The week ahead in central banking
Our week ahead email helps you to track the most important events in central banking. To see all of our emails and alerts visit www.ft.com/nbe
Keeping track of those Target2 balances
Fascinated by the Target2 debate, but your obsession hasn’t quite reached the levels where you’re willing to keep a beady eye fixed on all of the seventeen national central banks’ balance sheets?
Help is at hand in the form of this handy graphic and Excel file (last updated yesterday) pulled together by a team at Institute of Empirical Economic Research at the University of Osnabrück in Germany (hat tip to David Marsh at OMFIF for the link):
The page also provides links to papers explaining what Target2 is and some of the more noteworthy articles that have formed part of the debate. However, the articles mentioned, for the most part, take the view that the Target2 imbalances represent a serious risk to Germany’s economic well-being. For an alternative opinion, it’s worth looking at what Karl Whelan, professor at University College Dublin, has been writing on the topic.
MPC’s Miles: the case for more easing
David Miles, the only one of the Monetary Policy Committee’s nine members to call for more money printing at the past two votes, has given an interesting speech today.
The speech presents the case for doing more based in part on the view that, if the MPC continues to do nothing, or — worse still — tightens policy, then this could destroy the UK economy’s productive capacity and, hence, its ability to grow at the pace seen before the financial crisis.
MPC minutes hard to call
Were the minutes of May’s Monetary Policy Committee meeting, out today, dovish or hawkish?
The vote, which left David Miles as the sole member voting in favour of more money printing for the second month in a row, was more hawkish than most had expected.
The consensus view was that another of the committee’s external members, Adam Posen, would join Mr Miles in backing further asset purchases. Some had thought that a third member, most likely Martin Weale, would also vote more QE.
That neither Mr Posen nor Mr Weale joined Mr Miles might be seen as a sign that the barrier to more QE is higher than was thought after last week’s inflation report, which was slightly to the dovish side.
However, the wording of today’s minutes indicates the barrier to more QE is not as high as the vote suggests.
How so? The following sentence:
For several members, the decision not to expand the asset purchase programme at this meeting was finely balanced.
It’s difficult to know how many members the Bank means when it says “several”. All that can be said with any certainty is that the decision was “finely balanced” for more than one member and less than five. Most likely it means three or four.
Taken alongside Mr Miles’ vote, that could mean that the threshold for further QE is fairly low for the majority of the committee.
We know from comments made to Market News international last week that Mr Posen regrets his decision to vote with the majority over the past two months. Expect him to back more QE in June, then. Will “several” others join him?
Will the Bank follow the IMF’s advice?
Now that inflation is at a two-year low and the governor can put his best letter-writing pen to one side, should the Bank of England consider doing more to boost the UK economy?
The IMF certainly thinks so.
Today the Fund said the Monetary Policy Committee should print more money and cut the policy rate below 0.5 per cent. This, they argued, would lower yields further out on the curve, which in turn would lower businesses’ borrowing costs.
The Fund also said the Bank should consider buying assets other than government bonds in order to revive the UK’s beleaguered mortgage market and counter tough conditions for businesses. An LTRO-style operation was another option.
Will the Bank follow the IMF’s advice? The MPC might well plump for more QE in the coming months. But, in the short term at least, it is very unlikely to pursue the other measures.
Reviewing the Bank’s record
The Court of the Bank of England on Monday finally succumbed to pressure from politicians and the media to review Threadneedle Street’s performance during the crisis.
About time too.
The Bank is the only one of the Tripartite authorities yet to conduct an investigation into its handling of the turmoil.
But better late than never. Despite the Court’s tardiness, the three reviews announced today should be welcomed.
The week ahead in central banking
Our week ahead email helps you to track the most important events in central banking. To see all of our emails and alerts visit www.ft.com/nbe
Q&A: emergency liquidity assistance and Greece’s banks
RTRS: ECB STOPS MONETARY POLICY OPERATIONS TO SOME GREEK BANKS AS RECAPITALISATION NOT IN PLACE -CENBANK SOURCE
The Reuters headline above has sparked panic this afternoon. Is the panic warranted?
