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