Monthly Archives: October 2011

Ralph Atkins

Fittingly, at the end of a career spent managing global economic crises, Jean-Claude Trichet’s farewell party took a dramatic turn in Frankfurt late on Wednesday.

Trichet and Draghi at the Alte Oper. Image by Getty.

Trichet and Draghi at the Alte Oper. Image by Getty.

As Europe’s statesmen - including Germany’s Helmut Schmidt and France’s Valéry Giscard d’Estaing - paid tribute to the departing European Central Bank president in the city’s Alte Oper, Nicolas Sarkozy in Paris suddenly announced his intention to gatecrash the festivities. Despite his wife just giving birth, the French president jumped on a plane to Frankfurt.

As the farewell ceremony drew to a close, Mr Trichet – along with Angela Merkel, German chancellor and Mario Draghi, the new ECB president – headed for two hours of emergency talks on the latest eurozone rescue plan in a backroom in the grandiose 19th century opera house. Read more

Claire Jones

UPDATE: 20 October 20.06 After outcry from the Bank of Italy, cabinet ministers, and the Italian media, Mr Berlusconi has changed his mind on nominating Mr Bini Smaghi. Instead he has plumped for Ignazio Visco, the current number three at the central bank.

The FT’s Rome correspondent Guy Dinmore and Frankfurt bureau chief Ralph Atkins report that Lorenzo Bini Smaghi is set to succeed Mario Draghi at the helm of the Bank of Italy.

Lorenzo Bini Smaghi. Image by AFP.

Lorenzo Bini Smaghi. Image by AFP.

Silvio Berlusconi’s nomination is not announced until tomorrow. But if Mr Bini Smaghi does secure it, then it is a coup for the ECB executive board member. Read more

There is a rule of thumb that says you want nominal gross domestic product to grow by around 5 per cent a year. It is a pretty good guide, because it roughly accounts for the sum of Britain’s long-run productivity growth and a stable inflation rate close to the Bank of England’s 2 per cent CPI target.

Following the latest national accounts revisions, one worry is that the  year-on-year growth in nominal GDP in the second quarter was only 3 per cent. Low nominal growth implies semi-fixed cash variables such as public spending, borrowing and debt become a larger share of GDP when the denominator is growing slower than was expected. But that is not all, as the following chart shows.

 Read more

Claire Jones

Luc Coene, the governor of the National Bank of Belgium, is a worried man. One cause of Mr Coene’s concern is that banks would prefer to park funds at the European Central Bank rather than earn a higher rate of return by lending to other banks or companies.

For Mr Coene, and others, this is seen as a sign not just of banks thinking they will need the cash themselves, but also of their fears over the health of their rivals. This from Bloomberg:

Bloomberg: “Banks put their deposits with the central bank at lower yields than they could get from deposits at other commercial banks as sovereign debt crisis has made some banks lose money,” Coene said.

But how good an indicator is the amount held on deposit at the ECB of fears over counterparty risk?  Read more

Robin Harding

Today’s speech by Fed chairman Ben Bernanke was a hard one to decode. A lot of the material was bland and repetitive stuff about central banks’ responsibility for financial stability; how the recession doesn’t really change the consensus on monetary policy; and how prudential rather than monetary policy is the right way to tackle asset price bubbles.

That made his comments about how one consequence of the recession will be a greater role for communication in central bank doctrine stand out all the more. Read more

Listening to Wolfgang Schäuble, German finance minister, speak in London yesterday, he was genuinely shocked by Britain’s 4.5 per cent inflation rate in August. The Weimar Republic and the 1923 hyper-inflation still looms large in the German psyche.

Just imagine what he would make of today’s rise in the consumer price inflation to 5.2 per cent, the highest rate of inflation in Britain since the early 1990s.

I have not seen his text, but I am sure Sir Mervyn King will show his Anglo-Saxon side when he makes one of his three major speeches of the year tonight and will explain why he, unlike Mr Schäuble, is not concerned about inflation’s spike. Expect to hear about VAT, energy prices and commodities and that domestically generated inflation remains very low. Sir Mervyn can say nothing else.

What else can we say about today’s inflation figures and monetary policy? Read more

Ralph Atkins

Germany’s Jürgen Stark sent a tremor through financial markets when he announced his resignation from the European Central Bank’s executive board on September 9. At the time he cited “personal reasons,” but Mr Stark has just confirmed what everyone suspected – that there was much more to his decision.

He told the European Parliament on Monday that he will “very likely” make a statement at the end of this year, when he actually steps down. Expect a blast against the ECB’s government bond-buying programme – which he opposed, like many German conservatives – as well as other steps taken by central banks in Europe and beyond.

In the meantime, I couldn’t help thinking, Mr Stark might regret his decision to resign. Read more

Claire Jones

The Central Bank of Brazil shocked markets in August by lowering its benchmark rate to 12 per cent. Will it cut again this Wednesday? Analysts expect so.

The Central Bank of Turkey, another of the emerging market central banks that has been taking economists by surprise by loosening policy, votes on Thursday, as does the Central Bank of the Philippines. Read more

Ralph Atkins

Like a cardiogram, daily figures on use of the European Central Bank’s emergency “marginal lending” facility indicate the health of the eurozone bank system. When everything is working normally, the overnight facility is not used as it incurs a penal 2.25 per cent interest rate. For the past week the figures have signalled that something is amiss.

