Imported inflation from emerging countries can no longer be ignored, and central banks on the receiving end might need to tightly constrain domestic inflation to compensate.
This from an important speech by Lorenzo Bini Smaghi today in Bologna. The ECB executive board member points out that food inflation is here to stay and the era of ever-cheaper TVs is over, too:
Unlike the previous decade, the process of reducing the prices of manufactured goods imported from developing countries seems to have ended, particularly in respect of products imported from China. The gradual appreciation of the exchange rates of these countries should further affect the prices of products imported from advanced countries.
So several factors are working to increase imported inflation: Read more
The central bank of Holland might soon be able to take over troubled financial companies, and sell their shares, assets or liabilities without shareholder approval. Bloomberg says the Dutch Finance Minister is preparing a draft bill, which would provide an alternative to the “financial reorganization option” in the emergency procedure, which has “proven ineffective” according to central bank governor Nout Wellink.
From Bloomberg: Read more
Canada’s central bank is the latest to ask whether central banks should expand their remit beyond inflation targeting. “If we look only at interest rates, inflation and output, we may miss bubbles and other elements of systemic risk as they build,” Canada’s deputy central bank governor said on Tuesday.
Tiff Macklem said the Bank needed to develop models that include elements of banking and capital markets. “When the financial system is not working normally,” he said, “we cannot rely on the short-cut from interest rates to output and inflation.” The WSJ recently reported the Fed was also developing a more comprehensive model, the Quantitative Surveillance Mechanism (QSM). Read more
It’s official: financial system stability is part of the Reserve Bank of Australia’s mandate. This doesn’t mean, though, that the RBA will be bailing out banks.
The Reserve Bank’s mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions, and the Bank does not see its balance sheet as being available to support insolvent institutions.
With little fanfare, a statement published on the Bank’s website “records [its] common understanding of the Reserve Bank’s longstanding responsibility for financial system stability… arrangements which served Australia well during the recent international crisis period.” Read more
The bond markets might be overdoing it a bit at the moment, Guy Quaden has acknowledged. Asked whether bondholders were wrong to fear deflation, the ECB governing council member told Belgian business dailies L’Echo and De Tijd:
“You cannot rule out that the bond markets are overdoing it at the moment… But deflation is as unlikely as strong inflation. Central banks will do anything to avoid deflation. They do not tolerate high inflation.“
Asked why the ECB had decided to extend to Q4 its offer of unlimited short-term credit to banks, Mr Quaden said that the money market was often more nervous toward the end of the year, and that certain longer-term refinancing operations were due to expire in the period. He underlined, however, the temporary nature of the help: “The banking industry,” he said, “cannot depend forever on the exceptional credit of the ECB.”
On the subject of fiscal austerity, he said neither he nor Jean-Claude Trichet would argue for brutal and immediate austerity, except in Greece. Read more
Argentina’s central bank on Thursday relaxed key monetary targets after overshooting annual goals for growth in monetary aggregates, heralding a stance that favours stoking growth over reining in inflation.
It is the first time the central bank has failed to meet the monetary programme since Argentina introduced the method in 2003, and points to a central bank increasingly at the service of a spendthrift government, which ejected the former central bank president earlier this year for refusing to hand over reserves to pay debt. Read more
Irish banks might never be the same. New bank regulation legislation was passed yesterday, 69-65. The bill is now off to the upper house, the Seanad.
The Central Bank Reform Bill would merge the central bank with the regulator, giving the regulator’s consumer information roles to the national consumer agency. The new integrated central bank and regulator would be called the Central Bank Commission. Read more
Poland’s government can expect tough scrutiny of its efforts to cut the budget deficit from Marek Belka, the country’s new central bank governor.
In an interview with the FT today, Belka says: “I will remind the government to keep its promises.” For Belka, a deficit hawk and a former Polish prime minister and finance minister, even the 3 per cent budget deficit target of the Polish government and many other European countries is not ambitious enough.
“We should not forget that the growth and stability pact talks about 3 per cent not as a goal but as a maximum,” he says. “The real goal is a balanced public sector budget over the economic cycle. Over the longer term we should be aiming at a surplus.”
For Belka, the model of fiscal probity is Germany, Read more
What role for central bankers in the future? I have just been speaking to Stefan Ingves, governor of Sweden’s Riksbank, who argues that he and his colleagues may have to be more outspoken in the future in warning about risks to financial stability.
New rules for Venezuela’s central bank will allow government use of ‘excess’ reserves, Bank financing of government-led projects, and a permanent seat on the Bank board for the Finance Minister.
Venezuela’s National Assembly approved changes in the rules governing the central bank to increase the government’s influence on the institution and to allow it to finance state projects.
