Monthly Archives: June 2012

James Politi

Brian Sack’s decision to stay on at the Federal Reserve Bank of New York as an adviser could stoke speculation that further monetary easing is around the corner at the US central bank.

Mr Sack – who is stepping down as planned as head of the markets group –  played a key role in the previous rounds of “quantitative easing”, managing and executing the expansion of Fed’s balance sheet. So keeping him around would certainly be helpful. Read more

Claire Jones

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ECB cut likely
Next week’s two key events are the Bank of England’s and the European Central Bank’s monetary policy votes. Expect both central banks to act. Read more

Claire Jones

Bank of England. Image by Getty.

Bank of England. Image by Getty.

Hello and welcome to the Bank of England’s press conference on its Financial Stability Report.

The governor will be joined by Adair Turner, chair of the Financial Services Authority; Paul Tucker, deputy governor for financial stability; Andrew Bailey, soon to become head of the FSA’s  Prudential Business Unit; and Andrew Haldane, executive director for financial stability.

Expect a raft of questions on the Libor scandal and the eurozone crisis

All times are London time. 

11.54 This live blog is now closed.

11.53 Here are the key takeaways. Read more

Claire Jones

Barclays’ $450m fine over misconduct relating to its Libor fixings is a massive deal. The fixings, which span ten currencies and 15 maturities, are used as the reference point for financial contracts worth a staggering $350trn.

Libor is also extremely important for the world’s major central banks, many of which use the fixings to help decide how much liquidity to inject into markets. See, for instance, the minutes of the Bank of England’s June Monetary Policy Committee meeting:

UK banks had continued to access some term funding markets, albeit at an elevated cost.  In the interbank markets, sterling LIBOR-OIS spreads had remained elevated and larger than the corresponding euro spread.

However, the Swiss National Bank, goes a step further: when setting monetary policy, its governing council targets a certain level of three-month Libor for Swiss franc loans. Read more

I’ve worried for some time about potential clashes, overlaps and underlaps between the Bank of England’s Monetary Policy Committee, which does as its name suggests, and the Financial Policy Committee, which oversees system-wide financial rules, or to use its posh name, macroprudential policy.

The past month has proved the concerns are no longer theoretical. Although Sir Mervyn King, BoE governor, was more expansive on his black mood at the Treasury Select Committee this morning, the tensions between different policy arms were also laid bare. Read more

Claire Jones

The Treasury Committee held its latest hearing with the Bank of England this morning. The governor, Sir Mervyn King, along with three other members of the Monetary Policy Committee — Spencer Dale, David Miles and Ben Broadbent — took questions from lawmakers.

Here are some of the highlights, though lowlights is perhaps more apt.

Black clouds The governor was characteristically gloomy, warning repeatedly about the “black clouds” hanging over the UK, emanating from the eurozone. He warned that businesses “lacked confidence to invest today” because of the sovereign debt crisis, which could result in a “self-fulfilling” downturn in Britain.  No change there then. Read more

Claire Jones

More quantitative easing by the Bank of England appears a dead cert.  It’s also reasonably likely that whatever amount the Monetary Policy Committee plumps for, the money is going to be spent on gilts.

What is more difficult to predict is what sort of gilts the Bank is likely to buy.  Read more

Claire Jones

“Don’t rely too heavily on monetary policy” is the closest thing that the Bank for International Settlements has had to mantra in recent years.

Monetary policy is no cure-all. But that’s not to say that the BIS thinks the US Federal Reserve was wrong to act with unprecedented force following the collapse of Lehman Brothers in the autumn of 2008. Read more

Claire Jones

Unfortunately, the vicious cycle between the economic health of countries and the weakness of their financial systems has been all too evident over the past year.

Think of Spain. Before the crisis, the country’s debt-to-GDP ratios were among the lowest in the eurozone. But the state of its regional banks, the cajas, has pushed the sovereign’s borrowing costs to euro-era highs, far above the levels seen in members of the single currency with far higher levels public indebtedness. In Greece, the government’s fiscal profligacy is at the root of the problems befalling the country’s financial sector, in part because its banks held so much sovereign debt.

In both countries, the economy is stagnant.

So far, central banks have been called upon to stop the cycle turning even more vicious. But central banks’ actions can only buy time; the ECB’s pledge of a whopping €1trn in cheap three-year loans, revolutionary in every respect, only soothed tensions for a few months.

The Bank for International Settlements has long documented the vicious cycle phenomenon (see here, for instance). In its latest annual report, out Sunday, the so-called central bankers’ bank comes up with a prescription on how to cure it. Read more

Claire Jones

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Inflation report hearing/ financial stability presser Read more

Ralph Atkins

After eight years, I am leaving Frankfurt to return to London. Following the European Central Bank has meant many thrills and spills. The bank’s history has not yet been written — and it will be years before the dust finally settles. But here is one journalist’s perspective on the highlights — and lowlights.

Biggest about turn At a press conference after a governing council Read more

Claire Jones

The average British worker is now producing far less wealth for the UK economy than before the crisis. And one of the questions puzzling economists at present is why — until recently — inflation has not fallen on the back of this drop in labour productivity, which tends to reflect weak demand.

