Relevant and even prescient commentary on news, politics and the economy.

Worthwhile British Initiative

Today’s FT (front page, below the fold*) declares that Mark Carney “has been informally approached as a candidate” to head the Bank of England “in June next year.” He is currently governor of the Bank of Canada.

It would be a good choice. As the speeches at the link above note, Carney is no fool, which often seems rather more than one can say for many members of David Cameron’s Administration.**

Of course, the BoE already has one foreigner who should be considered as Merwyn King’s successor—but Adam Posen is American. As the FT anonymously notes:

Naming a foreigner as Governor…would break with tradition, although Mr. Carney has a British wife, studied at Oxford university [sic] and worked at [The Giant Vampire Squid] in London early in his career.

“As a Canadian national, he is a subject of the Queen,” said one supporter. “That is important.”

I’m now waiting for Felix Salmon to start a “Posen for the BoE Governorship” campaign which, sadly, is likely to be about as successful as his “Ngozi Okonjo-Iweala for the World Bank Presidency” campaign.

*no link–being a print subscriber, online access is limited to PDFs, and the website is quite unfriendly to non-online subscribers

**Cameron’s choices remind one that however pathetic Tim Geithner is, it is possible to do worse. I mean, really, George Effing Osborne? A man who supposedly prepared for five years in the “Shadow” role and came up with this shite?

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ECB policy is tightening – has been for some time

Update: Nouriel Roubini front pages this post on Euromonitor here.

The ECB dove in and hiked its policy rate by 25 basis points to 1.25%. I had the pleasure of listening to Wolfgang Munchau on Thursday, and he reiterated what I reluctantly understood: the ECB’s strict inflation target is ridiculously simple for such a complex region; but more importantly, the Governing Council is just itching to tighten.

Eurointelligence blog highlights the various interpretations of the ECB’s shift in policy: Thomas Mayer at Deutsche Bank suggests that the ECB’s normalization is appropriate, while David Beckworth and others (links at Beckworth’s site) are more sympathetic to the impact on the Periphery. They highlight that relative price fluctuations could facilitate the much-needed redistribution of capital flows (i.e., the current account); and furthermore, that ECB policy is even too tight for the core (a google translation of Kantoos Economics). Yours truly has written extensively about this – among others, here’s one, another, and another. Who’s right? Ultimately time will tell.

But I do suspect that we haven’t seen the end of this crisis. The ECB is squeezing out liquidity when more liquidity is needed. Furthermore, the core remains subject to export shocks via external demand; and there’s building evidence that global growth will slow (see this excellent post on global PMIs by Edward Hugh).

It’s ironic, too. While the ECB is currently being heralded or chastised for raising rates, monetary and financial conditions in Europe have been tight for some time, both on a relative and stand-alone basis!
(read more after the jump!)

First, the ECB’s bond purchase programs, the Securities Market Programme and the Covered Bond Purchase program, amount to just 1.4% of 2010 Eurozone GDP. In stark contrast, the size of the Fed’s program broke 16% (and is rising) and the Bank of England’s purchase program remains firm at around 13% of GDP.


The asset purchase programs are emergence liquidity programs and are not normal monetary policy tools. But while the Fed and the BoE do not sterilize their flows, the ECB does. And my interpretation of ECB rhetoric and policy as of late is that they want out of the secondary-bond purchase business. For example, they’ve slowed their SMP purchases markedly in 2011 (see the ad-hoc announcements here).

Second, Eurozone financial conditions have been tightening since August 2010, while those in the US and England loosened up. Goldman Sachs constructs a financial conditions index, which is comprised of real interest rates (long and short), real exchange rates, and equity market capitalization. I love this index (subscription required), as it represents a broad measure of monetary policy pass-through.

Even though the ECB just started its rate-hiking cycle, they’ve been effectively tightening for some time.

I would say that Eurozone (as a whole) growth prospects are seriously challenged at this time, especially by comparing monetary policy to that in England and the US. We’ll see if the ECB’s able to push its target rate back to 2.5-3% through 2012 – I suspect that may be just a pipe dream, as tight liquidity and a slowing global economy drag economic growth.

