Not the ECB (Getty)
The Bundesbank has weighed in on what forward guidance means for the European Central Bank and if you want the short version it boils down to: we have not forgotten about inflation.
The ECB pledged in July to keep interest rates at or below current levels “for an extended period of time,” which, as we’ve noted before has caused some confusion as to what precisely it means.
According to Germany’s central bank, that promise does not actually mean that interest rates cannot rise or that they will necessarily remain low for a long time. As it writes in its latest monthly report:
The decisive point in correctly interpreting this statement is that it is conditional on the unchanged obligation of the Eurosystem [the ECB and the eurozone’s 17 national central banks] towards its mandate of maintaining price stability (which means, operationally, medium term inflation that is below, but close to 2 per cent)… It follows that the ECB’s governing council has not bound itself. If higher price pressures become apparent in future compared to those expected now, forward guidance in no way rules out a rise in interest rates.
Search the pockets, wallets, purses, car cigarette ashtrays and homes of anyone in (almost) any eurozone country and you are likely to find significant heaps of small, brown iron-and-copper 1 and 2 euro cent coins.
They cost more to make than they are worth, there’s precious little you can buy with them (though the German post office does sell a €0.03 stamp) and they tend to accumulate in drawers and on flat surfaces at an alarming rate. So, one might reasonably ask, why not just get rid of them? Read more
What could be worse in the eyes of a central banker than money counterfeiting? Well, killing people, even if judicially mandated, seems to be the answer. Germany’s Bundesbank on Thursday beat a hasty retreat from plans to send experts to Bangladesh next month to help combat a recent spate of money forgers. Read more
The dust has yet to settle on the Bundesbank’s fight with the ECB over bond-buying, but this has not stopped Germany’s central bank from taking on another heavyweight global financial institution: the International Monetary Fund.
BuBa’s monthly report, published on Monday, includes a whole chapter entitled: “The IMF in a changed global environment.” It becomes clear fairly quickly that eyebrows are being raised in Frankfurt at some elements of the IMF’s stance in the eurozone sovereign debt crisis, where the Fund has taken on its own lending and acted as a member of the “troika” of IMF, ECB and European Commission officials advising on bailouts.
“By taking on excessive risks, the IMF would gradually transform from a liquidity-providing mechanism into a lending institution,” the bank says on the first page of its 15-page discussion. “Such a transformation would neither accord with the legal and institutional provisions of the IMF agreement, nor with the fund’s financing mechanism or its risk control functions.” Read more
Today the Bundesbank has leapt to the defence of the much-maligned male banker, saying that it was not them, but the women on lenders’ boards that encouraged risk taking.
This from the FT’s Frankfurt bureau chief Ralph Atkins:
Board changes at banks that result in a higher proportion of female executives “lead to a more risky conduct of business”, concluded the authors of an extensive study of German finance houses released by the country’s central bank…
…Explaining their controversial findings, based on an analysis of German bank executive teams from 1994 to 2010, the report’s authors suggest a main reason is that women executives tend to be “significantly less experienced” than male counterparts and that a lack of experience drives risk taking.
The argument that women fail to control risk because they lack experience is a bit circular surely.
But, regardless of what has happened at German lenders, a plethora of women in their upper ranks is not an excuse that central banks can rely on in explaining their policy failures. Read more
Jens Weidmann, the Bundesbank’s president, claimed today that the decision by the central bank to more than double the provisions for losses on assets held on its balance sheet on the back of “risks stemming from monetary policy operations” was not politically motivated.
Here at Money Supply, we beg to differ.
In fact, the three figures below, taken from the Bundesbank’s 2011 balance sheet, out today, highlight rather nicely just why the relationship between Buba and the European Central Bank is becoming more fraught. Read more
What do central bankers do when they are worried? They increase their reserves.
Tuesday’s Bild Zeitung reports the Bundesbank will next Tuesday declare a sharp drop in profits after increasing provisions against risks on its balance sheet. The amount transferred to the German finance ministry would fall below €1bn, Bild said. That would be less than half the €2.2bn profit reported for 2010 – which was around half the previous year’s figures, again because of higher provisions.
