Opinion

The Great Debate

from The Great Debate UK:

You never know when rates will rise

David Kuo-David Kuo, Director at the financial website The Motley Fool. The opinions expressed are his own.-

Go on. Admit it. You didn’t see it coming, did you? You never thought a member of the G20 nations would dare to break ranks and raise interest rates this soon.

But Australia has done just that. The Central Bank of Australia has increased the cost of borrowing by 0.25 percent to 3.25 percent. It is doing what it thinks is right for the country regardless of what the rest may think. Now, Asian countries, keen to avert another bubble, may follow Australia’s lead and ratchet up interest rates before long.

Of course, Australia’s economy is vastly different to the UK’s. It has huge deposits of iron, aluminium and nickel that are in demand by mineral-hungry China. That said, Australia did briefly flirt with a downturn, which it successfully corrected with 21 billion pounds of fiscal stimulus.

But the UK is not Australia. We do not have huge deposits of mineral, and we are not near fasting-growing Asian countries either. What we do have are consumers saddled with over a trillion pounds of debt following a decade of binge borrowing, and a national debt burden of similar magnitude.
Therefore, it is unlikely that we will experience demand-led inflation. In fact, consumers are saving more of their household income than they have done for eight years.

BoE extends QE, fears 1930s re-run

John Kemp

– John Kemp is a Reuters columnist. The views expressed are his own –

The Bank of England’s decision to continue with its asset purchase programme, or quantitative easing (QE), at the rate of 50 billion pounds per quarter in Oct-Dec, unchanged from Jul-Sep, shows bank officials are more worried about ending support for the recovery too soon than about risking inflation by leaving it too late.

The problem with QE is that you have to keep buying the same amount of assets each month to maintain the same monetary stance. With interest rates, the Bank can cut them and they stay cut. If asset prices drop with QE, it represents a tightening of monetary policy.

from The Great Debate UK:

Bank of England faces dilemma on QE extension

johnkemp-- John Kemp is a Reuters columnist. The views expressed are his own --

LONDON, April 9 (Reuters) - The Bank of England's terse press statement announcing it will maintain overnight rates at 0.5 percent and continue the existing 75 billion pound quantitative easing (QE) programme gives no clue about whether the Bank intends to extend the programme when the first tranche of asset purchases are completed in June.
But officials will have to make a decision soon: unless they signal a commitment to extend QE, gilt yields will rise even further in anticipation that the major buyer in the market will withdraw.
The QE programme is dogged by ambiguity about its objectives (which a cynical observer might conclude is deliberate).
Officially, the aim is to prevent inflation falling below target by accelerating money supply growth, not manipulate the yield curve for government and corporate debt.
In this, the Bank's avowed strategy is more conventional than the Fed's ambitious efforts to determine the cost of credit for borrowers throughout the economy. It is a straightforward quantitative easing patterned on the Bank of Japan, rather than a credit easing patterned on the Fed.
If true, the measure of success is how much the money supply has been boosted at the end of the three month period; the Bank should be indifferent about whether ending QE causes yields and borrowing costs to rise.
So long as money supply has risen consistent with the inflation target, and the Bank can discern some green shoots of stabilisation if not recovery, officials can declare victory, end the programme, and keep the other 75 billion pounds of asset purchases authorised by the chancellor in reserve. Yields can be left to find their natural level.
But many suspect the Bank's real objective is yield control -- in which case it will have to announce another round of buy backs of gilts and corporate bonds in good time, well before the current programme is completed, to shape market expectations.
The results of the existing round have been unimpressive.
After falling initially, gilt yields are almost back up to the level they were at before the Bank's foray into unconventional monetary policy.
The snag is that if the Bank stops buying, other investors will struggle to absorb all the new government paper on offer without a major increase in yield -- pushing up borrowing costs for everyone, precisely what the Bank has sought to avoid.
The Bank's dilemma is whether to push on (heightening fears about inflation) or call a halt (risking a spike in yields all the same).
Either way, the Bank needs to give the market, as well as the Treasury and the Debt Management Office, plenty of warning about its intentions.
(Editing by Richard Hubbard)

from The Great Debate UK:

Quantitative easing a last resort

img_3391-alan-clarke-Alan Clarke is UK economist at BNP Paribas. The opinions expressed are his own-

As expected, the Bank of England left the Bank Rate unchanged at 0.5 percent at the April meeting, the first unchanged decision since September 2008.

The accompanying statement was short and sweet. The Bank has accumulated 26 billion pounds of asset purchases and will take a further two months to complete the planned 75 billion pounds of purchases - see you next month!

It is disappointing that gilt yields haven't remained low - partly because of firmer economic data, but also because the market is wary of the exit strategy. Hence the statement was a bit of a missed opportunity. The Bank has run out of interest rate ammunition and hence is having to use alternative measures including quantitative easing. Some form of verbal intervention, voicing a desire to get gilt yields lower could have been a cheap and easy way to loosen conditions in the economy.

How G20 can unfreeze credit and cut bailout costs

Lena Komileva– Lena Komileva is Head of G7 Market Economics, Tullett Prebon –

One of the big historical lessons of this crisis for economic policy is that bringing down the risk-free cost of money – central bank rates or government bond yields – and injecting liquidity into the banking system cannot on their own fix broken credit markets.

Quantitative easing by central banks may help to solve short-term liquidity problems for domestic borrowers and lenders, by going around broken markets during times of extreme financial and economic uncertainty. However, this is no substitute for efforts to restore international credit markets back to health.

Effective policy measures would contain the economic fear and channel private sector incentives – the foundation of free markets – in a way that alters the behaviour of lenders, companies and consumers. The end-game policy strategy cannot be to replace free markets.

World stuck with the dollar, more’s the pity

jimsaftcolumn5– James Saft is a Reuters columnist. The opinions expressed are his own –

The dollar is, and will remain, the U.S.’s currency and its own and everyone else’s problem.

The idea of creating a global currency, as espoused by China earlier this week, is interesting, has a certain amount of merit and is simply not going to happen any time soon.

How will the Fed get off its Tiger?

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

The Federal Reserve and U.S. economy have two considerable risks now that quantitative easing is at hand: keeping the dollar from a disorderly decline and figuring out how to dismount from the tiger.

The Fed has cut interest rates to a range of zero to 0.25 percent and said it would use “all available tools” to get the economy growing again, including buying mortgage debt as well as exploring direct purchases of Treasuries.

Fed unleashes greatest bubble of all

John Kemp Great Debate– John Kemp is a Reuters columnist. The views expressed are his own –

Like the sorcerer’s apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control.

Now the Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.

Fighting deflation globally ain’t easy

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

With the U.S., Japan and Britain — nearly 40 percent of the global economy — facing the threat of deflation, it’s going to be just too easy for one, two or all three of them to get the policy response horribly wrong.

The global economy is so connected, and our experience with similar situations so limited that the scope for error is huge.

Quantitative easing has begun

johnkemp3– John Kemp is a Reuters columnist. The views expressed are his own –

Quietly, without fanfare, the Federal Reserve has turned on the printing presses.  The central bank is flooding the market with enough excess liquidity to refloat the banking system — and hopes to generate an upturn in both economic activity and inflation in the next 12-18 months to prevent the economy falling into a prolonged slump.

Since the banking crisis intensified in September, the Fed has been rapidly expanding the credit side of its balance sheet, providing an ever-increasing array of facilities to support the financial system (repos, term auction credit, primary discount credit, broker-dealer credit, commercial paper funding, money market mutual fund liquidity and term securities lending).

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