Occasionally there are spikes lasting a day or two when banks get caught short of liquidity by accident. But use of the facility has now been hovering around €3bn for more than a week - the latest reading on Thursday night was €2.9bn – which indicates significant problems somewhere in the system. Read more

Claire Jones

Jean-Claude Trichet, the departing president of the European Central Bank, talked to the FT’s editor Lionel Barber and Frankfurt bureau chief Ralph Atkins on Wednesday in London.

The transcript and story will appear on later this evening. But, until then, here’s a sneak peek at what the interview covers:  Read more

Claire Jones

Next to the Georgian splendour of the buildings that flank it, the brutal modernism of the Central Bank of Ireland’s Dame Street headquarters stands out. 

That it does is deliberate. Its architect, Sam Stephenson, was keen to shake off the associations that Dublin’s architecture had with the country’s colonial past.

It’s ironic, then, that the ‘Occupy Dame Street’ movement – which RTÉ reports is a call for the EU and IMF “to stay out of Ireland’s affairs” – has set up camp outside the central bank. Read more

Robin Harding

The main short-term policy message from the “Operation Twist” Fed minutes is that all options remain on the table and two FOMC members would have supported still further easing.

Beyond that, the minutes offer some intriguing insights into the Fed’s debate about communication policy. They show how that debate is running up against the biggest division on the committee: between those who think the structural rate of unemployment has risen sharply and the majority who believe that it has not.

Going through the communications policy paragraphs:

Most participants indicated that they favoured taking steps to increase further the transparency of monetary policy, including providing more information about the Committee’s longer-run policy objectives and about the factors that influence the Committee’s policy decisions. Participants generally agreed that a clear statement of the Committee’s longer-run policy objectives could be helpful; some noted that it would also be useful to clarify the linkage between these longer-run objectives and the Committee’s approach to setting the stance of monetary policy in the short and medium run.

It’s not actually clear whether we have moved closer to an explicit inflation objective. We know that a large majority of the FOMC support this — but ‘most’ still suggests an opposing minority. Read more

At less charitable moments, I have described the Bank of England’s attitude towards “credit easing” as akin to belligerent buck-passing. By burying a 2009 agreement with government to buy private sector assets and investigate ways to increase the availability of credit to the corporate sector, the Bank was putting purity before pragmatism, I argued.

Having listened to subsequent Bank explanations of its attitude towards credit easing, it appears that the Bank is actually taking a leaf out of the book of the Bundesbank and the European Central Bank, showing it to be a true believer in Ordnungspolitik – the German concept of order and playing by the rules, which has no direct English translation, but was brilliantly explained by Ralph Atkins last yearRead more

Ralph Atkins

If only central bankers could rely on politicians! More than an element of frustration at the ways of governments was clear when Jean-Claude Trichet, European Central Bank president, gave evidence this morning to the European Parliament for the last time.

He urged European governments to “act together swiftly” to address a crisis that had taken on a “systemic dimension”. He also went further than before in hinting that the €440bn European Financial Stability Facility – Europe’s new bail-out fund – might not be up to the job, even if proposed enhancements to its powers are approved by Slovakia. Read more

Claire Jones

Bank Indonesia today became the latest emerging market central bank to confound analysts by cutting rates.

Darmin Nasution. Image by Getty.

Darmin Nasution, Indonesia’s central bank governor, cited fears of the global outlook as the reason for the cut, echoing his counterparts in Brazil, Turkey and Israel.

As this post explains, emerging market central banks are now likely to interpret their inflation-fighting mandates far more loosely than before the crisis so they can adjust policy if  financial stability appears threatened.

How can analysts adjust their expectations so that they stop getting it so wrong?  Read more

Things go from bad to worse for the UK economy. Perhaps the least reported, but most important aspect of last week’s national accounts revisions is the apparent difference between the pre and post crisis trend growth rate.

Because the Office for National Statistics improved (lowered) its calculation of inflation in the national accounts without changing nominal gross domestic product much, growth rates in most years were significantly revised higher. The average annual rate of growth between 1997 and 2008 rose from 2.9 per cent to 3.2 per cent. But the ONS also said the recession was deeper and sharper than before, revising down post 2008 levels of output even with the more generous inflation measure. Read more

Claire Jones

As this post highlights, the Bank of England has been pretty inconsistent in explaining how quantitative easing works.

With the Bank restarting its asset purchases today, here are the two latest interpretations.  Read more

Claire Jones

Monetary policy is no longer shrouded in mystery; the curtain has been pulled back on the great and powerful Federal Reserve to reveal Ben Bernanke.

That central bankers now bother to tell us what interest rate they are targeting owes much to a belief that more transparency affords them greater influence on markets’ and the public’s expectations, which in turn makes monetary policy more effective in affecting demand.

But how much of an impact do expectations about policy actually have on the economy? Today’s Nobel Prize has been awarded to two economists – Thomas Sargent and Christopher Sims – that have done much to answer this question.  Read more

Claire Jones

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The Federal Open Market Committee’s minutes are out on Wednesday for its late September meeting, where the majority backed Operation Twist, at 14.00 DC time (18:00 GMT). Read more

Claire Jones

The only thing we have to fear is fear itself.

That’s according to Andy Haldane, the executive director of financial stability at the Bank of England, who said in August markets were over-pessimistic as a result of “psychological scarring” from the events of recent years.

It would seem that what Mr Haldane labelled the “fear factor” has also afflicted his boss, Sir Mervyn King, who yesterday claimed “this is the most serious financial crisis we’ve seen at least since the 1930s, if not ever.”  Read more