Last week anti-capitalist protesters outside the European Central Bank were dominating (at least the local) news in Frankfurt, this week it was the turn of the policymakers inside the building. The ECB is keeping its rates on hold at 0.5 per cent and Mario Draghi, president, has been quizzed on where the eurozone is headed.
The ECB staff’s quarterly economic forecasts have been tweaked, so this year’s contraction is greater than previously forecast at 0.6 per cent and next year’s growth forecast creeps up to 1.1 per cent (but then a year is a long, long time in economic forecasting.)
What else have we learnt? Read more
David Miles, the only one of the Monetary Policy Committee’s nine members to call for more money printing at the past two votes, has given an interesting speech today.
The speech presents the case for doing more based in part on the view that, if the MPC continues to do nothing, or — worse still — tightens policy, then this could destroy the UK economy’s productive capacity and, hence, its ability to grow at the pace seen before the financial crisis. Read more
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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? Read more
Vincent Reinhart of Morgan Stanley has a fascinating note out today which reverse engineers US forecasts from the IMF’s World Economic Outlook to answer questions about headwinds to demand, the effectiveness of unconventional Fed policy and the potential growth rate.
His chart on the effectiveness of Fed policy is particularly neat. Essentially, he plots annual long-term real interest rates against short-term real interest rates for the years from 1980 to 2007, draws a regression line, and then adds on dots for 2008 to 2011. Read more
As most suspected, the Bank of Japan did little today to step up its fight against deflation.
Bar some tinkering with its special lending facilities, the BoJ kept policy on hold with the size of its asset purchase programme remaining at Y65tn.
However, there are signs that the central bank could do some proper easing in the coming months.
The pound, along with Britain’s fiscal retrenchment, are often cited as explanations for why yields on UK government debt now hover around record lows.
Some suggest another factor is at play: financial repression.
This sinister-sounding phrase describes the situation where government policy attempts to artificially lower interest rates with the specific aim of reducing their debt burden. Given that QE has done much to lower yields on UK government debt, some have tagged the policy with the financial repression label.
Regardless of whether or not this is the case (more on which later), Fathom, a consulting group made up of former Bank economists, today expressed doubts about whether such a policy – and for that matter gilt purchases – will do much to aid the UK recovery. Read more
I agree with my colleagues at FT Alphaville that “counterfactuals are inherently tricky” but I don’t think they quite get to the heart of the case that you could mount against the new estimates of the effects of Fed stimulus programmes that Janet Yellen cited in her speech on Saturday.
Those estimates are that inflation is one percentage point higher than it would be had the Fed made no asset purchases and employment will be 3m higher than it would have been in 2012.
It’s important to note that David Reifschneider, senior associate director of the FRB’s department of research and statistics, and John Williams, once of that parish and now research director of the San Francisco Fed, are co-authors of the paper. That means this is as close to an official ‘Fed view’ as we are ever likely to get on the effectiveness of QE. Read more
Japan’s central bank has lowered its key rate from 0.1 per cent to a range of 0-0.1 per cent and will consider setting up an asset-purchase programme worth about $60bn to enhance monetary easing and achieve price stability.
The Asset Purchase Program is, at this point, a consideration rather than a promise: the Chairman has asked staff to examine the specifics and report back. For a consideration, it is quite well fleshed out, however:
The Bank will examine the new purchase of assets so that, principally, the outstanding balance of the total assets purchased will reach about 5 trillion yen after around one year from the start of the purchase, with about 3.5 trillion yen for long-term government bonds and treasury discount bills and about 1 trillion yen for CP, ABCP, and corporate bonds
The general reaction to Adam Posen’s speech on Tuesday has been to predict a 1-7-1 vote at next week’s Monetary Policy Committee with Mr Posen voting for a resumption in quantitative easing and Andrew Sentance voting for higher interest rates. I have no idea how the MPC will vote. But I do know that Mr Posen is not necessarily alone on the Committee in his central view that if demand is too weak, the risk is not just a temporary double dip but a persistent loss of output which can blight lives and an entire economy.
In fact, Mervyn King, the Bank of England governor made the same point at the February inflation report.
“I think if anything we’re more uncertain about how much spare capacity there is. It’s an extraordinarily difficult judgement to make, and I think the Committee – we had a long discussion of this – we were more inclined to think that this is a reduction in effective supply in the short run that could be reversed. So I don’t think we are confident that this reduction in supply capacity will necessarily persist. And indeed we are in a position where, if growth in demand were to be rapid, I suspect that much of the capacity which has been, quote, “lost”, would come back and be able to be used again, whether in the labour market or on capital stock.
Current policy rate: 0 to 0.25%
Consensus expectation: no change
Taylor rule policy: -0.5%
Headline consumer price index: +1.1% (August)
Inflation objective: around 2%
Notable special measures in operation
• Circa $2,000bn in completed asset purchases, including $1,100bn in mortgage-backed securities and $792bn in Treasuries.
