Seldom are statements of the obvious as significant as the Bundesbank’s comments yesterday that Germany might well have to tolerate higher inflation than the rest of the eurozone in the coming years.
Jens Weidmann often cites the EC Treaty’s prohibition of monetary financing as an argument against stepping up the European Central Bank’s purchases of government debt. It would be hypocritical for the Bundesbank president to argue against what is also implicit in the legislation that governs the ECB: that the governing council sets monetary policy for the eurozone as a whole, not individual member states.
Above-target inflation is the natural result of Germany’s position as the bloc’s strongest economy at a time when the divergences between member states’ fortunes are becoming more and more pronounced.
Still, from a central bank more aware than most of the social and economic carnage that accompanies the debasement of currencies, the Bundesbank’s acceptance that higher inflation is a price that it must pay as part of its commitment to monetary union is to be welcomed.
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More QE from the Bank?
The Bank of England‘s Monetary Policy Committee meets on Wednesday and Thursday, when the decision is due out at noon UK time (11am GMT).
Will the MPC vote for more QE?
Three rumours doing the rounds this morning. First, that China might be about to raise reserve requirements again. The People’s Bank of China will raise reserve requirements for “several” banks, including key lenders, by 50bp on Monday, Dow Jones newswires reports via AFP. Chinese prices rose significantly between August and September, with year-on-year consumer price inflation standing at 3.6 per cent in September. China has recently employed other tightening measures, such as raising a key interest rate by 25bp last week.
Second rumour: that the Bank of Japan’s contributions to the Treasury will be waived or reduced if the central bank incurs losses in its asset purchase programme. Nikkei English News reports, via Bloomberg, that finance minister Yoshihiko Noda may soon make an official announcement.
Eurozone banks are parking record sums overnight at the European Central Bank in the latest sign of heightened nervousness across the 16-country region’s financial sector.
The arrival of Vítor Constâncio as the European Central Bank’s new vice-president this week has led to a reshuffling of responsibilities on the bank’s six-person Frankfurt-based executive board. For ECB-watchers, the obvious questions are: who’s up and who’s down? I am not sure if much has changed.
As expected, Mr Constâncio, a former Portuguese central bank governor, will take over responsibility for financial stability issues from his predecessor, Lucas Papademos. That will take up much of his time in coming years, so it is probably not a big deal to him that responsibility for ECB research has been transferred to José Manuel González-Páramo, perhaps the biggest winner from today’s moves. Mr González-Páramo remains in charge of market operations – a busy beat in recent years.
The eurozone’s financial sector and economy are facing “hazardous contagion” effects from the region’s debt crisis, according to the European Central Bank, which has also predicted another €195bn in bank writedowns this year and next.
Lorenzo Bini Smaghi, European Central Bank executive board member, has attacked financial market analysts for not doing their homework properly on Greece. Many have jumped to the conclusion that the country will default or have to restructure its debt at some point, he said in a speech in Morocco today. But the International Monetary Fund, eurozone governments and the ECB have taken a different view. “They all consider that a default is not a viable solution.”
His explanation is that private sector economists have simply looked at horrific projections for Greek debt-to-GDP ratios and not studied carefully enough the details of the country’s rescue package. “I have not seen a serious analysis of the 120-page report produced by the IMF which looks at the various aspects of the programme, including the impact of structural measures on growth, the sustainability analysis or other features of the programme”.
Much secrecy surrounds US Treasury secretary Tim Geithner’s trip to Frankfurt this evening, after his London stop-off. The European Central Bank is not saying when or where he will meet Jean-Claude Trichet, ECB president (although it is safe to assume Mr Geithner will not be enjoying the local beers and sausages). Instead, the theatre will be left until Thursday, when Mr Geithner will talk to journalists in Berlin.
But this does not mean it will be a tough meeting. When, earlier this month, the US was urging a vigorous European response to the eurozone debt crisis, Mr Trichet was on message and the ECB president has played a big role in cajoling the German government into supporting effective emergency measures. Mr Trichet, a former French Treasury director, thrives at times of crisis – even if some on the 22-strong governing council have worried about the loss of the ECB’s reputation for conservative, gradual decision making.
After Ben Bernanke was confirmed for a second term as Fed chairman back in January, the political heat surrounding the US central bank died down a little.
But with the Fed re-establishing currency swap lines with the European Central Bank and others over the weekend to help the strains of the sovereign debt crisis, some lawmakers have ratcheted up their criticism again.
Politicians around the world are putting increasing pressure on their central banks. It is changing their behaviour from Japan to the UK. Some of the greater scrutiny is welcome, writes Chris Giles of the Financial Times, but having central banks under constant pressure from politicians is a retrograde step.