That inflation has remained above the Bank’s target for two-and-a-half years despite the fall in productivity has led some economists, including a few members of the Monetary Policy Committee, to argue that the economy has suffered the ill-effects of a substantial supply shock and that workers will continue to contribute less to economic output for years to come.

If they’re right, then there is only so much that looser monetary policy can do to help solve the UK’s economic problems.

An article in the Bank of England’s latest quarterly bulletin, out on Wednesday, suggests the recent slump in workers’ productivity does indeed point to a slowdown in the growth of Britain’s supply potential, which represents the amount by which an economy can expand without stoking inflation. Read more

Claire Jones

After the surprise news today that annual inflation fell to a two-and-a-half year low of 2.8 per cent in May, analysts now increasingly expect the Monetary Policy Committee to announce more quantitative easing on 5 July.

Following Sir Mervyn’s Mansion House address last Thursday, it has largely been a case of when — not if — the MPC would plump for more money printing. But before today’s inflation number, analysts were split on whether more QE would come in July, or in August.

Now, the majority expect further asset purchases to come sooner rather than later. Here’s what economists are saying: Read more

Ralph Atkins

The Federal Reserve Board is used to long periods without a full complement of governors. Now, the European Central Bank’s executive board is experiencing how it feels when politicians dither.

An ECB spokesman has confirmed that Mario Draghi, president, has written a brief but pointed letter complaining that eurozone governments have still to agree a successor for Spain’s José Manuel González-Páramo, whose term on the central bank’s six-man executive board expired at the end of May. The vacancy has increased the workload of the five remaining board members — not exactly what they need with the eurozone crisis re-escalating. Read more

Outgoing Financial Services Authority chief executive Hector Sants said last week that he thinks that the Bank of England governor will have too much to do under the government’s current regulatory reform plan, but he believes the problem can be solved by passing some of his specific duties to other people.

Mr Sants, who was slated to become a BofE deputy governor next year until he decided to resign instead, said he broadly agrees with the coalition’s plan, which creates a new stability regulator — the Financial Policy Committee — within the bank  and gives supervision of banks and insurers for safety and soundness to the Prudential Regulation Authority, another new arm of the BofE . The governor will chair the FPC, the PRA and the Monetary Policy Committee. Read more

Claire Jones

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

Joint action?

Hopes for joint central bank action mounted on Friday ahead of Sunday’s Greek election. Will the central banks deliver?  Read more

Claire Jones

Sir Mervyn King’s address at the Mansion House this evening was both heartening and exasperating.

It was heartening because the Bank has offered up a range of policy measures that could go some way to spurring lending to businesses. It was exasperating because the effectiveness of those measures could well be undermined by the governor’s relentless pessimism on the eurozone.

It is glaringly obvious how bad things are in the bloc without the governor of the Bank of England telling us that “the problem is one of solvency”, following his declaration last month that “our biggest trading partner is tearing itself apart without any obvious solution”.

That’s hardly the sort of talk that’s going to make banks want to go out and lend, or businesses borrow. As Andy Haldane, executive director for financial stability, pointed out last year, the “fear factor” in financial markets needs to be dampened, not fanned, by policy makers.

There were, however, many positives to take from Sir Mervyn’s address, chief among them the “funding for lending” scheme to provide banks with funding for a “several years” at below market rates to support their lending to UK businesses.

The details remain sketchy, but early indications are that it will work as follows. Read more

Ralph Atkins

What do eurozone central bankers do when then step down?

Lucas Papademos, a former ECB vice president, and Axel Weber, an ex-president of Germany’s Bundesbank, took academic posts in the US before springing back into action — as Greek prime minister and UBS chairman respectively. Now Athanasios Orphanides, Cyprus’s former central bank governor, is taking a job teaching at the MIT Sloan School of Management, also in the US. Read more

Claire Jones

The Swiss National Bank’s governing council has today been deliberating on what to do to protect Switzerland from events in the eurozone.

Since September, the SNB has capped the franc’s gains against the euro at Sfr1.20 after a massive currency appreciation raised the chances of deflation and a recession in the Swiss economy.

Until recently the floor held without too much bother. But in the past month or so the SNB has been forced to up its game, spending tens of billions of francs in May buying euros. If the SNB losses its nerve and speculators force the franc below the floor, then the interventions could lead to substantial losses, potentially resulting in more political pressure for the central bank.

We will find out at around 8.30am London time tomorrow what the governing council decides to do. But these are the main options open to them. Read more

Claire Jones

As the FT’s economics editor Chris Giles and chief regulation correspondent Brooke Masters write here, Paul Tucker’s speech on Tuesday evening was a blatant attempt to convince the Treasury that he’s their man to replace Sir Mervyn.

Paul Tucker, deputy governor of the Bank of England, distanced himself from Sir Mervyn King – whom he is favourite to succeed as governor – by calling on Tuesday for a review of the bank’s stance against directly easing credit conditions…

…The willingness to think again about credit conditions will please the Treasury, which has been frustrated over BoE unwillingness to consider policies to loosen credit constraints for households or small companies.

Beyond the politicking, Mr Tucker also makes an interesting point about why quantitative easing hasn’t been nearly as effective as the Bank had hoped. Read more