Monthly Archives: May 2012

For the first time in quite a while, the Monetary Policy Committee of the Bank of England has today made a knife-edge decision which genuinely might have gone either way. The outcome, which was to leave the total of quantitative easing unchanged at £325bn, tells us something about the inflation fighting credentials of the MPC, which have been widely questioned in the financial markets. And it also tells us something about the way in which other central banks, including the Fed, might react to similar, if less strained, economic circumstances in coming months.

The Bank of England has been on a mission in the past two years. That mission has been to participate, possibly a little too enthusiastically at times, in a plan to change the fiscal/monetary mix in the UK, and to support the Coalition’s plan to reduce the budget deficit on an accelerated timsescale. The MPC has therefore delivered the largest dose of monetary easing among the major economies, and has acquiesced to a prolonged period in which UK inflation has exceeded targets by very significant amounts. From my vantage point, while inflation and unemployment have both been far too high, there were few better policy options available at a time of enormous difficulty for both the Treasury and the Bank.

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Claire Jones

Fears over inflation remaining stubbornly high have won out and the Bank of England’s Monetary Policy Committee has today opted to stay put, rather than plump for more money printing.

Most had expected the decision, though a few had thought a combination of concerns over weak economic activity and sterling’s recent surge would force the MPC to act. Read more

Claire Jones

In the current climate, there is scant need for nations to be reminded of the risks presented by spiralling borrowing costs.

If markets doubt a nation’s ability to service its debt, then yields are ramped up to levels which governments cannot possibly afford without resorting to rampant money printing, which risks debasement of the currency.

As we are seeing in the eurozone at present, if the ability to create inflation lies beyond the control of the national authorities then the economic and social consequences of spiralling debt can be disastrous.

With this in mind, Yale professor Robert Shiller was invited to the Bank of England last week to present his idea for a far more sustainable way for sovereigns to manage their finances. Governments, he argued, should ditch bonds and instead issue equities with dividends linked to growth. Read more

Claire Jones

The Bank of England’s Monetary Policy Committee might well plump for more money printing on Thursday.

But, if the committee were to back further asset purchases, would it do any good?

The Bank’s view is that the first £200bn-worth of quantitative easing boosted growth by between 1.5 per cent and 2 per cent. It expects the second round of asset purchases to have a similar effect.

Not everyone buys the MPC’s line, including the former Bank economists at Fathom Consulting, who argued today that Threadneedle Street has misdiagnosed the problem befalling the UK economy.

Rather than spur growth, Fathom argues that further gilt purchases would merely stoke inflation, eroding the Bank’s credibility in the process.

For Fathom, more QE would represent a repeat of the mistakes seen in the 1970s, where the misdiagnosis of the UK’s economic ills led to a series of policy errors, the result of which was years of high inflation and low growth. Read more

Roger E A Farmer, Distinguished Professor and Chair, UCLA Department of Economics

The US recovery has stalled, the UK has fallen back into recession and most of Europe is mired in a debt quagmire to which there appears to be no quick exit. It is against this background that Charles Evans, president of the Federal Reserve Bank of Chicago, has come out aggressively in favor of additional Fed actions.

But what can the Fed do to alleviate the unemployment problem?  What should it do?

In a series a recent research paper1(here), I have shown that there is  stable connection between the stock market and the unemployment rate and I have argued2(here) that this connection is causal. The stock market crash of 2008 caused the Great Recession. If this relation is truly causal, then central banks can do a great deal to alleviate persistent unemployment.

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Claire Jones

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More QE from the Bank?

The Bank of England‘s Monetary Policy Committee meets on Wednesday and Thursday, when the decision is due out at noon UK time (11am GMT).

Will the MPC vote for more QE? Read more

Today’s governing council meeting at the ECB marked a return to “business as usual” after the dramatic injections of liquidity into the banking system in December and February. The ECB understandably wants to return to its regular duties, where it focuses on keeping inflation below its 2 per cent long term target, and is desperate to shift the burden for other aspects of managing the eurozone economy back to member governments.

Mario Draghi’s main message in recent weeks has been that “the ball is in the court of governments” in three different ways: the need for fiscal consolidation, bank recapitalisation and a “growth strategy” involving labour and product market reform. Assuming satisfactory progress on these three objectives, the ECB would retire to the relative obscurity of inflation control, a place where it is always happy to find itself. “Non standard” monetary measures, which involve the use of the ECB balance sheet to finance troubled banks and sovereigns, would no longer be needed.

Unfortunately, it is improbable that the ECB will be granted its wish to remain on the sidelines for very long. The key question is how, when and where it will be called back into action.

