Digging into the details
One of the most important financial events of this year is the European Central Bank’s Asset Quality Review. The review is the opening act in the central bank’s health check of the eurozone’s biggest lenders, which goes by the glamorous title of the Comprehensive Assessment.
The ECB today published details of the second phase of its AQR, which will see national regulators, under the scrutiny of the ECB, scour the balance sheets of the region’s 128 biggest lenders to see what’s lurking in the darkest parts of their loan books. Unlike most earlier exercises, the exercise will focus on those murkiest of corners — what are known as lenders’ Level 3 assets.
Here’s a quick Q&A on what that entails. Read more
The Bank for International Settlements has a fascinating section in its latest quarterly report drawing attention to the amount of debt globally, which has soared since the turn of the millennium from under $40trn to hit a whopping $100trn towards the end of 2012. Here’s the chart:
Forward guidance is central banking’s latest fad. Since the nadir of the crisis, all four of the major central banks have adopted their own version of it.
But is this fashion for keeps? That depends on whether the policy works.
Guidance involves saying what you’re going to do, before doing it. This, central banks hope, will temper markets’ uncertainty about what happens to interest rates.
Whether it works or not, then, depends on how much markets trust policy makers to do what they say they’re going to do. If investors think policy makers are lying, or central banks lose credibility by reneging on their pledges, then the guidance could harm reputations for a long time to come.
So does it work? According to a paper, published by the Bank for International Settlements today, it does. Well, sort of.
Yet the research also flags that if forward guidance does succeed, it could end up doing more harm than good. Read more
Mario Draghi has warned that, though unlikely, Europe’s fledgling economic recovery could be derailed by the turmoil in Ukraine.
While the direct financial and trade linkages between the European Union and Ukraine are small, the ECB president told lawmakers in Brussels yesterday that the geopolitical dimensions of the tensions could have a strength that goes beyond mere statistics on capital and current accounts.
One of the most important economic aspects of those geopolitical dimensions is the supply of Russian gas to the EU.
The EU’s reliance on Russia has dwindled over the past decade, but it still matters. The relationship still accounts for 30 per cent of all gas imported into the bloc and when Gazprom cut off Ukraine in 2009, the disruption to energy supplies hit the EU hard. And though the EU is now less reliant on receiving its gas via this route, there’s no way of Russia using the gas button against the Ukraine without it having some impact on the rest of Europe.
The popularity of this tweet by Reuters’ Jamie McGeever highlights the interest this geopolitical dimension has received:
But there are good reasons to bet against Russia turning off the gas tap, regardless of whether or not one believes relations with the EU are the direst since the Cold War. Read more
January’s eurozone inflation number, out earlier on Monday, showed price pressures in the currency bloc are not quite as subdued as first feared, registering 0.8 per cent – a touch higher than Eurostat’s initial estimate of 0.7 per cent.
It’s hardly a game changer: inflation is still less than half the 2 per cent target. But the slightly better figure will reduce pressure on the European Central Bank a little after it faced renewed calls to ease policy following the release of the flash estimate.
However, the detail of this morning’s release suggest disinflationary pressures might be even worse than feared. This excellent chart from Marchel Alexandrovich of Jefferies International shows why: Read more
European Central Bank presidents, current and former, are renowned for their fondness to “never pre-commit”. Even when the ECB opted to jump on the forward guidance bandwagon, it did so in a much more halfhearted way than its counterparts.
However, a few months ago Mario Draghi made quite a firm pledge to tell us by the end of the autumn how the ECB intended to go about producing an “account” of the governing council’s policy deliberations. Will Mr Draghi end up breaking his promise? Read more
Jackson Hole, the nearest thing on the central banking calendar to Davos, is upon us again, with some of the world’s most senior monetary officials set to head out to the upmarket Wyoming resort over the next few days.
Unlike the annual bash in the Swiss Alps, however, Jackson Hole, which kicks off on Thursday evening and closes on Saturday night, is usually a bit more than a talking shop. Of late, it has been the venue of choice for Fed chair Ben Bernanke to offer clues on where policy is heading.
But, while tapering looks like it is almost upon us, those hoping for more detail on the pace at which the US central bank will slow its asset purchases will not get it from Bernanke this weekend. Read more
1. Wednesday’s inflation report press conference has been billed as a massive day for the MPC, in particular the new governor Mark Carney. Why?
The Bank of England is set to unveil a framework for what is known in central bank parlance as forward guidance. That involves telling markets -and the public – that central bank cash will remain ultra-cheap until the economy returns to rude health.
It would be one of the most substantial changes to the UK’s monetary policy framework since the rate-setting Monetary Policy Committee became independent in 1997.
It is also Carney’s big idea to lift the UK economy out of the doldrums and into what he has termed “escape velocity”. Others interpret this as a self-sustaining recovery.
However, while Carney is a fan of guidance, the rest of the MPC might take some convincing. Four of its current members, including deputy governor Charlie Bean and chief economist Spencer Dale, have spoken out against forward guidance in the past. Read more
From the FT on Wednesday:
Vince Cable, business secretary, has lifted the lid on tensions between the government and the Bank of England criticising its “capital Taliban” whom he accuses of holding back the recovery by imposing excessive financial burdens on the banks. Read more
What is forward guidance?
Forward guidance has been around for a while (it was pioneered by the Reserve Bank of New Zealand 16 years ago) and can take many forms.
But, as the FT’s Frankfurt bureau chief Michael Steen writes here
, all of them boil down to saying — or at least hinting at — what you’re going to do before you do it.
Until recently, guidance usually involved central banks using a mix of their economic projections and their inflation targeting frameworks to show markets whether their expectations of the direction and timing of policy changes were right or not. It was all a bit techy and abstruse.
Most of the focus recently has been on forms of forward guidance that the public — as well as markets — can easily understand. These more explicit forms of forward guidance involve central banks promising to keep monetary policy ultra-loose either until a fixed point in the future, or until economic conditions pick up.