Monthly Archives: February 2012

Robin Harding

Ben Bernanke made no news on policy with his testimony to Congress on Wednesday but he did set out very clearly why there is no news on policy. He repeated several times that the apparent strength of the labour market is not consistent with the apparent weakness of final demand.


“The decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected, given that the economy appears to have been growing during that time frame at or below its longer-term trend; continued improvement in the job market is likely to require stronger growth in final demand and production.”*

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Claire Jones

The eurozone financial system remains under pressure. But the results of the European Central Bank’s second offer of three-year loans will provide cheer to residents of the Eurotower.

The total amount of bids was higher than in December, and the net increase in liquidity was around 50 per cent higher than the €210bn injected in December. Read more

Claire Jones

The ECB has just released the results of the second offer of three-year loans.

€529.5bn will be winging its way to the accounts of eurozone banks tomorrow, when the operation is settled. Read more

Claire Jones

The ECB’s exposure to peripheral sovereign debt and a host of other assets of dubious quality has sparked concerns about the central bank’s solvency.

The concerns are misplaced. Central banks cannot go bust. The vast majority of the ECB’s obligations are denominated in euros and so, in the case of losses, the central bank can simply print more money.

But money printing on a grand scale could spark inflation. And, while the ECB and the eurosystem central banks have a capital buffer of €80bn, this is relatively small when the size of the eurosystem’s balance sheet, which stands at a whopping €2.7trn even before tomorrow’s offer of three-year loans, is taken into account. Read more

Claire Jones

When the Federal Reserve dared to suggest some policy fixes for the troubled US housing market, it was not thanked for its efforts.

A white paper on housing published in January, followed a couple of days later with a speech by New York Fed president Bill Dudley on the same topic, provoked an onslaught of criticism from lawmakers.

Orrin Hatch, a Republican senator for Utah, said in a letter to Fed chair Ben Bernanke the paper contained “a number of policies that are clearly in the province of fiscal policy”.

For former Federal Reserve governor Randall Kroszner, now an academic at the University of Chicago’s Booth School of Business, the outcry demonstrates just one of the potential pitfalls central banks will face in their attempts to prevent crises. Read more

Robin Harding

The afternoon session here in New York is a panel on fiscal policy: a subject that central bankers always say they can’t talk about but nonetheless talk about all the time.

New York Fed president Bill Dudley’s speech makes two broad points: Read more

Ralph Atkins

How far would the European Central Bank under Mario Draghi go in cutting interest rates?

The ECB president has taken care to rule out little in the way of possible steps were the eurozone crisis to deteriorate again. But Benoît Cœuré, the ECB’s new French executive board member, has hinted at one limit. In a speech delivered in the US a few days ago but just published on the ECB’s website, he warns of the potential costs of reducing interest rates to zero, or even pushing them into negative territory. Read more

Claire Jones

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ECB’s big bazooka

Next week’s main event is, of course, the European Central Bank’s second offer of cheap three-year loans.

Attention is fixed on whether the take-up will be greater or less than in December, when the central bank loaned €489bn. Read more

Robin Harding

The main paper at today’s US Monetary Policy Forum in New York, organised by the University of Chicago’s Booth business school, is about housing.

Written by Michael Feroli of JP Morgan, Ethan Harris of BoA Merrill Lynch, Amir Sufi of the Booth school, and Kenneth West of the University of Wisconsin, it’s a comprehensive breakdown of the channels through which the housing bust continues to affect the recovery and well worth a read. Not only for its assessment of the housing market, but also on the implications for policy. Read more

Sir David Lees, chairman of the Court of the Bank of England since 2009, has been re-appointed to the role, the Treasury announced on Friday.

Sir David’s term expired in May, but he has now indicated he will step down from Court at the end of 2013, once he has overseen the transition of the Bank’s new responsibilities and personnel (Sir Mervyn King, Bank governor, is due to step down mid-way through next year).

However, not everyone has the same level of confidence as the chancellor and the prime minister do in Sir David’s firm stewardship of what is expected to be the central bank with more sweeping monetary and regulatory authority than any other in the world.

The Bank has come under fire in recent years for its poor corporate governance, with parliament’s influential Treasury select committee among those calling for root-and-branch reform. For many critics, that includes the scrapping of the Court, which Treasury committee chairman Andrew Tyrie described as “a 19th-Century structure for a 21st-Century institution”.

It is not difficult to see why. Here is Sir David being questioned by Mr Tyrie as part of it inquiry into standards of corporate governance at the Bank on March 15, 2011:

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Ralph Atkins

The Frankfurter Allgemeine Zeitung interview with Mario Draghi produced other insights (see earlier post on his comments on the ECB’s Greek bonds).

Positive news about the eurozone outlook had increased since the ECB’s last governing council meeting, he said, “although uncertainty remains high”, which appeared to confirm there are no further cuts in official interest rates in the pipeline.

Mr Draghi also hinted strongly he would not relax further standards applied to the collateral banks can use to obtain the central bank’s liquidity. Read more

Ralph Atkins

At last! The European Central Bank has said something official about its Greek governments bonds.