Expect greater collaboration between the central bank and regulator in Switzerland. They have signed a memorandum of understanding saying they will work more closely together in future.
The two bodies worked more closely during the financial crisis, and fell in love found some common ground. Principal changes/ how it will work: Read more
Imagine walking down the high street, cash in hand, to place your savings into your local deposit bank. Now imagine going to a different bank to check on your loan balance. And a third bank to find out about insurance. Each bank only offers a specific service: they are local and they do not compete with each other.
Such a set-up would redefine the concept ‘bank’. Read more
By Tom Braithwaite
Democrats led by Barney Frank on Tuesday slammed a proposal to grant additional consumer protection powers to the Federal Reserve, as the latest idea designed to unlock talks in the Senate appeared destined for the scrap heap. Read more
Argentina’s expected co-operation with the government has been confirmed explicitly by the central bank president and the economy ministry. Bank president Mercedes Marco del Pont told reporters that the Banco Central will co-ordinate its policies with the country’s Economy Ministry, while economy minister Amado Boudou announced the formation of a new economic council, which will group officials from both institutions.
Focus at the central bank will be on company output rather than inflation, said Ms Marco del Pont: “We want to focus on price stability but from a different, non-orthodox view, from the supply side.” Annual inflation is running at 32.1 per cent, according to a report by Graciela Bevacqua, the former head of the consumer price department at the national statistics institute. Read more
“It makes little sense to extend the mandate of monetary policy to include financial stability. Flexible inflation targeting, applied in the right way and using all the information about financial factors that is relevant for the forecast of inflation and resource utilization at any horizon, remains the best-practice monetary policy before, during, and after the financial crisis.”
This from the deputy governor of Sweden’s central bank, Lars Svensson, addressing the Mumbai-based central banker conference last week. He observed that using interest rates and targeting inflation were not sufficient to ensure financial stability. But he did not conclude from this that central banks should widen their targets or toolkits. Read more
Just what should central banks do? Their role is increasingly being debated, often with the banks themselves seeking to expand their remit beyond price stability. But the Bank of Japan seems to be bucking the trend: governor Masaaki Shirakawa has said that deflation cannot be stopped by the Bank of Japan alone.
The comments follow a call from Japan’s finance minister, who said he wants 1 per cent inflation, and called on the Bank of Japan to do more. “I personally would like to see growth of around 1 per cent [in CPI], or perhaps even a little more,” Naoto Kan told a lower house budget committee. “I think the BoJ shares the government’s view that this is a desirable policy goal,” he said, adding that how best to achieve the goal was up to the central bank to decide. Read more
Sweden’s central bank is the latest to ask whether financial stability should be added to its list of goals. The Riksbank has proposed a formal review, to include “whether it should be explicitly stated … that the Riksbank has a responsibility for financial stability”.
A similar question was raised at a central banker conference on Friday by India’s central bank governor Dr Duvvuri Subbarao. The significance of the question is great: price stability was previously thought necessary – and perhaps even sufficient – for financial stability. Now there is a growing belief that there might be a trade-off between the two. Read more
Should central banks persist with inflation-targeting? “The crisis has given fresh impetus to the ‘new environment hypothesis’ that pure inflation targeting is inadvisable and that the mandate of central banks should extend beyond just price stability,” Dr Duvvuri Subbarao said today.
The Indian central bank governor argues that price stability does not ensure financial stability. In fact, he says, there is a trade-off between the two, and “the more successful a central bank is with price stability, the more likely it is to imperil financial stability.” Read more
Well done to the Swedes. While the world frets and dithers about house price bubbles, the Swedish central bank has come up with a plan. In less than a year, a new commission will report back on all you could wish to know about Swedish housing bubbles: what makes them likely; what pops them; what tools are – or should be – available to combat them; and whether Swedes are currently in one.
The report will focus on residential property, although the (better studied) commercial property sector will be included. The commission will be run from within the central bank by heads of the monetary policy and financial stability departments. A related conference will be held in the autumn of this year and the final report is expected no later than January 31, 2011. Read more
It’s a bit like a prenup: the European Central Bank is encouraging the Irish government to grant its central bank a veto over its intended life partner, the financial regulator.
Legislation is currently being drawn up that will effectively re-merge the central bank and the regulator. But the ECB says the central bank governor should be granted an “explicit” right to veto the regulator’s funding and budget decisions, if they infringe his independence.
Draft legislation may be reviewed this month. Finance Minister Brian Lenihan has yet to work out how the board would be arranged, and precisely how incumbent governor, Dr Patrick Honohan, and regulator, Matthew Elderfield, would work together. Read more