Monthly Archives: November 2011

Robin Harding

The cut in the interest rate on the Fed’s currency swaps with Europe has led to speculation that the Fed will have to cut its discount rate as well. I’m pretty sure that speculation is wrong.

The point is fairly simple: European banks will now be able to get one week dollar loans from the ECB at an interest rate of about 0.6 per cent. If a US bank needed to borrow dollars from the Fed and went to the discount window it would have to pay 0.75 per cent. That seems perverse. Read more

Claire Jones

Today’s co-ordinated action saw six of the world’s central banks agree to provide dollar funds a lot more cheaply. The European Central Bank, however, went a step further than its counterparts by lowering the margins, or haircuts, applied on the assets that borrowers hand over to the central bank in order to secure dollars.

This from the FT’s Robin Harding and Ralph Atkins:

In a further move to boost the attractiveness of its dollar offers, the ECB said it would value more favourably assets that have to be put up by banks as collateral to obtain US dollar liquidity. The current margin, or discount, applied would be cut from 20 per cent to 12 per cent.

That means that the ECB is not only willing to provide dollar funding more cheaply, but also take on more of the credit risk for doing so. This pretty much consigns the traditional way in which central banks have provided emergency funding to the dustbin.

But that may be no bad thing. Read more

Chris Giles

Yesterday, I included the Treasury chart below showing that the potential level of output is 13 per cent lower than that assumed by the same organisation in March 2008.

But the chart has been troubling me overnight because it is comparing apples with pears. The calculation methodology of GDP has changed since the 2008 Budget in a way which would have made the 2008 trend higher. Read more

Ralph Atkins

Just what the eurozone did not need right now: another possible German-Franco row, this time over jobs at the European Central Bank. In Brussels late on Tuesday, Wolfgang Schäuble, German finance minister, pressed for his deputy Jörg Asmussen to take over the ECB’s economics department from Jürgen Stark when he joins the ECB’s six-man executive board at the start of 2012.

The problem is that France’s Benoit Coeuré, an academic economist as well as French civil servant, who will arrive at the ECB at the same time as Mr Asmussen, is arguably much better suited for the economics portfolio.  Read more

Robin Harding

Nathan Sheets, head of the Fed’s international division until August, clearly plans to enjoy his freedom as head of international economics at Citi. In a new note he proposes a fairly dramatic communications option for the Fed – setting a target for the level of nominal consumption – which is definitely not the kind of thing you’re allowed to say in public when you work at the Federal Reserve Board.

As Mr Sheets notes, the Fed has ruled out any dramatic changes to its framework for the time being, but “our view is that in the event of a sizable financial shock from Europe—or evidence that the economy was slipping into recession—the Fed would be looking for a ‘bazooka,’ and such a regime would again be considered”. Read more

Chris Giles

When he established the Office for Budget Responsibility, George Osborne had never envisaged his creation would give him such a grim day less than 18 months later. But the OBR has just told the chancellor that without further action his deficit reduction ambitions were seriously off track.

The latest forecasts with lower growth and higher borrowing implied Britain would miss Mr Osborne’s March Budget ambition of eliminating the current structural deficit by 2014-15 by miles. The original OBR forecasts showed he was set to meet his goals not one, not two, but only three years later in 2017-18, close to the election after next.

With such bad news, the government has had to announce not a “plan B” of policy stimulus, but an “augmented plan A” with £15bn additional spending cuts a year by 2016-17 – deeper cuts in the final two years than the annual austerity being undertaken now. And that is all just to allow him to scrape home on his fiscal mandate. Austerity is no longer a four-year pain, but a six-year trial. Read more

Claire Jones

Sir Mervyn King. Image by Getty.

Sir Mervyn King. Image by Getty.

Welcome to our live blog on Sir Mervyn King’s appearance at the Treasury select committee.

The governor has been called before the committee to field questions on the Monetary Policy Committee’s latest inflation report, which came out earlier this month.

Reporting by Claire Jones. All times are GMT.

17.16 This live blog is now closed.

17.14 Given that the hearing was supposed to be about the MPC’s inflation report, it was ironic that the governor ended up revealing more about what the FPC is likely to recommend in the financial stability report later this week. Read more

Chris Giles

Ahead of the Autumn Statement, the Treasury has released some details of its plan for growth, in what appears to be a cynical bid to muddy the waters. The truth is that estimates of Britain’s growth potential are being revised down across the board.

Are the announcements mostly sensible? They’re OK.

Are they large? No.

Will they change the narrative of the Autumn Statement? Only if Britain allows itself to be hoodwinked and reporters are as pliable as ministers hope. Read more

Claire Jones

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


The Bank of England’s financial (in?)stability report is due out on Thursday. Read more

Ralph Atkins

Has Thursday’s pact between Angela Merkel and Nicolas Sarkozy over the European Central Bank been misinterpreted? At their Strasbourg meeting with Italian premier Mario Monti, the French president agreed with Germany’s chancellor that he should not put pressure on the ECB to act more aggressively against the escalating eurozone debt crisis. Some, especially in financial markets, saw that as making bolder ECB moves less likely. But maybe that is the wrong way of looking at it? Read more

Claire Jones

Paris is again calling on the European Central Bank to act as lender of last resort for governments. From the FT’s Hugh Carnegy in Paris:

Alain Juppé, the French foreign minister, stepped up the pressure on Thursday, saying intervention by the ECB was a matter of urgency.