As previously noted, the ECB’s communication on the subject has been opaque. The bank has still not publicly announced the swap deal it negotiated that will allow it to escape forced losses. But Mario Draghi, president, could not avoid commenting when quizzed on the subject by the Frankfurter Allgemeine Zeitung in a interview published on Friday. Read more

Claire Jones

A few months’-worth of good data do not a recovery make. However, better-than-expected news since the turn of the year has given Bank of England’s economists cause for optimism, which they duly factored into the latest growth forecasts.

Not so their counterparts at the European Commission.

While the Monetary Policy Committee has raised its 2012 growth estimates in recent months amid signs of a nascent recovery, in a more-or-less uniformly grim forecast of the economic outlook for Europe, the Commission on Thursday left its estimate for the UK, last recorded in November, at 0.6 per cent. Read more

Ralph Atkins

European Central Bank communication was not at its most brilliant ahead of this week’s deal on a second bail-out for Greece. Nothing has been said formally about the bond swaps, which will circumvent forced losses on Greek government bonds acquired as part of its eurozone crisis-fighting measures or by individual eurozone central banks for their investment portfolios. We still do not know, officially, the size of those holdings.

The result has been a lot of misinformation. One commonly held assumption is that some of the eurozone’s monetary institutions had worrying levels of exposure – for instance Cyprus’s central bank. In fact, the amount of Greek bonds it holds are much lower, I have been told by someone who has seen its figures. Read more

Claire Jones

The European Central Bank has now agreed to distribute the profits on its Greek government debt holdings. But Mario Draghi has been adamant that no similar deal will be offered to Lisbon, or indeed Dublin.

Earlier this month, Mr Draghi said any ECB offer on Greek debt was “unique” and that the central bank did not want to repeat the experience.

But will Portuguese or Irish taxpayers buy the ECB president’s line?

On the evidence of a press conference in Brussels today with an understandably careworn Olli Rehn, EU Commissioner for Economic and Monetary Affairs, it appears not. Read more

Claire Jones

If there was ever any doubt that the Bank of Japan’s adoption of an inflation “goal” owed everything to political pressure and nothing to economic theory, then it was removed  by Masaaki Shirakawa.

The BoJ’s “goal”, announced last Tuesday, was seen by some as a sign that the central bank would step up its fight against deflation.

However, to others, the central bank’s odd take on inflation targeting always looked more like a move to appease a Diet intent on reining in the central bank’s independence than a genuine change in the BoJ’s thinking on monetary policy.

It was an impression that the BoJ governor did little to dispel in comments made late last week, which signalled that the central bank stance on deflation will be little changed. 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

MPC minutes

The minutes of this month’s Monetary Policy Committee meeting, out on Wednesday, will reveal whether all of the nine-strong committee backed the decision to expand quantitative easing by £50bn.

Many think the decision will have split the committee. Read more

Ralph Atkins

The deal is all but done but we still have no formal announcement that the ECB has exchanged its Greek bonds for new bonds that will be exempt from legal steps by Athens to force losses, as reported already.

The hold-up is, perhaps, over the issue of what to do about those Greek bonds held by eurozone national central banks in investment portfolios but not acquired under the ECB’s bond buying programme launched by Jean-Claude Trichet, then president, in May 2010. We don’t have any figures on how big these holdings are, or where exactly they are — although the biggest are thought to be held by the central banks of France, Cyprus and, of course, Greece. The Bundesbank has none. Read more

Fifteen years ago, a little-known tragedy hit the Bank of Japan. In the mid 1990s – or during the early stages of Japan’s banking crisis – BoJ officials decided to use some of the central bank’s own yen to prop up a failing finance company, in a desperate effort to paper over problems and buy time.

But the company went bust, and the money was lost, creating a hole in the BoJ balance sheet for the first time since the second world war. Haunted by shame, the senior official in charge committed suicide, in a move that has left scars on the collective psyche of central banks’ leadership that last, even today.

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Claire Jones

Sir Mervyn King has in the past been of the sort of central banker that has, at every opportunity, extolled the virtues of inflation targeting.

So comments at yesterday’s Inflation Report press conference, where the governor conceded that the Bank of England’s monetary policy framework has its deficiencies, were something of a surprise. Here’s what he said:

“I do think the experience of the last four to five years has raised some question marks about what inflation targeting can hope to achieve and whether it’s sufficient. I think our feeling now is, on its own, it’s not sufficient, it did not prevent the build up of a large degree of financial instability. And there is I think a debate to be had about whether other instruments are the right way to deal with that, through our Financial Policy Committee, or whether monetary policy should take other considerations into account.”

Could this be the beginning of the end for the Bank of England’s inflation target, at least in its current guise?

It’s far too early to say. Besides, with the governor due to depart mid-way through next year, whether or not the Bank alters its monetary policy framework will largely depend on the views of Sir Mervyn’s successor.

However, his calls for a debate could prove significant. Read more