Did you know there’s something called the Eijffinger-Geraats central bank transparency index?
There is one. It’s in the Warsh Review. On Thursday, the Bank of England accepted the review’s recommendations in favour of more open central banking. So, it decided to release minutes of meetings alongside policy decisions as they come out, to release transcripts of those meetings eight years later — and to hold fewer meetings a year from 2016 (8 versus 12). Read more
Take another 100bp puny market!
Oh… Read more
Nonsense is a rude word. But there isn’t a milder way of describing the Bank of England’s estimates of UK labour market slack.
For three inflation reports in a row, the BoE has published a chart (below) showing its model of labour market slack with accompanying text highlighting its great importance in the monetary policy decision. “One of the key determinants of inflationary pressures in the economy is spare capacity or slack – that is the balance between demand and supply,” the November inflation report states. Read more
Governments need to reform their labour markets, reduce taxes that weigh on business, free companies from red tape and continue to repair their public finances. Merely talking about such reforms is not enough…QE would merely enable governments to borrow even more cheaply, giving recalcitrant politicians an easy way out.
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… are doomed to repeat it.
Or you could say, “have we learned nothing from the crisis?!”
That at least is the assessment of HSBC’s Stephen King regarding the current nuttiness of the market. He joins the growing ranks of concerned types who worry that it’s only a matter of time before the house of cards we are building collapses, especially given that we’re now at beyond 2008 levels on almost all fronts (apart from, you know, things like jobs).
Which brings King in his latest note to question the soundness of inflation targeting in and of itself. He claims instead that it’s the stability of inflation targeting which may be causing the instability:
In a similar fashion, the pursuit of price stability more recently appears to have given way to financial instability. Propagandists for the Great Moderation were inadvertently sowing the seeds for its eventual downfall.
Look, no minus signs.
Which means an experiment has ended in Denmark, for now. The CD rate rose 0.15 per cent on Thursday.
From the central bank… Read more
George Magnus, former chief economist at UBS, writing in a private capacity on his blog, says central banks can’t do much more to support the economy and it’s time to stop obsessing about their every policy manoeuvre because it’s counterproductive.
In his opinion, the economy’s future health lies in structural adjustments which can only be implemented and organised by government. The burden of responsibility, meanwhile, has only been placed on central banks because of bad politics, which have prevented necessary fiscal and structural action being taken. The sooner we realise this, the sooner we can make progress. In the meantime, he says, it’s best for central banks to remain reassuringly vague so as to put the onus on progressive government action and step out of government’s way. Read more
In the last few weeks the “Is QE deflationary?” debate has fused with the “What’s the natural rate of interest anyway?” and the “Is it really all about the risk premium?” conversation.
Many important insights have been offered by a whole host of people. A notable development, however, came in the shape of Tyler Cowen’s post on negative T-bill returns in which he considered the phenomenon of T-bill “entrance fees” during a zero-rate climate and how this can take returns for many investors into negative nominal territory, while providing advantages to those with access to “special technologies’” even when official rates are very mildly positive. Read more
Which part of future Fed tightening “is now completely up in the air”?
The answer (according to Societe Generale) is in the useful table below… click to enlarge: Read more
The ECB, BOE and Fed all meet this week, though expectations vary about what will emerge from each:
– The Fed: The FOMC seems unlikely to announce anything major regarding its possible tapering strategy until September, though as always its post-meeting statement will be scrutinised for changes regarding the committee’s outlook for the economy. Some private sector strategists think the Fed could introduce a tapering schedule as soon as this week’s meeting without actually beginning to taper. But given the obviously unanticipated and unwelcome market reaction to Bernanke’s comments about tapering in the latest meeting, we doubt it. If anything, the minutes to this meeting will probably be more interesting than the statement itself. Then again, the FOMC has surprised us before, so we could turn out to be wrong. Read more
Ostensibly, this is Governor Mervyn King and Governor Zhou Xiaochuan celebrating the RMB 200bn currency swap announced between their two central banks this weekend.
The voices arguing that digital e-money should be added to the central bank/government toolkit are not only rising in number, they’re getting louder as well.
Among the first to argue the point, of course, was Willem Buiter back in 2009, before he took up the position of chief economist at Citi. But there’s also been a strong patter of support from advocates such as Mobino’s Jean-Francois Groff and Slate’s Matt Yglesias (to name a few). Read more
Back in July, 2012 the Danish central bank, Nationalbanken, lowered the deposit rate to -0.2 per cent. Back then we wrote that it was going to be costly for the banks, and that money market rates were going deeper into negative territory. With Draghi’s comments last week, how did that whole negative deposit rate action turn out for Denmark?