Speaking on France Inter radio, Mr Juppe said the market’s cool reception of Wednesday’s German Bund auction showed that the crisis “touches all the economies, including the most solid”.

“There is urgency. We will talk about (ECB intervention) today in Strasbourg. I think and hope that the thinking will evolve and that the ECB should play an essential role to re-establish confidence.”

Paris is hoping that, backed by similar pressure from other European countries, the US and even the media, Germany and the ECB itself could be persuaded to bend their hitherto rigid refusal to act, in effect, as a lender of last resort.

Regardless of the rights and wrongs of Paris’s stance, if the French want more action from the ECB, then they might want to consider thinking a little more carefully about what they say. It is not just Germany and European treaties that are barriers; no central bank in its right mind is going to agree to being a lender of last resort for governments.

But that doesn’t mean that the central bank couldn’t be persuaded to step up its sovereign debt purchases on other grounds.  Read more

Claire Jones

As the chart below shows, banks tend to own the sovereign debt of the country they call home.

This tendency is counter-intuitive. Rather than dispersing risk by spreading their holdings of government debt over several countries, banks are raising the chances of a vicious circle developing between the health of the sovereign and the country’s financial system – a phenomenon that lies at the heart of the eurozone crisis.

Various reasons have been suggested for this in the past. But, in a note published on on Thursday, economists Raghuram Rajan and Viral Acharya add another. Read more

Ever since Wen Jiabao, China’s premier, promised in October to “preemptively fine-tune policy at a suitable time and by an appropriate degree” markets have been waiting for monetary easing to begin.

In fact it is already under way, in the form of increased lending from China’s state-owned commercial banks and in sharp falls in China’s money market rates. But on Wednesday came the first sign of a lifting of reserve requirements. It has begun with rural banks. More will follow.

 Read more

Claire Jones

The Bank of England’s latest forecasts show inflation falling below the Monetary Policy Committee’s 2 per cent target over the course of 2013 and 2014.

Given that the MPC usually sets policy based on where inflation will be two to three years from now, the burning question ahead of the publication of its latest minutes on Wednesday was why the committee hadn’t already announced more QE.

The minutes shed plenty of light on why that’s the case. But they do so in a way that undermines the  Bank’s ability to influence expectations of what people expect the MPC to do next. Read more

Robin Harding

For me, the most interesting passage in the November Fed minutes was:

“The Chairman asked the subcommittee on communications to give consideration to a possible statement of the Committee’s longer-run goals and policy strategy, and he also encouraged the subcommittee to explore potential approaches for incorporating information about participants’ assessments of appropriate monetary policy into the Summary of Economic Projections.”

A host of communication options were discussed in the minutes but these are the only two that the Chairman referred back to the subcommittee on communications (vice chair Janet Yellen, governor Sarah Bloom Raskin, Charles Evans of Chicago and Charles Plosser of Philadelphia). That’s a strong signal of the direction that debate is going. Read more

Claire Jones

Sir Mervyn King has a rival in the banker-bashing stakes.

Robert Jenkins, an external member of the Financial Policy Committee, on Tuesday lambasted the industry’s attempts to water down regulation as “dumb” and “dishonest”.

A few snippets: Read more

Claire Jones

When the Bank of England’s latest fan charts showed inflation falling way below the 2 per cent target, analysts were quick to conclude that the MPC, or at least De La Rue, “was already greasing the wheels of the money printing presses” in expectation of more QE.

The Bank’s central forecast shows inflation falling to 1.3 per cent by the end of 2013, which would suggest that further asset purchases are indeed on the way.

But, if the views of Paul Tucker, deputy governor for financial stability, chime with those of his fellow MPC members, then more QE may not necessarily be a dead cert. Or at least that the scale of the additional easing may be far smaller than analysts expect. Read more

Claire Jones

The Bank of England’s latest systemic risk survey is a predictably grim read.

The interim Financial Policy Committee, which meets on Wednesday, will find little to cheer them in the poll of the UK’s risk managers.

But the survey makes slightly better reading for the Monetary Policy Committee. Read more

Claire Jones

Austria on Monday became the first country in the eurozone, and one of only a handful across the globe, to say it would fast track compliance with the Basel III capital rules.

With a eurozone recession imminent and Austrian lenders exposed to woes further east, it appears odd to heap pressure on banks to comply with rules six years ahead of their rivals elsewhere.

To boot, Austria will also introduce an additional capital buffer early. And the buffer will be set between 2-3 per cent dependent on the risks inherent in banks’ business models, higher than the 1-2.5 per cent specified in the Basel III framework.

Is Austria getting too tough too soon? Read more

Robin Harding

It looks like Congress will not heed pleas from the Federal Reserve for a fiscal policy plan – see Bill Dudley’s speech last Thursday for another example – as we await confirmation that the ‘supercommittee’ has failed. This is very bad news for the coherence of US economic policy, something totally ignored by Congress, which seems to think it can have an extended philosophical argument about the correct size of government without any consequences.

As Mr Dudley noted (emphasis added):

“It would be greatly beneficial if the Administration and Congress could more effectively work together to craft a coherent fiscal policy. As I see it, this would consist of two elements—continued near-term fiscal support to underpin economic activity and long-term fiscal consolidation to ensure debt sustainability. Without action in Washington, fiscal policy will turn sharply restrictive in 2012—exerting a direct drag on real GDP growth of more than one percentage point. At the same time, the long-term path under current policy is unsustainable.”

 Read more