The mood music around central banks has changed quite a bit in recent months. The Covid-19 brought an answer to the question are their monetary policies “maxxed out” ( hat tip Mark Carney)? We saw more interest-rate cuts and much more QE bond buying. But now things have gone much quieter in that area as last week’s frequent announcements by central banks proved. What we are now seeing is a concentration on other areas which in one case has nothing to do with inflation targeting at all and in the other has a dark secret.
Let us start with the European Central Bank which presently is in a mess on two counts. There was not a lot to say on Thursday but even so Christine Lagarde managed to confuse both herself and everyone else.
So, those are really, I’d like to think in terms of this, the compass and the anchor and the two of them interact in order to assess whether or not we need to adjust and calibrate our purchases of any period. Because don’t forget that PEPP is intended to preserve the financing conditions, is earmarked by flexibility, and that flexibility, you’ve heard me say before, is flexibility along time sequences, flexibility in asset classes, flexibility in countries.
This is not helped by the fact that Chief Economist Phillip Lane seems to keep making some more equal than others.
The bilateral calls with ECB watchers, including chief economists and research directors, took place within this
framework and were fully disclosed via the regular publication of diaries…… ( A letter to an MEP from Christine Lagarde)
Again language is a casualty as briefing some privately is described as being “fully transparent”
When you are under fire, one route out is to try to do something you think is popular. Hence this from Christine Lagarde at the World Economic Forum this morning.
It is with this history in mind that I want to talk about the role of central banks in addressing climate change.
One similar feature to monetary policy is there which is the counterfactual.
Yet the transition to carbon neutral is not so much a risk as an opportunity for the world to avoid the far more disruptive outcome that would eventually result from governmental and societal inaction.
Indeed it is time to note the reference to “Be afraid! Be very afraid!” from the film The Fly as we recall how the scenarios for monetary policy have gone.
Scenarios show that the economic and financial risks of an orderly transition can be contained.
Are those like the scenarios which showed Greece growing at 2% per annum from 2012 onwards? Anyway don’t worry if they are wrong (again) because it doesn’t really matter.
Even a disorderly scenario, where the economic and financial impacts are potentially substantial, represents a much better overall outcome in the long run than the disastrous impact of the transition not occurring at all.
Still it is a growth area for ECB officials.
At the ECB, we are now launching a new climate change centre to bring together more efficiently the different expertise and strands of work on climate across the Bank. Climate change affects all of our policy areas. The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves.
Is this an example of re-invention in the way that former Bank of England Governor Mark Carney has morphed into a fearless climate change warrior? It seems that Christine Lagarde is on her own road to Damascus.
Climate change is one of the greatest challenges faced by mankind this century, and there is now broad agreement that we should act. But that agreement needs to be translated more urgently into concrete measures. The ECB will contribute to this effort within its mandate, acting in tandem with those responsible for climate policy.
Oh and let me refine my view that this has nothing to do with inflation targeting. Because they can use it as a way of raising inflation to 2% per annum although it would make everyone worse off. Perhaps that is why it has to come with such apocalyptic imagery.
The effective price of carbon is expected to rise if the EU’s targets for reducing emissions are to be reached. Modelling by the OECD and the European Commission suggests that an effective carbon price between €40-60 is currently needed, depending on how stringent other regulations are.
The heat is on across many countries as this from Reuters over the weekend highlights.
The House of Commons’ Environmental Audit Committee – which looks at public bodies’ impact on global warming – said buying bonds from firms such as energy companies with high carbon emissions contravened government goals to reduce global warming.
“The Bank must begin a process of aligning its corporate bond purchasing programme with Paris Agreement goals as a matter of urgency,” the committee’s chairman, Philip Dunne, wrote in a letter to BoE Governor Andrew Bailey.
Just in case you thought that the corporate bond purchase programme could not be more of a shambles. Indeed as it has found itself buying the bonds of European companies as it is could we see it and the ECB in a race to buy green bonds and thus bidding up the prices?
Central Bank Digital Coins
These are also back in the news and some of it is misleading. Here is Benoit Coeure formerly of the ECB.
If banknotes keep declining, a world without CBDC is one where financial institutions, but not citizens, can access the central bank balance sheet. Is it safe? Does it support trust in the currency? Is it politically acceptable?
This is to say the least curious and some may consider it an outright lie. If we look at the latest numbers for currency in circulation for last November we see that in the last three months it has risen by 9 billion Euros, then 8 billion and then 13 billion. So they are rising rather than falling and if anything growth has risen. Indeed the annual rate of growth is now 11.1%! The only possible thing you can say is that it is slower than overall narrow money growth (M1) at 14.5% but seeing as they have been throwing the kitchen sink at that and frankly the bathroom sink too that is no surprise.
I guess next they will return to claiming that the growth they claim doesn’t exist is all down to criminal activity.
It is revealing that these days central bankers want to talk about anything but monetary policy these days. Well at least in public because they seem keen on doing so in private to a select crew and maybe their future employers. After all they can afford it.
BOSTON (Reuters) – The world’s 20 best-performing hedge funds earned $63.5 billion for clients in 2020, setting a record for the last 10 years during a chaotic time when technology oriented stocks led a dramatic rebound from a pandemic induced sell-off, LCH Investments data show.
If we return to climate change then regular readers might like to recall my regular refrain that you should never believe anything until it is officially denied.
This is not “mission creep”, it is simply acknowledging reality. ( Christine Lagarde )
Next comes the issue of central bank digital coins or CBDC. To my mind the real rationale now is the fact that they would help enable increasingly negative interest-rates. Or as Sweet informed us many years ago.
Does anyone know the way, did we hear someone say
We just haven’t got a clue what to do
Does anyone know the way, there’s got to be a way
To Block Buster