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

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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