Today brings the Euro area and European Central Bank into focus as the latter announces its policy decision. In terms of a change today I am not expecting anything as policy was set for the early part of the tenure of Christine Lagarde as ECB President by her predecessor Mario Draghi when he cut the main interest-rate to -0.5% and restarted QE bond purchases late last year. If you think about it that was quite revelaing as to what Mario thought about the capabilities of his “good friend” Christine. But whilst the surface may be quiet there is quite a bit going on underneath as highlighted by this from the Financial Times.
Lagarde’s legacy building begins at the ECB
I would say that this is an extraordinary level of sycophancy but then this is standard for the FT which of course called Bank of England Governor a “rock star”. Still I guess the media have to compete for priority at the various press conferences. After all the idea was a classic political style tactic of playing for time. But the catch is that it seems likely to end up with actual changes just as the time when the ECB is at its most intellectually lightweight. Also there is something of a swerve in that the ECB is in effect being allowed to set its own exam paper. Most of us wish we could have done that at school, college and university! More seriously central bank mandates are supposed to be set by elected politicians. Now whilst the ECB is headed by politicians these days ( Lagarde and De Guindos) they have been appointed rather than elected.
What is going on?
This is really extraordinary stuff because if you think about it Mario Draghi acquired a legacy by responding to events ( Whatever it takes to save the Euro…) whereas wht we have now is self-chosen as described above,
Every good central banker needs a legacy. Mario Draghi, the former head of the European Central Bank, is widely credited with rescuing the eurozone from a debt crisis. Today his successor, Christine Lagarde, will kick off the search for a defining cause of her own.
Also this “Every good central banker needs a legacy” provokes the question why? Before we note that this is very damning of a former FT favourite Mark Carney who is leaving without one.
Oh and did I mention buying time?
Ms Lagarde will launch the second strategic review in the 20-year history of the ECB — a process that she has said will last until December as it turns “every stone” in search of ways to fine tune its monetary policy toolkit.
Also just like we have seen in various wars if your main priority is going badly it is time for some mission creep.
One of the most controversial ideas Ms Lagarde has proposed for the review is to make tackling climate change a “mission-critical” priority of the ECB. It is easy to see why this idea appeals to Ms Lagarde, with extreme weather events increasing in frequency and intensity every year — the latest being the wildfires raging across Australia — and pushing green issues to the top of the political agenda.
Indeed it is with the Euro area economy struggling. A diversion is badly needed.
With the Ivory Tower style economic modelling in so much trouble you might think this is really rather cruel and heartless.
For a start, the ECB could integrate climate-related risks into all its modelling and take more account of them when valuing collateral it accepts from financial institutions, as proposed by Banque de France governor François Villeroy de Galhau.
Collateral is a potentially explosive issue as the Bank of England discovered early in the credit crunch when it found that it had received “Phantom Securities” ( the clue is in the name). This is even more likely in a fashionable cause such as climate change.
A problem with this is that it would lead to central bankers choosing which stocks to favour which even the equity loving Tokyo Whale tries to avoid.
Environmental campaigners are calling on the ECB to do even more and repurpose its €2.6tn asset-purchase programme, known as quantitative easing (QE), by divesting “brown” bonds issued by carbon-intensive companies while increasing purchases of green bonds…….Critics say it is up to politicians, not central banks, to decide which companies to favour and which to penalise.
Meanwhile back on the day job.
Growth expectations have been scaled down.
If we switch to CNBC we see something which is quite damning for an ECB which has been so expansionist and interventionist. After negative interest-rates and all the QE this is the result.
Monetary policy action in Frankfurt is not expected by some market watchers for the whole of 2020. With inflation sluggish and no real economic rebound in sight, the majority of economists expect the ECB to adopt a “wait and see” approach.
The International Perspective
This matters on an international perspective as has been revealed by the head of the Swiss National Bank today.
“We know that negative rates also have side effects, that is the reason why we changed the threshold,” Jordan told CNBC, referring to the SNB raising the limit before the charge of -0.75% applied to commercial bank deposits at the central bank.
That is an awkward one for Christine Lagarde to mull as she imposes negative interest-rates but there is more.
ordan’s colleague Andrea Maechler said on Wednesday the SNB would end negative interest rates “as soon as we are able,” when asked about the central bank’s ultra-loose monetary policy aimed at curbing the Swiss franc’s over-valuation.
In essence it is the ECB that runs Swiss monetary policy as another ECB interest-rate cut seems likely to push the SNB to -1% as an official interest-rate. There is a similar state of play in Denmark. As to Sweden it’s central bank has been something of an unguided missile in the way it has raised interest-rates into an economic slow down so who knows what it will do next?
The opening issue is how did the ECB end up with its review being headed by someone known for incompetence ( Greece and then Argentina) as well as having a conviction for negligence in a fraud case?
Perhaps the fact above is related to a state of pay where nobody seems to be discussing the actual mandate or what we might call the day job. This is to keep consumer inflation as defined by HICP ( what we call CPI in the UK) below but close to 2% per annum. This was later refined by former President Jean-Claude Trichet to 1.97%, mostly because that is what it averaged in his watch.
There is a warning there because the apparent success on Trichet’s watch was combined with the credit crunch. Ooops! More specifically there were the house price booms and then busts in Spain and Ireland in particular. This allows me to suggest a fix which is to put house prices in the inflation index to help avoid that occurring again. Also it would represent not only a tightening of policy but adding an area that somehow they have managed to mean to include but forget for two decades now. Otherwise they had better keep playing Elvis on their loudspeakers.
We’re caught in a trap
I can’t walk out
Because I love you too much baby