Later today the ECB ( European Central Bank) will announce it latest policy decisions on interest-rates and extraordinary monetary policy such as QE ( Quantitative Easing) asset purchases. I am not expecting any grand announcement of change as this came last time if you recall.
As regards non-standard monetary policy measures, we will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017. From April 2017, our net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.
Ever since then they have been keen to tell us this is not a taper and the formal minutes showed quite a bit of debate on the matter.
either to continue purchases at the current monthly pace of €80 billion for an additional six months, or to extend the programme by nine months to the end of December 2017 at a monthly pace of €60 billion. In both cases, purchases would be made alongside the forthcoming reinvestments starting in March 2017.
I think they made the right choice to reduce the size of the monthly purchases but do not see why they guaranteed it to the end of the year apart from them being afraid of markets getting withdrawal symptoms.
What are these policies supposed to do?
Back in 2015 the ECB issued a working paper on how it thought QE worked.
First, via the direct pass-through channel, the non-standard measures are expected to ease borrowing conditions in the private non-financial sector by easing banks’ refinancing conditions, thereby encouraging borrowing and expenditure for investment and consumption.
Actually this is a generic explanation of the claimed benefits of extraordinary policies and applies in some ways more directly to the TLTROs (Targeted longer-term refinancing operations) . As ever it is the “precious” which is considered to be the main beneficiary.
this encourages banks to increase their supply of loans that can be securitised, which tends to lower bank lending rates.
Of course this can have plenty of effects and let us remind ourselves that house prices in Portugal are rising at an annual rate of 7.6% which is the “highest price increase ever observed” as I analysed on Monday. Let us then move on by noting that officially this will be recorded as a “wealth effect” and will benefit the mortgage books of the troubled Portuguese banking sector whereas for first-time buyers and those looking to move up the property ladder it is inflation. Although the Euro area measure of inflation ignores this entirely.
In December 2016, the annual rate of change was 0.9% (0.5% in the previous month)
We note that even so it is rising and move on.
Next we have this effect.
Second, via the portfolio rebalancing channel, yields on a broad range of assets are lowered. Asset purchases by the central bank result in an increase in the liquidity holdings of the sellers of these assets. If the liquidity received is not considered a perfect substitute for the assets sold, the asset swap can lead to a rebalancing of portfolios towards other assets.
This is how the 0.1% and indeed the 0.01% benefit as they of course by definition have plenty of assets overall. It is also part of the road where 8 people have as much wealth as the bottom half of the world’s population.
There is supposed to be a third announcement effect but it is hard not to have a wry smile at the claims made for Forward Guidance when you read this.
It has been found to be muted in the United Kingdom, moderate in the euro area and highly uncertain in the United States,
Here we have the definition of it.
The primary objective of the ECB’s monetary policy is to maintain price stability…….The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.
There is clear abuse of language here as the Euro area his in fact had price stability with inflation ~0% in recent times but the ECB does not want this. Back in the day a past ECB President ( Trichet) gave us a rather precise definition of 1.97% in his valedictory speech.
Where are we now?
Yesterday there was something of a change.
Euro area annual inflation was 1.1% in December 2016, up from 0.6% in November. In December 2015 the rate was 0.2%.
So the broad sweep of higher inflation in December around Europe continued as we saw quite a jump. Some of that may unwind but 2017 is likely to see a higher and higher theme as we note transport for fuel rising at an annual rate of 6% and vegetables at 5.2% so exactly the wrong sort of inflation for consumers and workers. There is only one country now with disinflation which is Ireland but more than a few clustering around 2% including Germany at 1.7%. It makes you think if we move to today’s house price update how statisticians in Ireland can report disinflation with house prices rising at an annual rate of 7.1%. Also we seem set to see a phase of more general inflation worries from Germany which has house price inflation of 6.2%.
Back in December 2009 my old tutor at the LSE Willem Buiter wrote this.
The large-scale ex-ante and ex-post quasi-fiscal subsidies handed out by the Fed and to a lesser extent by the other leading central banks, and the sheer magnitude of the redistribution of wealth and income among private agents that the central banks have engaged in could (and in my view should) cause a political storm.
He was not aware then of the scale of what he calls fiscal subsidies which have been handed out by the Bank of England, Bank of Japan and the ECB since amongst others. But here is his crucial conclusion.
Delay in the dropping of the veil is therefore likely.
The prediction that they will delay exiting from monetary policies such as QE is spot on in my view and is where we are now. We have seen a PR campaign for example by Bank of England Governor Mark Carney as he sings along to Shaggy on distributional issues concerning wealth and also income.
She saw the marks on my shoulder (It wasn’t me)
Heard the words that I told her (It wasn’t me)
Heard the scream get louder (It wasn’t me)
However I disagree with Willem completely here.
There are few if any technical problems involved in reversing the unconventional monetary policies – quantitative easing, credit easing and enhanced credit support – implemented by central banks around the world as short-term nominal interest rates became constrained by the zero lower bound.
I was never entirely convinced by this line of argument but of course to be fair to Willem the situation now concerning QE is completely different in terms of scale. Many bond purchases look to be permanent and the UK for example has bought Gilts which mature in the 2060s.
If we look at the overall picture we see that 2017 poses quite a few issues for central banks as they approach the stage which the brightest always feared. If you come off it will the economy go “cold turkey” or merely have some withdrawal systems? What if the future they have borrowed from emerges and is worse than otherwise? We learn a little from what the US Federal Reserve has done but maybe not as much as we might think for two reasons. Firstly whilst it stopped new QE purchases it continues to reinvest maturing purchases from the past. Secondly in terms of the international picture it did so whilst so many others were on the “More.More,More” road as it got a type of first mover advantage.
The Bank of England is in a particularly bad place as it applied more when in fact there were arguments for less ( likely higher inflation) followed by the Bank of Japan which is buying assets so quickly. Accordingly I wait to see if we get any hints of future moves from the ECB today.
Oh and do you note that the official rationale for QE type policies never seems to involve confessing you would like a lower value for your currency?
Me on TipTV Finance