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Claire Jones

Mario Draghi. Image by Getty.

Mario Draghi. Image by Getty.

Hello and welcome to today’s live blog on the ECB’s press conference.

ECB president Mario Draghi is in Barcelona, where he will be responding to journalists’ questions from 13.30 UK time.

All times are UK time.


14.33 This live blog is now closed.

14.31 The questions end.

14.31 Can Mr Draghi understand the anger of poor, jobless young people? Read more

Claire Jones

The European Central Bank has held rates, as expected.

The ECB’s benchmark main refinancing rates remains at 1 per cent. The rates on the marginal lending facility and the deposit facility remain unchanged at 1.75 per cent and 0.25 per cent respectively. Read more

Claire Jones

Auditors are supposed to know “where the bodies are buried”. Or at least root out evidence of anything with a whiff of misconduct.

So it perhaps wasn’t PricewaterhouseCoopers’ finest hour when, in December, its investigation cleared former Swiss National Bank chairman Philipp Hildebrand of any wrongdoing over those FX transactions, only for Mr Hildebrand to resign a little more than a fortnight later.

PwC told the Financial Times that, despite his resignation, there was no “wrongdoing” by Mr Hildebrand as he complied with internal regulations, which formed the basis of their review. “It was not our duty to assess the behaviour of Mr Hildebrand other than with regard to the compliance with the internal regulations,” PwC said. They also noted that they qualified one transaction as “sensitive”.

Still, it will not make much difference to PwC’s bottom line; it emerged late last week following the conclusion of the SNB’s shareholders’ meeting which took place in Berne that the auditor will continue to work for Switzerland’s central bank.  Read more

Robin Harding

Vincent Reinhart of Morgan Stanley has a fascinating note out today which reverse engineers US forecasts from the IMF’s World Economic Outlook to answer questions about headwinds to demand, the effectiveness of unconventional Fed policy and the potential growth rate.

His chart on the effectiveness of Fed policy is particularly neat. Essentially, he plots annual long-term real interest rates against short-term real interest rates for the years from 1980 to 2007, draws a regression line, and then adds on dots for 2008 to 2011. Read more

Claire Jones

Sir Mervyn King’s address on BBC Radio4 tonight is the first by a Bank of England governor in peacetime since the 1930s.

An obvious opportunity, then, to step back and review where it all went wrong. Which — as far as the banks are concerned — the governor takes, detailing how they expanded, took on more risk, all the time their fates becoming more and more intertwined, until August 2007: “the moment when financial markets began to realise that the emperor had no clothes.”

However, as a history lesson into central banks’ less-than-stellar performance over recent years it’s pretty revisionist.

Do we get an apology on monetary authorities’ failure to prevent the crisis? Or the promise of a review into how the Bank has performed during the turmoil? Not quite. There is some admission of guilt, but more half-truths and excuses.  Read more

Ralph Atkins

Tension surrounding the European Central Bank’s monetary policy meeting in Barcelona, Spain, on Thursday will be higher than might have been imagined even a few weeks ago.

Eurozone economic woes have deteriorated noticeably, and Spanish police are on guard for possibly aggressive demonstrations. Here are some ideas on how ECB governing council members may be thinking: Read more

Five years ago today, Mervyn King, governor of the Bank of England, gave a lecture to mark the 10th anniversary of BoE independence. He also granted the Financial Times a rare interview on the same theme.

I will go into the details in a bit, but the bottom line of both was that the first decade of the monetary policy committee was a huge change that had brought economic stability to Britain. Moreover, the improved economic performance could not be luck because the UK’s performance had improved materially compared with the rest of the Group of Seven leading economies.

This post updates the evidence given by the BoE governor. Everyone knows Britain’s economic performance has deteriorated since 2007. It has also slipped badly relative to the rest of the G7. On the basis of Sir Mervyn’s 2007 logic, the deterioration must be a sign BoE independence has performed poorly and it cannot just be misfortune. Alternatively, I would argue that the 2007 lecture can represent a tutorial in hubris, the measures used were far from ideal and pride, did indeed come before a fall.

It will be interesting to see whether Sir Mervyn agrees in his BBC lecture tonight. Read more

Claire Jones

Quantitative easing is here to stay. At least if three economists at the Riksbank have anything to do it.

The Riksbank economists argue in a fascinating paper published at the end of last week that — far from being the sort of policy measure undertaken only in extreme circumstances — buying bonds should become commonplace for central banks.

Given what we’ve seen in the past few years, the Riksbank’s research makes some sense. Read more