The ECB’s actions imply to me that they still do not understand the following: Europe faces a banking crisis not a fiscal crisis!

Rebecca Wilder

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Trichet and King: it’s energy, VAT, and food!

The global inflation picture is heating up. On Google, a search of ‘inflation’ spanning the month of February 2011 gets 311,000,000. For one year ago, the same search parameters yielded 1,850,000 hits. Inflation’s on the monetary policy makers’ minds. But why? In the developed world, it’s a food and energy story!

Seriously, look at German and US inflation since the 1960’s. Furthermore, check out core price pressures:

US 0.95% in January 2011…

…Germany 0.77% in January 2011

Dear Trichet, King, and part of the US FOMC: it’s energy and food….energy and food….energy and food…and VAT! David Beckworth writes a great piece about the merits of inflatin targeting.


Wheat, corn, soybean, and sugar prices have surged, whose price gains are now sitting very much on the back burner to oil prices. But look, wheat, soybean, and sugar price pressures are coming down. Therefore, food prices are showing signs of peaking. This should be taken into account when the ECB and BoE meet this week and next, especially if gas and fuel prices start to hinder economic growth prospects.

Some evidence:

* In the UK, price pressures are ever-present – the diffusion is much higher than in other European economies – but it’s very likely that prices peak. The economy’s been hit by a VAT hike twice in the last two years, and the depreciation of the nominal exchange rate continues to pass through to prices. Fiscal austerity will drag aggregate demand and prices – just hold on.
* In Germany, the domestic measure of consumer prices is expected to mark a 2.05% annual pace in February (1.96% in January), but the core level is growing a just a 0.77% annual rate (in January, which the latest available data point). For now, and probably throughout the rest of the year until union contracts reset on an aggregate level, it’s really all food and energy there.
* And in the US, core inflation is rising, but that’s primarily based on the re-emergence of the micro-pressures that are owner’s equivalent rent AND food and energy. Core inflation is now rising again (see recent Calculated Risk article), however, in my view, there’s not enough leading evidence to suggest that inflation expectations have in any way become unmoored. Unit labor costs, for example, remain submerged below a sea of economic profits (more on that tomorrow – but you can see a previous post on the subject here).

Watch monetary policy closely. The oil inflation may simply be the straw that breaks the camel’s back for some, since food prices have been headed north for some time. Key central banks shouldn’t hike – UK and ECB are notable examples – but they may.

I, consequently, still ‘hope’ that the recent hawkish rhetoric coming out of the ECB is simply a reflection of the hole that is the appointee to run the ECB after Trichet leaves in October. More bluntly put: they’ll say anything to get the job. (See Eurointelligence’s case for Mario Draghi.)

Rebecca Wilder

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Comparing the Fed, the ECB, and the BoE before policies diverge

The coming week is G4 central bank week. The Federal Reserve Bank (Fed) announces its policy decision on November 3; the European Central Bank (ECB) and the Bank of England (BoE) will make policy announcements on November 4; and the Bank of Japan pushed forward its November 15-16 meeting to be held now on November 4-5.

At this juncture, G4 ex Japan monetary policy is likely to diverge sharply: the Fed is expected to announce an extension of its asset purchase program, while the ECB and BoE are not expected to increase theirs. In fact, the policy wedge between the three central banks is already wide. Despite the ECB’s enacting its covered bond purchase program, the amount is small, roughly 1.4% of Eurozone GDP (see chart below), and the central bank is sterilizing the flow – sterilizing the operation means that the ECB performs equal and opposite monetary operations to reduce bank reserves by the amount of the bond purchase program.

The chart above illustrates the size of the bond purchase programs (assets sitting on the central bank balance sheet) as a share of 2010 GDP (IMF forecast). Ostensibly, and from a bank-lending point of view, Eurozone financial conditions appear to be “healthier” than those in the UK or US.

The chart above illustrates total bank lending in the Eurozone, UK, and the US; but this may change as austerity measures in some European countries infect the stronger economies via a tightly integrated trade relationship.

Policy is already much tighter in the ECB compared to its US and UK counterparts. This discrepancy is expected to diverge, as the Fed moves into QE2 mode this week.

Rebecca Wilder

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