China has temporarily increased the reserve ratio required from six large commercial banks banks. For two months, the banks will need to keep 17.5 per cent of depositors’ balances on hand, instead of 17 per cent. With banks hoarding more cash, money supply and credit availability will fall in China. In two months’ time, the reserve ratio is expected to return to 17 per cent.
The surprise move, reported by Reuters from four unnamed sources, may be a response to rising capital flows, rather than a prelude to monetary tightening. It could also be intended as a warning to banks rumoured to have stepped up their lending in September, above government targets. Read more
People with a free-market orientation believe that the economy has a strong tendency towards equilibrium. Over the long term money is “neutral”: a rise in the money supply merely raises the price level. In the short term, however, monetary policy may have a big impact on the economy. A big question, however, is over how to measure the impact of monetary policy in an environment such as the present one, when short-term interest rates are close to zero and the credit system is damaged.
The difficulty arises because of the huge divergence between what is happening to the monetary base (the monetary liabilities of the government, including the central bank) and what is happening to broader measures of money (principally the liabilities of the banking system). The former has exploded. But the growth rate of the latter is extremely low. (Look at the chart that accompanied my column, “Why it is right for central banks to keep printing”)
People worried that governments are “printing money” point to the balance sheets of central banks with horror and insist this is bound to be inflationary. Inside the eurozone, Germans are particularly concerned Read more
Some of the broader measures of Japan’s money supply are now rising at their fastest rate since the current series started in 2003.
David Miles’ first speech as a Monetary Policy Committee member bears a striking resemblance to secret briefings given by Bank of England officials to City economists, writes Chris Giles of the Financial Times. It contains the latest Bank view of why quantitative easing is working and why critics who focus on the lacklustre supply of money are wrong Read more
Krishna Guha of the Financial Times says the key points to the FOMC’s statement that were no change to the extended period language, the completion of the asset purchase programme and no prospect of early rate hikes Read more
Krishna Guha of the Financial Times predicts the FOMC will stick to its current $1,450bn MBS and agency debt buying programme but stretch out the timeline past year end Read more
How the ECB is revamping its “monetary pillar”… but why M1 is not behaving as it should, writes Ralph Atkins of the Financial Times