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

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

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.”

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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.

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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.

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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

Welcome to a live blog of Mario Draghi’s press conference from ECB HQ in Frankfurt. With rates held and Mr Draghi already having worried investors with his remarks on Wednesday about a slowing German economy, attention will be on what more the bank’s president has to say about the main driver of Eurozone growth. Brought to you by Ben Fenton and Ben Hall.


14.47: That’s it for this live blog, but….

…the last word goes to the FT’s Frankfurt bureau chief Michael Steen (well it is his city and his newspaper). His view of the most interesting line from the Draghi press conference:

“Pressed on ways ECB might ease Greek funding problems, Draghi said the bank already agreed to send back any profits it made from Greek bond holdings to the central bank in Athens which could then be transferred to government. The ECB was “by and large done” helping Greece within its mandate he said.”

14.45: Here is an instant reaction from Howard Archer, chief UK & European economist at IHS Global Insight:

ECB President Mario Draghi appeared to ease open the door to a cut in interest rates over the coming months and potentially as soon as December. Potentially significantly when asked whether the ECB had discussed an interest rate cut at their November meeting, Mr. Draghi commented that “we always discuss all instruments.” This contrasted to his comments after both the September and the ECB meetings, when Mr. Draghi said that the ECB had not discussed cutting interest rates. Mr. Draghi also commented that the ECB stands ready to act on standard monetary policy as well as on non-standard policy. Interestingly, though Mr. Draghi indicated that the ECB had not discussed negative deposit rates (they were cut to zero in August).

Furthermore, Mr. Draghi acknowledged that the Eurozone growth situation and outlook had weakened recently, and hinted that the ECB’s GDP growth staff projections would be revised down in their December forecasts. The ECB’s statement observed that “most recent survey evidence for the economy as a whole, extending into the fourth quarter, does not signal improvements towards the end of the year.” Furthermore, the ECB considered that “growth momentum is expected to remain weak” in 2013, largely due to the need of balance sheet adjustments in both the financial and non-financial sectors, an uneven global recovery and high uncertainty. Mr. Draghi has also expressed concern recently over very high and rising Eurozone unemployment. Reinforcing this downbeat assessment of Eurozone growth prospects, the ECB statement observed that “the risks surrounding the economic outlook for the euro area remain on the downside.”

Meanwhile, the ECB’s view on inflation does not appear to preclude an interest rate cut in the near term. While the ECB expects Eurozone consumer price inflation to remain above 2.0% and at elevated levels for the remainder of 2012, the bank sees inflation “declining to below 2.0% again in the course of next year”. The ECB regards long-term inflation expectations as “well-anchored” and believes that underlying price pressures should remain moderate, with the result that current levels of inflation should be “transitory”.

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It is six days since Bank of England internal reviews urged more transparency in monetary policy. The BoE’s Court – its governing body – welcomed the review and promised to act.

Today was the first test of that transparency. The BoE failed at the first hurdle. Read more

Claire Jones

Guest post by Ed Crooks, US industry and energy editor

A pleasurable consequence of my research into the economic impact of the giant storm Sandy was that I spent spent some time reading the work of the great French economist Frédéric Bastiat, who more than 160 years ago set out the foundations for the way we still think about the economics of natural disasters today.

Bastiat is not as well-known as he deserves to be in the English-speaking world, perhaps because of a reflexive Anglo-American view that “great French economist” is a contradiction in terms. But as the collection of his work at the excellent website makes clear, he was a brilliant man: full of sharp and original insights expressed in his distinctively pithy style.

The description of the famous “broken window fallacy”, which explains why natural disasters do not make an economy better off, is a case in point, packing a wealth of ideas into just 846 words. Read more

Claire Jones

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MPC/ ECB votes

Will the Bank of England’s Monetary Policy Committee opt for more quantitative easing on Thursday? Most now think more money printing is unlikely. Read more

Bank of England©Getty

Excessive deference and hierarchy are damaging the Bank of England’s effectiveness, according to three independent reviews that criticise the central bank’s culture.

The reviews into operations during the financial crisis found that officials in Threadneedle Street had learnt “rapidly” and handled the crisis “effectively”, but were also critical of the cental bank’s governance culture.

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Claire Jones

Frequent readers of Money Supply will be aware of FT economics editor Chris Giles’ frustration with the Bank of England’s secrecy.

Chris has often criticised the Bank for its reluctance to provide more information to accompany the publication of the Inflation Report’s fan charts, which represent the Monetary Policy Committee’s views on where inflation and growth are heading and provide an important signal on the direction of policy. Read more

Claire Jones

Charlie Bean’s speech on Wednesday evening was grim, even by central bankers’ standards.

Mr Bean is the Bank’s deputy governor with responsibility for monetary policy. But he doesn’t seem to think that particular policy strand can do much good. Either now, or in preventing the next bubble.

Not only did Mr Bean echo the governor’s warnings over the effectiveness (or lack thereof) of more quantitative easing in the current climate, he is also sceptical that monetary policy can curb the build-up of credit bubbles. Read more