Nordea had a note out last week on that very subject. Now, before we move, let’s remember that Danish monetary policy is tailored around the FX peg. The deposit rate was there to assure outflow because of mounting pressure on the EUR/DKK pair. Read more
Liquidity and credit are not always best friends — Funding for Lending in the UK and the LTROs spring to mind. However, blaming liquidity alone for the lack of credit out there is obviously [expletives removed].
For one, banks can’t lend if they can’t find borrowers — although it might be unfair to blame borrowers who are seeing unappealing terms — and for two, central banks have poured a fair amount of liquidity out there with more available on tap.
There’s been some thought-provoking revisionism floating around about Cyprus lately.
The gist seems to be this: Why not push bank bail-in policy in the eurozone much harder, right into uninsured depositors if need be, if Cyprus has not (yet?) budged most gauges of bank funding from their current calm. And more importantly, when there is a vicious circle to resolve. Read more
Here follows a thoughtful commentary on the changes going on in gold market from BNY Mellon’s Neil Mellor, including the point that central bank purchases are in many ways helping to stabilise what might otherwise be a much more substantial slump.
Our emphasis throughout… Read more
Anyone who bought gold in 2008 is probably more than tempted to cash in their profits right about now.
Reflecting the scale of the change in sentiment — and confirming that there was indeed something of a choke level for gold at around the $1,908 mark — is the following chart from Macro Risk Advisors which neatly sums up the degree to which investors have been liquidating gold ETF positions. Read more
Okay. Negative interest rates have now gone fully mainstream in the UK thanks to this week’s testimony by Bank of England deputy governor Paul Tucker.
Even the Daily Mail is writing about it.
But a number of major misunderstandings are popping up as a result. So let us try to clear some of them up. Read more
This alarming gilt fact is brought to you by Bank of America Merril Lynch and it underlines one of the main fears many people raised about the QE surplus “raid” staged by the Her Majesty’s Treasury on the Bank of England last year.
From BofAML’s John Wraith (our emphasis):
As a result of the dramatic spike higher in yields that occurred over the first week or so of the New Year, the mark-to-market value of the BoE’s portfolio of Gilts acquired through QE over the past four years dropped by more than £7bn. This exceeds the largest decline in the portfolio’s value in any full month since QE began by more than £1.5bn, emphasizing both the extent of the rise in yields, and also the very large size the BoE’s holdings have reached (£326.7bn in nominal terms, with a basis point value of about £360m).
Remember the whipsawing days of 2008? The days when commodity prices couldn’t get crazier?
Nowadays, the idea of not having an independent central bank is seen as being a bit backward. One could even say that central bank independence is widely accepted as the optimum set-up for any country’s monetary system, a reflection of its developmental status.
“Independent central bank? Check.”
“This country must be civilised. ”
Yet, can we really be so absolute about the matter? Read more
Central bank puts have done a great job of removing tail risks.
Such is the conclusion of the team at Bank of America Merrill Lynch upon analysing the remarkable drop in trade conviction of late.
In FX, the move in volatility has been notable… Read more
A lot of ink has been spilled by various FX strategists over what the Reserve Bank of Australia is or isn’t doing with its FX transactions and whether this is or is not tantamount to printing money. The RBA isn’t ‘printing money’ but it is doing something… or rather, not doing something, as a way of signalling that it doesn’t like the Australian dollar being so strong. They’ve been given the opportunity to do this by a foreign central bank, but that’s neither here nor there. Read on for all the messy details… Read more
There’s something we’ve never quite got about this debate on “cancelling” all the government bonds acquired by central banks under quantitative easing, either for helicopter money or for debt relief.
Now the Governor of the Bank of England has weighed in: Read more
This trip down the central bank money supply lane will seem almost nostalgic to some people, so we thought it’d be worth a revisit.
It is excess rather than gross money supply that generates upward pressure on asset prices or prices of goods and services in the economy. Read more
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively…
This won’t be the main event of Draghi day. We’re 45 minutes away from details of the ECB’s bond-buying plan at pixel time. Read more
By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case).
Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops. Read more
The reversal of currency flows in and out of China is continuing. The PBoC published data on Tuesday showing that the country’s banks were net sellers of yuan in July, selling Rmb3.8bn or $587m. As the WSJ’s Tom Orlik explains, this means that the banks’ foreign exchange purchases are lower than the monthly inflows from trade and investment, and it suggests some “hot money” is leaving — possibly in part because exporters and importers no longer want to settle in yuan.
Of course this is only a change in the direction of flows — and a small one when viewed in context. The chart below from Chinascope Financial demonstrates how, while the trend has been negative since September 2010 and particularly since September 2011, the banks’ overall forex position hasn’t changed that much in the past year: Read more
A grainy picture of some central bankers. A warning in German that “it is immensely amateurish to renounce this mechanism.”
The biggest change is in the very first paragraph. In June the Fed had written that the economy “has been expanding moderately”. Now economic activity has “decelerated somewhat over the first half of this year.” Read more