The Bundesbank is not confirming Bild’s report, but it sounds plausible. Jens Weidmann, Bundesbank president, told Handelsblatt in an interview last month that the rising risks borne by Germany’s central bank would require “more rather than less provisions. That will have an equivalent impact on the level of Bundesbank profit.” Besides significantly higher provisions this year would fit with the Bundesbank president’s increasingly-cautious rhetoric more recently. Read more
Shock news in the Bundesbank’s latest monthly bulletin: German house prices have gone up. The more-or-less flat profile of residential property prices over the past decade has been one of the defining features of Europe’s largest economy over the past year. It meant the country escaped a house price bubble, the downside of which is now being seen in the US, UK and, within the eurozone, in Spain and Portugal. (Instead German investors piled into US subprime mortgages – but that’s another story.) Read more
Germany’s ruling centre-right coalition parties are expected to agree this week to appoint Jens Weidmann, chief economic adviser to Angela Merkel, the German chancellor, as the youngest president of the Bundesbank. The move follows the surprise resignation of Axel Weber as head of the fiercely independent German central bank.
Mr Weber, who will leave at the end of April, had been expected to be Germany’s candidate to be the next president of the European Central Bank. His departure has left Ms Merkel without an obvious alternative for the ECB job. Read more
The International Monetary Fund is already the world economy’s fire fighting team (as well as police force). Does it need even more powerful tools to do its job?
Not according to Germany’s Bundesbank. It has today signalled strong opposition to the idea of a “global stabilisation mechanism” (GSM) that would allow the IMF to offer unlimited credit without conditions to several countries at once.
The idea of equipping the IMF to prevent an economic crisis on one country spreading to others, has been floated by South Korea, and has apparently been received sympathetically in France and the UK. But ahead of this weekend’s IMF meetings in Washington, the Bundesbank is warning that the plan could have the opposite of the desired effect. Read more
Mario Draghi, Italy’s central bank governor, is profiling himself increasingly as a hardliner, especially when it comes to the banking system The ECB governing council member warned on Friday that national authorities needed to identify and act against “zombie banks” - and that the ECB’s exit strategy could not be held up by a few weak institutions dependent on its liquidity support. “The problem of addicted banks should not be addressed by the ECB but by financial authorities,” he said, according to Reuters.
“When you exit, and there is no doubt that we will exit, you want a monetary policy that is free of these constraints,” he added. Read more
The problems Axel Weber, Bundesbank president, has faced over Thilo Sarrazin, the controversial Bundesbank board member, whose recently-published book shocked the country’s establishment, continue to attract headlines in Germany. The damage to the famously-reticent Bundesbank’s reputation was seen as a threat to Mr Weber’s chances of succeeding Jean-Claude Trichet when the European Central Bank president’s non-renewable eight year mandate expires in October 2011.
The Frankfurter Allgemeine Zeitung has been investigating the role played by Christian Wulff, Germany’s federal president, in negotiating a deal by which Mr Sarrazin agreed to resign. The thrust of its coverage is that Mr Wulff, in effect, imposed a deal on the Bundesbank, which ended up withdrawing its previous criticism of Mr Sarrazin and thanking him for his work as a board member.
Does all this matter? Read more
Has Axel Weber, head of Germany’s Bundesbank, just blown his chances of becoming European Central Bank president next year? In an interview with the country’s Börsen Zeitung newspaper, to be published on Tuesday, he warns of the risks to monetary stability involved in buying government bonds and says he saw this part of the ECB’s actions “critically”.
His opposition is not surprising. What is, is Mr Weber’s decision to make his view public. Open dissent is viewed dimly within the ECB – and the Bundesbank president’s comments risk undermining the effectiveness of yesterday’s package. Read more
A new headache for Jean-Claude Trichet, European Central Bank president: Another “hawk” on the ECB’s governing council has broken ranks over the risks to the eurozone inflation outlook. I noted in a post last week how Jürgen Stark, executive board member, saw them “tilted to the upside” – contradicting the official position that they were broadly balanced. Now Axel Weber, another German who sits on the council as Bundesbank president, has made a similar comment in a speech in Mannheim. Inflation risks were “to be sure small, but directed upwards,” he said. At the moment, there is no sense that ECB ultra-loose monetary policy is going to change any time soon. But the impression is growing of discord or frustration within Frankfurt’s Eurotower.
