Monthly Archives: November 2012

Claire Jones

Mark Carney may be the first foreigner to become governor of the Bank of England in its 318-year history, but he is not the first to be approached.

Back in the 1960s, Harold Wilson’s Labour government wanted to replace Lord Cromer with the governor of the Reserve Australian central bank. This from David Kynaston’s The City of London: The History: Read more >>

Claire Jones

Mark Carney appointed as Sir Mervyn King's successor. Image by Getty

1. Mr Carney could introduce a commitment to keep rates on hold for an extended period of time.

Fed chairman Ben Bernanke was not the first to come up with the idea of making a commitment to keeping rates at ultra-low levels for a number of years, so long as inflation remained low. Mr Bernanke’s big idea was copied from Mr Carney’s Bank of Canada, which introduced a conditional commitment in April 2009 – two years before the Fed – with the aim of lowering longer-term interest rates.

2. Expect radical changes to the way in which the Bank operates.

Bringing in a foreigner to head your central bank is very rare – it signals that the government of the day believes there’s something deeply wrong. That Mr Carney has got the job signals the government is intent on root-and-branch reform of the Bank. Read more >>

Chris Giles

Officials I have spoken to since venting my anger at the raid on the government’s quantitative easing surplus have struck a decidedly disappointed tone. It was a shame I didn’t understand that there was no trickery involved; it was a pity I could not see that the move was standard practice in public sector liability management; and it was sad I had questioned whether the the Treasury’s move, which itself eased monetary conditions, undermined the BoE’s operational independence to set monetary policy.

While I have convinced a sizable majority of readers, I note that some people are swallowing these lines without much challenge. Here I will deal with the independence of monetary policy.

Let me be absolutely clear. Sir Mervyn King, BoE governor, rejects my arguments entirely. He wrote on November 9 that the monetary policy committee “was content that its ability to set the appropriate stance of monetary policy would not be affected by this action”. MPC members I have spoken to subsequently have reiterated this argument. They decide monetary policy last, they say, so they are in control. Read more >>

Chris Giles

Officials I have spoken to since venting my anger at the raid on the government’s quantitative easing surplus have struck a decidedly disappointed tone. It was a shame I didn’t understand that there was no trickery involved; it was a pity I could not see that the move was standard practice in public sector liability management; and it was sad I had questioned whether the the Treasury’s move, which itself eased monetary conditions, undermined the Bank of England’s operational independence to set monetary policy.

While I have convinced a sizable majority of readers, I note that some people are swallowing these lines without much challenge. Here I will deal with trickery and liability management. In the next post, I will turn to monetary policy. Simon Ward of Henderson Global Investors is the latest to say that anything other than treating temporary profits from QE as government revenue “would be out-of-line with the treatment of other future government liabilities”. Read more >>

Robin Harding

The most interesting part of Ben Bernanke’s speech today is what he says about the recession reducing potential growth in the US.

“The accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years. In particular, slower growth of potential output would help explain why the unemployment rate has declined in the face of the relatively modest output gains we have seen during the recovery.”

This is quite a big evolution in Mr Bernanke’s arguments about the weakness of the recovery and why the unemployment rate has fallen faster than expected. This is from his March speech on the labour market:

“Notably, an examination of recent deviations from Okun’s law suggests that the recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009. To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”

 Read more >>

Claire Jones

IMF data to include Australian dollars. Getty

It is often forgotten that central banks are major players in global capital markets. At the last count, monetary authorities held reserves worth $10.5tn, according to International Monetary Fund data.

Most of this stockpile is thought to be invested in “safe” assets, such as government bonds of highly-rated sovereigns and gold. But, while some of the more open monetary authorities, such as the Swiss National Bank, provide some information about the currency composition of their reserves and asset allocation, most of the big reserves holders, located in Asia, don’t.

Not a lot is known about what’s held in central banks’ coffers. This matters because changes in central bank reserve managers’ behaviour can endanger financial stabilityRead more >>

The three independent reviews of the Bank of England’s performance before and during the financial crisis must have been sobering for the court, its governing body. In polite but pointed language the reviews, published on November 2, confirmed that the BoE was ill prepared to recognise or deal with the crisis in its early days. The BoE’s forecasting was also found to be subject to groupthink.

The reviews provided many detailed recommendations but also made it clear that a full-scale cultural change is needed to address the root causes of the problems. This will be a high priority for the next governor.

 Read more >>

Government 'not serious about economic or fiscal policy'. Image by Getty

It is rare to have a moment of epiphany in economic commentary. Few developments disprove your previous beliefs entirely and such is the economic uncertainty that it is easy and comforting to hold on to views far too long. At 11:30 last Friday, I had such a moment.

A Treasury press release entitled “Changes to cash management operations” showed my faith in the credibility of the UK government’s economic strategy to be misplaced. I no longer believe that this government is serious about economic or fiscal policy. Nor does it appear the institutional checks and balances work to protect the public.

 Read more >>

Chris Giles

On the day of the inflation report, the Bank of England came out with its most pessimistic medium-term outlook for the economy, suggesting weak growth would not cause inflation to fall below the 2 per cent target. That suggests no room for more quantitative easing. But is that really the case?

How loose is monetary policy? How big is the QE programme? These were all questions that popped up again and again at Bank governor Sir Mervyn King’s press conference this morning in light of the Treasury’s temporary raid on the accumulated surplus of the QE pot. Here is a timeline of what we know and Sir Mervyn’s answers today. Read more >>

Claire Jones

Marek Belka (right) with José Manuel Barroso, president of the European Commission. Image by Getty

The debate over monetary policy’s limits is, once again, big news.

In recent weeks, Sir Mervyn King, governor of the Bank of England, and his deputy governor for monetary policy, Charlie Bean, have both questioned the usefulness of more quantitative easing. On Thursday, the Monetary Policy Committee halted bond-buying, suggesting the majority agrees with the Bank’s top brass.

It is clear that the MPC now believes that it is running out of options, at least as far as “normal” policy is concerned.

But what is normal? Sir Mervyn has always considered quantitative easing an orthodox monetary policy. Marek Belka, president of the National Bank of Poland, disagrees. Read more >>