In some ways, yes. In some ways, no.
The Reuters story states that some Greek banks no longer meet the conditions required to access European Central Bank funds.
This is because Greek banks no longer have enough assets deemed to be of sufficient quality to secure cash from the ECB.
At a time when more and more deposits are leaving the Greek banking system, that hardly helps soothe market jitters.
However, Greek banks can still access euros through the Greek central bank.
How so?
Through something called emergency liquidity assistance, or ELA.
What’s the difference between ELA and accessing ECB cash?
For the banks, the terms of the loans. Under ELA, the Greek central bank, rather than the Eurosystem – which includes the ECB and the other national central banks, can set the collateral requirements. This means that poorer quality assets could be accepted by the Greek central bank in exchange for euros.
For the central banks, the difference is that with ELA, the national central bank is on the hook for any losses. With ECB loans, any losses would be shared.
ELA is usually approved by the ECB’s governing council, made up of the heads of the national central banks and the ECB’s executive board. However, below a certain threshold, ELA does not require approval of the governing council and can be made at the discretion of the national central banks.
Greek banks have already been reliant on ELA for a while now.
So why is so much attention being paid to this now?
It appears that more financing of the Greek banking system is now being done through ELA than before.
However, this rise in usage of ELA may well prove temporary.
Why?
It seems that the reason for the rise in usage is because of the delay in their recapitalisation (Greek banks are due to get European Financial Stability Facility bonds in the coming days — more on which here in this excellent post by FT Alphaville’s Joseph Cotterill).
And the ECB will exchange EFSF bonds for cash through its regular open market operations.
So, once/ if this recapitalisation goes ahead, Greek banks will be able to return to the ECB for cash?
So long as they are then considered by the ECB to be solvent and they have enough assets that the Eurosystem is willing to exchange for cash, then yes.
Bank of England Inflation Report presser: live blog
Sir Mervyn King. Image by Getty.
Hello and welcome to today’s live blog on the Bank of England’s Inflation Report press conference. The governor is due to begin speaking at 10.30am.
This post should update automatically every few minutes, although it might take longer on mobile devices. All times are UK time.
11.56 This live blog is now closed.
11.49 Here are the key takeaways:
Negative interest rates in the UK?
Back in early 2009, around the time the Bank of England was first firing up the printing presses, one of the oft-stated aims of quantitative easing was for it to produce a sharp increase in broad money, which acts as a guide to the amount of bank lending in the economy.
Broad money growth of 6-8 per cent would have suited the Bank — and the UK economy — nicely. If only.
As the chart above shows, quantitative easing has failed to produce the sort of pick-up that the MPC had hoped for.
There are many reasons for this. One of which, according to former MPC member Charles Goodhart, is the Bank’s practice of paying interest on reserves held in their coffers.
Mr Goodhart today accused the authorities as having “connived” would-be lenders into keeping their cash on deposit at the central bank by paying interest of 0.5 per cent on banks’ reserves.
Mr Goodhart argued that this is discouraging banks from lending. After all, why bother to risk making a loss on a bad loan if you can earn interest by parking your cash at the central bank?
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Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Ralph Atkins, Frankfurt bureau chief, has been writing about European economics and politics for the Financial Times for more than 20 years following an economics degree from Cambridge. He has been watching the European Central Bank and eurozone economies since 2004. He has previously worked in London, Bonn, Berlin, Jerusalem and Brussels. RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS
James Politi is US economics and trade correspondent for the Financial Times, based in Washington DC. He joined the Washington bureau in January 2008 following four and a half years as US deals correspondent covering M&A and private equity. James Politi joined the FT in London in 2000 with an MSc at the London School of Economics, and undergraduate degrees from Georgetown University and the University of Florence. RSS
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