Jean-Claude Trichet’s performance at yesterday’s press conference was widely criticised by US and London-based financial analysts. The European Central Bank president’s attempts to build confidence in the eurozone’s Greece rescue plans were seen as unconvincing, as was his attempt to defend the ECB position on International Monetary Fund involvement.
But Germany’s Handelsblatt this morning provides a reminder of the diametrically opposite pressures Mr Trichet faces in the eurozone’s largest economy – where he is seeing as going too far in Greece’s defence. A full-page picture on the front shows a €50 note going up in flames and the headline “what remains of the euro”? On the next page is a short – but brutal – comment from Gabor Steingart, the newspaper’s new editor-in-chief. Read more
The Bundesbank has distanced itself from a report this morning that it opposed Europe’s fall-back plan for rescuing Greece. The Frankfurter Rundschau newspaper quoted a Bundesbank “internal paper” arguing that the plan would not stop German money flowing to Athens and threatened to undermine eurozone fiscal rules.
If that really were the Bundesbank’s view, it would be another blow for those hoping for united and effective eurozone support for Greece. But a Bundesbank spokesman said the paper was “not authorised” and was just the “first reaction” of an official. The paper had not been presented to the Bundesbank’s board, let alone been agreed. “A process of forming an opinion has not yet taken place,” it said. Read more
The Bank of England does it. The Bank of Japan does it. So why can’t the Fed do it?
Ben Bernanke spent the afternoon arguing before a House committee that it would be a serious mistake to take bank supervisory authority away from the central bank. It was an argument he, and several other FOMC members, had made before. But for the first time, a question from a Congressman forced him to publicly justify his position from an international perspective. Read more
Germany’s Bundesbank is getting jumpy, and I am not sure it is doing Axel Weber, its president, many favours.
The cause of its agitation is the proposal for a European Monetary Fund by Wolfgang Schäuble, the country’s finance minister. Jean-Claude Trichet, European Central Bank president, has said the EMF idea is worth considering if it would make existing arrangements more effective. But the Bundesbank has set itself squarely against the proposal, which is aimed at making the eurozone better equiped to control future crises, such as currently being experienced (traumatically) over Greece’s finances. The proposal is simply a distraction at this stage, the Bundesbank believes. Read more
Axel Weber, Bundesbank president, has just dealt another blow to the idea of a European Monetary Fund, as floated by the German finance ministry. Speaking in Frankfurt, Mr Weber objected to talk about the “institutionalisation of emergency help” just as it looked like Greece might actually get its finances back in order.
Listening to him, at the Bundesbank’s annual results press conference, you might have been forgiven for thinking Mr Weber was back in the lecture rooms of Bonn, Cologne and Frankfurt universities, where he worked previously as an academic. The “game theories” he had discussed in his past life had shown how, if the end result was known in advance, the behaviour of participants altered accordingly, he told a crowded room of journalists.
What Mr Weber meant was that if Greece knew it would be bailed-out, it would give up now in its drive to bring its public finances back under control. Thus “constructive ambiguity” – being deliberately unclear about what would happen in the worse case – was an important part of eurozone policymakers’ strategy, Mr Weber concluded. Read more
As the FT is reporting, the race to succeed Jean-Claude Trichet as European Central Bank president, is gaining momentum. Trichet does not step down until November next year, but the need to chose a new ECB vice president next month to replace Lucas Papademos is concentrating eurozone government’s minds. Germany wants the balance of power within the 22-strong ECB governing council to favour a conservative, northern European for the top position next year – that is, Axel Weber, Bundesbank president.
My view is the race is still very much open. Mr Weber has many strengths, but he is not a traditional Bundesbanker. His background is as an academic and, when asked a question, has a habit of answering it – rather than practicing the strict verbal discipline and reticence/obtuseness more normally expected at Germany’s central bank. Of course that could increase his attractiveness, but perhaps not if the search is on for hard-line inscrutability. Anyway, there is still at least a year before a decision will be made – in which time a lot could happen. Read more