Money Supply, Inflation & Currencies

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BoE minutes

Adam Posen is stepping up to become president of the Peterson Institute in Washington instead of seeking a second term as an external member of the Bank of Engalnd’s Monetary Policy Committee.

One of the most vocal and the most transparent members of the MPC since its inception, he is quite an act to follow. He is seen as an arch-dove, but that is more due to circumstances than inclination in my view.

RTRS: ECB STOPS MONETARY POLICY OPERATIONS TO SOME GREEK BANKS AS RECAPITALISATION NOT IN PLACE -CENBANK SOURCE

The Reuters headline above has sparked panic this afternoon. Is the panic warranted?

Sir Mervyn King. Image by Getty.

Hello and welcome to today’s live blog on the Bank of England’s Inflation Report press conference. The governor is due to begin speaking at 10.30am.

This post should update automatically every few minutes, although it might take longer on mobile devices. All times are UK time.

11.56 This live blog is now closed.

11.49 Here are the key takeaways:

• Growth is lower, and inflation higher, in the short term, but “the big picture” on the UK economy remains the same. The governor acknowledged, however, that the UK’s productivity problems may be more persistent than previously thought, which is significant given that this would lessen the amount of growth the economy can tolerate without higher inflation.
• More QE is a possibility given that the central forecasts show inflation edging below 2 per cent two years from now. It would appear that further asset purchases (and more liquidity) are pretty much a certainty if the eurozone crisis worsens.
• The Bank is not too concerned about the recent appreciation of the pound. Not yet anyway.
• The governor was unwilling to opine on fiscal policy. Which makes a change.

Back in early 2009, around the time the Bank of England was first firing up the printing presses, one of the oft-stated aims of quantitative easing was for it to produce a sharp increase in broad money, which acts as a guide to the amount of bank lending in the economy.

Broad money growth of 6-8 per cent would have suited the Bank — and the UK economy — nicely. If only.

As the chart above shows, quantitative easing has failed to produce the sort of pick-up that the MPC had hoped for.

There are many reasons for this. One of which, according to former MPC member Charles Goodhart, is the Bank’s practice of paying interest on reserves held in their coffers.

Mr Goodhart today accused the authorities as having “connived” would-be lenders into keeping their cash on deposit at the central bank by paying interest of 0.5 per cent on banks’ reserves.

Mr Goodhart argued that this is discouraging banks from lending. After all, why bother to risk making a loss on a bad loan if you can earn interest by parking your cash at the central bank?

The ballooning of central banks’ balance sheets in recent years has sparked fears of rampant inflation.

These fears stem from traditional monetary theory, which holds that an increase in central banks’ reserves will eventually lead to a rise in bank lending (and broad money), which in the end will lead to inflation.

This theory of the so-called “money multiplier” assumes monetary policy can influence broad money and inflation through central banks’ control of short-term interest rates and the monetary base of coins, paper money and central bank reserves.

But, as central banks’ largely failed attempts to control inflation through broad money in the 1970s and 1980s suggest, the money multiplier is too slippery to form the basis for policy rules.

Yet, despite its propensity to fluctuate, the money multiplier still matters. As IMF economist Manmohan Singh and his former colleague at the Fund, Peter Stella, say in a VoxEU note published last week, “its impact on how people think about monetary policy cannot be overstated”.

Luc Coene, Belgium’s central bank governor, was outspoken on Greece in his interview with the Financial Times. He also revealed a little more on the use of emergency liquidity assistance across the eurozone.

ELA, provided by national central banks rather than the ECB, is meant to be used only in exceptional circumstances — and requires special approval by the ECB’s governing council. We know its use has been heavy in Greece and Ireland. But as I have noted before, there is still a considerably amount of unexplained ELA about.

Our week ahead email helps you to track the most important events in central banking. To see all of our emails and alerts visit www.ft.com/nbe

BoE Inflation Report

Seldom are statements of the obvious as significant as the Bundesbank’s comments yesterday that Germany might well have to tolerate higher inflation than the rest of the eurozone in the coming years.

Jens Weidmann often cites the EC Treaty’s prohibition of monetary financing as an argument against stepping up the European Central Bank’s purchases of government debt.  It would be hypocritical for the Bundesbank president to argue against what is also implicit in the legislation that governs the ECB: that the governing council sets monetary policy for the eurozone as a whole, not individual member states.

Above-target inflation is the natural result of Germany’s position as the bloc’s strongest economy at a time when the divergences between member states’ fortunes are becoming more and more pronounced.

Still, from a central bank more aware than most of the social and economic carnage that accompanies the debasement of currencies, the Bundesbank’s acceptance that higher inflation is a price that it must pay as part of its commitment to monetary union is to be welcomed.