The European Central Bank has revealed the details of arguably the most important element of the package of extraordinary monetary policy measures it unveiled last month to rid the eurozone of the threat of deflation.
On Thursday, the ECB announced exactly how its targeted longer-term refinancing operation, or the TLTRO, will work. Earlier forward guidance that rates were likely to remain on hold until the end of 2016 was watered down by Mario Draghi, ECB president, possibly in the hope that this would raise the take-up of the TLTRO funds.
Mr Draghi also revealed that banks would be able to borrow up to €1trn from the central bank, should they smash targets, or benchmarks, set by the ECB. Lenders are already able to borrow an initial amount of $400bn in two auctions, scheduled for September and December. The €400bn figure corresponds to 7 per cent of their lending books to businesses and households, excluding mortgage loans. Read more
Last month, students from four continents joined forces to call for reform of the economics curriculum.
In an open letter, the students said they wanted their courses to delve into a wider range of economics theories and methodologies than the standard neo-classical model that dominates undergraduate teaching, and to learn more about the implications of policy-making.
Speaking to those students was a heartening experience – all of them struck me as extremely thoughtful and articulate. Their desire for reform seemed driven by a curiosity about the world and what economics could do to improve it.
I suspect they’ll be encouraged by comments made in a speech today by the similarly thoughtful and articulate Benoît Cœuré, who sits on the European Central Bank’s executive board. Read more
Throughout its campaign to convince everyone that the eurozone is not about to fall into deflation, the European Central Bank has drawn a distinction between two different sorts of episodes of falling prices.
The first involves a short period during which prices fall. In its monthly bulletin, published on Thursday, the ECB tries to define it, not as deflation, but as “negative annual inflation”. In the ECB’s view, a few months of falling prices will do little long-term damage to the economy. Indeed, the eurozone has already experienced this sort of deflation in the autumn of 2009.
The more dangerous sort of deflation, which the bulletin labels “outright deflation”, can, however, cause lasting pain. If what Mr Draghi has recently dubbed a “pernicious negative spiral”, triggered by ever weaker demand, was to emerge, all hope of the currency bloc’s economy returning to health anytime soon would be shot.
So how can you tell one from the other? Read more
It’s crunch time for the European Central Bank. After more than six months of jawboning, pretty much every seasoned ECB watcher thinks the governing council is finally going to ease monetary policy on Thursday.
Disappointing growth, worryingly weak inflation, and the rise of anti-establishment parties in the European Parliamentary elections have only added to the sense that rate-setters must do something to stave off the threat of deflation and help stimulate lending in the real economy. What can we expect from the ECB and how will it work? Read more
Lithuania looks set to become the 19th member of the euro in January 2015 having met all the requirements demanded by the European Commission. Were the Baltic state to join the single currency, as is widely expected, that would trigger a big change in the way the European Central Bank’s governing council votes on monetary policy. Read more
For those who have followed the scrap between Raghuram Rajan, governor of the Reserve Bank of India, and his counterparts at the European Central Bank and the Federal Reserve on the ill-effects of Fed tapering, Benoît Cœuré’s thoughtful speech today is worth a read.
In Mr Rajan’s view, the way the Fed conducts its monetary policy is irresponsible. The US central bank acts merely on the basis of national interest, with scant regard for the ramifications of mass dollar printing in a world where the dollar remains the dominant reserve currency.
These attacks have usually been parried with remarks that central banks such as the Fed (and, given its role as issuer of the only other real reserve currency, the ECB) have little choice but to act within the national interest given the scope of their mandates. From Mr Coeure’s boss Mario Draghi earlier this year:
Draghi: Mr Rajan is really an excellent economist. What one would have to demonstrate to speak of selfishness is the following. One would have to show that monetary policy actions within the United States, the ECB and so on were decided for reasons other than for the sake of the mandate and that, as a result, they were harmful to other countries. As I said, the priority for all of us is compliance with our mandate, which for us is maintaining price stability and for the Federal Reserve Board is the dual mandate.
Mr Cœuré’s speech is interesting as, while he does not go so far as to side with Mr Rajan, he is not so intellectually dishonest as to say that all is fine with the pre-crisis orthodoxy. In short, this said that if everyone just sticks to their inflation targeting mandate and flexible exchange rates everything will be just great. Read more
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
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
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
Welcome to our live coverage of ECB president Mario Draghi monthly press conference. Earlier, to the surprise of some, the ECB kept its rates on hold. Follow the questions and reaction live here with capital markets editor Ralph Atkins and Emily Cadman