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