• Size of the programme is currently stable. Capital payments from MBS are reinvested in Treasuries. Read more
Overdraft rates are at a record premium to the Bank of England base rate: the spread is 18.6 percentage points, the highest since records began in 1995. Central-bank-quoted overdraft rates rose to a record 19.1 per cent in August. The base rate, of course, remained constant at 0.5 per cent.
The fact that consumer-facing interest rates are rising in spite of a static and extremely low base rate will be of concern to policymakers. Unsecured debt levels, which rose slightly in July, remain extremely high and write-downs are increasing. This will add to the growing debate on the need for further extraordinary measures, such as credit easing. Read more
Adam Posen, one of the more outspoken external members of the Monetary Policy Committee, has dangled the intriguing possibility of the Bank shifting into “heavy-duty credit easing” if necessary.
The Bank had promised to release the remarks he made in the US last night and I understand the reason they have not is cock-up not conspiracy. That means we have to rely on wire reports of his words. Without much context, Bloomberg is reporting Mr Posen saying:
“Because we have only done quantitative easing up till now, our plan B or our next page in my opinion, and I’ve said this, is to shift into heavy-duty credit easing.”
For Bank of England watchers, this should come as little surprise. While the bank has usually emphasised the amount of money it has created (a liability on its balance sheet), Mr Posen has regularly highlighted the effect of QE on the assets markets. It is also not much of a departure. Mr Posen has repeatedly said similar things. In a speech last October he bemoaned the fact that:
“Other central banks were able to buy a wide range of assets from the private sector, under the heading of ‘credit easing,’ as described in Bernanke (2009), to good effect.”
An interesting new NBER working paper by Vasco Curdia of the New York Fed and Michael Woodford of Columbia University will likely feature on Ben Bernanke’s reading list as he ponders both the options for further Fed easing (should it be necessary) and the Fed’s eventual exit strategy from easy policy. Mr Woodford is one of the world’s top monetary economists and a former colleague of Mr Bernanke at Princeton.
Here is part of the abstract:
We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times.
To attempt to paraphrase these conclusions:
- Quantitative easing – e.g. buying Treasuries to increase bank reserves with no commitment to keep them high in the future – doesn’t work. Read more
… or coins from a truck. Two million euro coins have spilled on to a motorway in Southern Italy, thanks to an overturned lorry. Accident? Possibly. Or could it be the ECB reintroducing quantitative easing on the sly…?
So, just like the US Federal Reserve and the Bank of England, the European Central Bank has bitten the bullet and launched an outright asset purchase scheme (it is called the Securities Market Programme). But the ECB is rejecting the idea that its buying up of government and private debt is ”quantitative easing”.
Why? First, on technical grounds, because the liquidity injected will be re-absorbed through other ECB operations. Second, because the programme is not intended to have the effects of classic “quantitative easing” — that is, to stimulate economic growth and inflation, or both. The ECB says the SMP’s objective “is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism”. It will be “intervening” in government bond markets, rather than buying to hold. Read more
Apparently, sterling has fallen on the back of zero QE news from Mervyn King at parliament’s Treasury Committee this morning.
The policy of quantitative easing – whereby the central bank increases its credit balance and buys assets – finished in early February. But its resumption was never ruled out. Time and again, Mr King has said the policy would be reinstated if needed. Read more
After Mervyn King said it was “far too soon” to rule out further quantitative easing, the chief economist of the Institute of Directors said he believes quantitative easing will be extended and that a ‘W’ or even ‘VW’ recovery is likely. Responding to the latest inflation report, Graeme Leach said:
“We agree with the governor of the Bank of England that it is far too soon to conclude that a further extension in quantitative easing won’t be required. We think that it will, and that the risk of a double-dip or even a triple-tumble recession and recovery remains high.”
Credit and finance constraints are a growing concern among companies, judging by the below BoE survey data. Read more
Click on the image to see (and hear) an audio slideshow on the effects of the government’s programme
When the FT’s economics team in London was musing about the best metaphor for monetary policy and quantitative easing today, we couldn’t get Toyota out of our heads.
Bank of England officials have consistently said that even if QE is suspended, the Bank’s monetary policy would still be the equivalent of a driver with her foot slammed on the accelerator pedal. The trouble is the economy does not seem to be responding rapidly. Read more
Today, Bank of England figures show that, by its own yardstick, quantitative easing is falling short. In the Bank’s bluffers’ guide to QE, the goal of the policy, which creates money to buy assets, was described as “the degree to which the cash injection boosts the growth of money and spending by households and businesses.”
But the measure of the money supply that the MPC has pointed to in the past fell at 5.3 per cent annualised in the three months to October. Read more