The European Central Bank has found itself caught in the crossfire of a battle raging between the world’s leading macroeconomists.
The Bank for International Settlements’ call last month for the world’s central bankers to hurry up and raise interest rates has reignited the debate over how to explain – and tackle – the financial and economic turmoil that has persisted over the past six years.
On Thursday, the ECB announced exactly how its targeted longer-term refinancing operation, or the TLTRO, will work. Earlier forward guidance that rates were likely to remain on hold until the end of 2016 was watered down by Mario Draghi, ECB president, possibly in the hope that this would raise the take-up of the TLTRO funds.
Mr Draghi also revealed that banks would be able to borrow up to €1trn from the central bank, should they smash targets, or benchmarks, set by the ECB. Lenders are already able to borrow an initial amount of $400bn in two auctions, scheduled for September and December. The €400bn figure corresponds to 7 per cent of their lending books to businesses and households, excluding mortgage loans.
Despite inflation remaining extremely low across the eurozone and signs that the recovery is weaking in the single currency bloc, the European Central Bank kept its interest rates unchanged at its monthly meeting. Analysts are now looking for Mario Draghi's assessment of the extraordinary measures introduced in June and details of any further measures..
“Inflation expectations appear to be rising on the whole.”
Check out the last 11 policy statements from the Bank of Japan: you’ll find the same line, an upgrade from a milder assertion about “some indicators” last July.
But according to the second round of the BoJ’s survey of companies’ expectations for price rises – the grand-sounding “inflation outlook of enterprises”, published on Wednesday – expectations are not rising. If anything, they’re falling.
There are many uses of the phrase “new normal” in economics these days. Usually, it is used to signify lower growth or a different type of growth than in the pre-crisis period. Mark Carney went onto the radio this morning to talk about the “new normal” in monetary policy.
Interest rates would be materially lower in future than the 5 per cent rate widely seen as normal before the crisis. The Bank of England governor’s words have been widely reported as a big new statement of policy.
Is this a new policy?
No. Carney first talked about future interest rates being “well below historical norms” in his January speech at the World Economic Forum in Davos, which confirmed the BoE had ditched its original forward guidance linking interest rates solely to unemployment. The important passage was reported clearly in the FT at the time and is copied below.
In an open letter, the students said they wanted their courses to delve into a wider range of economics theories and methodologies than the standard neo-classical model that dominates undergraduate teaching, and to learn more about the implications of policy-making.
Speaking to those students was a heartening experience – all of them struck me as extremely thoughtful and articulate. Their desire for reform seemed driven by a curiosity about the world and what economics could do to improve it.
I suspect they’ll be encouraged by comments made in a speech today by the similarly thoughtful and articulate Benoît Cœuré, who sits on the European Central Bank’s executive board.
Mark Carney, the governor of the Bank of England, presented the Financial Policy Committee's report on how it intends to keep the UK economy on an even keel. Most of the press conference was on what it intends to do about the booming housing market and which of its macro prudential tools it intends to use to cool it.
As Iraq appears to be descending into all-out sectarian war, the implications for the oil-dependent economy are huge. Iraq is Opec’s second-largest crude exporter, so markets are already feeling a little jittery, sending crude oil to its highest since September on Friday. Here are five charts showing how Iraq’s economy has developed since the 2003 US-led invasion of Iraq and where its vulnerabilities lie.
Those hoping for a rapid pickup in UK productivity shouldn’t hold their breath.
That’s the message from a new Bank of England paper which suggests the UK’s dismal figures are more likely to be the result of “persistent effects” from the financial crisis, rather than temporary, cyclical factors which will fade away as the economy recovers.
Just under half (around 6 to 9 per cent) of the UK’s productivity gap can be explained by the hypothesis that the crisis resulted in underlying damage to the UK’s productive capacity: