wine region that surrounds Frankfurt. Those apparently invited included Yves Mersch and Klaas Knot, his counterparts from Luxembourg and the Netherlands who are similarly conservative-minded.

Germany is awash with conspiracy theories these days about the ECB, and the idea that Mr Weidmann would want stiffen the sinews of other opponents of its bond buying – which has exceeded €70bn in the past six weeks - might appear plausible. I have heard an alternative version of the story, however. Read more