Three issues should dominate tomorrow’s Bank of England inflation report: changes to the Bank’s economic forecasts; the implications of these changes for monetary policy; and the degree to which the Bank is confident it can offset further fiscal tightening with looser monetary policy.

Will we get clear indications of the Bank’s thinking on these three areas? There is no good reason why not, but a lack of justification for obfuscation doesn’t usually prevent the practice. All three are related so I have used the following decision tree to help my thinking.

In the diagram negative numbers represent the degree of policy loosening implied relative to November, while positive numbers indicate a degree of policy tightening and:

Continue reading "Bank of England: A decision tree"

A change in travel plans by Jean-Claude Trichet, European Central Bank president, has caused a flurry of excitement in financial markets this morning. He is leaving early a Reserve Bank of Australia conference in Sydney in order to get back for Thursday’s European Union leaders summit in Brussels. The buzz in markets is that this could be a sign that a bail-out is being prepared for Greece.

It is a good story to trade on (the euro is up a bit) but is such speculation credible? I am not so sure. It didn’t help that the first reports said Mr Trichet was returning for an extraordinary meeting of the ECB’s governing council - an understandable mistake for anyone in Australia not familiar with the EU’s array of councils and presidents.

But my understanding is that the ECB president always intended to be at Thursday’s summit in Brussels, which was Continue reading "Trichet comes home early"

A trope of current writing about the BoJ is that it is coming under increasing political pressure from the Democratic party government to ease monetary policy. Pressure, maybe, but it’s an arm around the shoulders rather than a cattle prod in the back.

Public government pressure takes the form of regular comments by finance minister Naoto Kan. Here is a sample, via Reuters:

“They are holding a policy board meeting today and the BoJ has reiterated it would keep very easy monetary conditions … To be honest, I feel they could do more, but we are following the same policy direction by communicating with each other.”

It’s not very scary stuff. There are also other reasons why the BoJ feels nothing like the political pressure to act on deflation that it did back in 2001. Continue reading "Political pressure and the Bank of Japan"

William C Dudley, president of the NY Federal Reserve, today spoke at length about the dangers of allowing a financial institution become “too-big-to-fail.”

Though he said there is “no one silver bullet” to prevent financial crisis (and, indeed, his speech highlighted the importance of effective macroprudential supervision and increasing the robustness of the financial system), he said that it was “critical that we ensure that no firm is too big to fail.”

The moral hazards with giant institutions were two-fold, he said. First, too-big-to-fail institutions would be able to get cheaper credit, since they’d effectively have an implicit government guarantee. Second, institutions would have an incentive to become large, simply so they could get the government backstop, reguardless of their financial health.

Notably, though, his solutions to the too-big-to-fail problem did not mention actually limiting firms’ size.  Continue reading "NY Fed chief: Taking on ‘too big to fail’"

The Federal Reserve board members have argued that asset bubbles are hard to identify when they’re growing. In retrospect, though, St. Louis Fed president James Bullard is calling a bubble a bubble.

Asked by Fox Business News about the housing market recovery, Mr Bullard made clear he wasn’t holding his breath waiting for the market to pick back up.

We have too many houses, so I wouldn’t expect that to really boom on us.

Housing prices have “by and large” stabilised, he said. And even there, he hedged. Continue reading "St Louis Fed chief: ‘We have too many houses’"

If nothing else, a positive aspect of Greece’s plight has been the wave of ideas on how the eurozone could operate more effectively in the future.

A big shortcoming identified by many has been the lack of proper “crisis management” procedures, which have arguably exacerbated Greece’s difficulties. Now - just in time for the EU leaders’ summit in Brussels this week - comes an ingenious solution for a European Monetary Fund, put forward by Daniel Gros, director of the Brussels-based Centre for European Policy Studies, and Thomas Mayer, chief economist at Deutsche Bank.

Their idea is for a sort of eurozone version of the International Monetary Fund, which could provide emergency loans to struggling countries or ensure a default was orderly, with minimum effect for other eurozone countries. It would be funded by contributions from countries in the weakest financial position, calculated according to how grievous was their abuse of the EU’s fiscal rules as set out in its ”stability and growth pact”. Continue reading "A European monetary fund?"

If Greece needs a bail-out, it would be far better for it to seek one from the International Monetary Fund than from other euro-zone countries, Otmar Issing told the NYT.

Mr Issing is a former top official of the German and European central banks. “I don’t think that the EU can impose the kind of sanctions that would be needed, and it would make Brussels too unpopular,” said Mr. Issing. “A better way is for Greece to approach the IMF. It is the only institution that can impose strict enough conditions.” Bailing out Greece would involve “a more or less disguised transfer of taxpayer money,” he added, “and I don’t see any support for that from the people in Germany or elsewhere.”

The Swiss central bank has declined to comment following reports that it sold swiss francs for euros in a rare foray into Asian forex markets. The euro had been under downward pressure because of sovereign debt fears in several member states, hitting a 15-month low directly before the intervention. The Swiss National Bank has a stated policy of intervention to weaken the swiss franc while the threat of deflation persists.