Price stability key to ECB bond buys?
Price stability remains the only needle in the compass for the European Central Bank, even when it is buying government bonds, the 17-country bloc’s central bank strived to argue on Sunday.
ECB President Jean-Claude Trichet said, in the statement announcing extension of its bond-buying programme, that the decision was made to keep inflation at an acceptable level.
“This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area,” Trichet said.
Analysts had pegged the decision to trying to salvage Spain and Italy from being in markets’ crosshairs and some likened it to quantitative easing policies conducted in the United States, Britain and elsewhere.
Granted, Italy and Spain being dragged down could have created a chance of deflation in the euro zone, which of course would mean undershooting the central bank’s target of annual inflation of just under 2 percent.
But just last Thursday, the ECB said inflation risks are on the upside. It has already raised interest rates twice this year to quell inflation, which has topped its target for eight months running. No matter, the programme is needed for price stability, Trichet said – an explanation used for pretty much everything the ECB does.
Axel who? ECB gets tough without hardman Weber
When it decided the time was right to crack down on inflation, the European Central Bank did so without the man who is often regarded as its toughest inflation hawk: Bundesbank chief Axel Weber. The ECB took financial markets by surprise by announcing on Thursday it could raise rates as soon as April — a decision its policymakers reached without Weber even in the room.
The German, who has appeared isolated at times over the last year because of his staunch commitment to price stability above all else, was absent without leave and did not attend the meeting.
“He’s tied up today,” a spokesman for the Bundesbank said of Weber, who last month announced he would step down from the central bank a year before his term ended and that he was no longer a candidate to head the ECB when Trichet’s term expires in October. Weber said his hardline views were not well received by other decision makers.
The ECB’s decision to flag a rate hike took markets completely unawares.
“The position of the Governing Council is that an increase in interest rates at the next meeting is possible,” Trichet said in his matter-of-fact style, sending the euro soaring.
Weber made a splash last May when the lone ranger came out swinging against the ECB’s decision to start buying government bonds – seen as a breach of protocol in the sanguine central bank which prides itself on unanimity in its decisions.
The ECB’s exit strategy gets the austerity treatment
As a top central banker you have to watch your words. Almost every one you utter is scrutinised by finanical markets for a cryptic hint on policy the way a jeweller studies a diamond. So when you chop out almost a quarter of the content of your main policy message, the likelihood is that you know you are playing with fire. The ECB juggled the flames on Thursday, slashing 427 words — almost 25 percent –from its monthly policy statement. The leaner 1,388 word composition represented no change at all in the bank’s view of the world, stressed the bank’s President, Jean-Claude Trichet. But the some of the stuff binned involved some of juiciest material, particularly all-important plans to remove crisis support. That section got reduced by almost 30 percent to a slender 62 words although the message stayed the same, something along the lines of: we will reel support in gradually and when markets are ready. With central banks in other major advanced economies now turning back in the direction of stimulus, the ECB’s unwavering, albeit shorter, view of the exit route helped the euro break through the $1.40 barrier. It just shows that austerity really is all the rage in much of the euro zone.
Diplomacy not needed for top ECB job, says Bundesbank boss
Axel Weber, head of Germany’s Bundesbank and a frontrunner to take over the leadership of the European Central Bank next year, thinks diplomacy is over-rated in central bankers.
Weber normally avoids all comment on the tricky subject of choosing a successor to current ECB President Jean-Claude Trichet but with just over a year to go before the plum post comes up, could not resist making an ambit claim.
Asked by a television interviewer whether he was enough of a diplomat to take over from Trichet given his public criticism of the ECB’s decision to buy government bonds in May, Weber said he thought diplomacy was an optional extra.
“I’t's important to be diplomatic for the diplomatic corps; it’s not so important for the central bank,” he said.
“I think it’s very important for central banks to have a strong view, to basically stand for that view … that sometimes requires (putting) diplomacy in the back seat.”
Weber’s main competition for the top job, Italy’s Mario Draghi, is is no stranger to diplomacy as head of the Financial Stability Board of international regulators and is seen as more moderate than the anti-inflation Weber.
Interesting that Weber’s comments came during an interview in which he backed extending the ECB’s ultra-generous liquidity supplies into the start of next year, surprising many observers who had expected him to take a hard-line stance.
Has it really been three years?
It is three years to the day since the European Central Bank first threw unlimited amounts of cheap cash at banks in a bid to ease liquidity logjams, and at least one of its 22 policymakers sees no reason to rush for the exit yet.
”We remain sensitive to the liquidity needs in the banking sector and, as we have been doing since the beginning of the crisis, we will continue to provide liquidity as necessary,” Cyprus central bank governor Athanasios Orphanides said in an interview with Reuters.
The ECB has promised to announce on Sept. 2 whether it will extend its open-door liquidity policy beyond September for three-month operations and beyond October for its main one-week operations.
As a result of the liquidity flood and drastic interest rate cuts, overnight euro interest rates are now just 0.3 percent , compared to as high as 4.6 percent on August 9, 2007 when subprime tensions in the United States first spilled over to European money markets.
The ECB stunned markets by lending banks a then-record sum of 95 billion euros in overnight cash, kicking off a wave of similar action by other central banks including the U.S. Federal Reserve and the Bank of Japan.
“It seems probable that the ECB will have to continue to intervene, by injecting liquidity, or otherwise, to stabilize the markets,” Barclays Capital analyst Laurent Fransolet wrote at the time. Perhaps Orphanides’ comments show the same statement still holds true today.
ECB’s Trichet ready for Bermuda shorts
Jean-Claude Trichet, the head of the European Central Bank, was in a good mood on Thursday.
The 16-country bloc’s central bank is starting to see light at the end of the tunnel after a long, hard slog through the financial crisis and the resulting Great Recession, and this gives the policymakers a chance for some R&R.
“We are now … in a situation, which is obviously better than before,” Trichet said after the 16-country bloc’s central bank kept interest rates on hold at a record-low 1.0 percent. “Again, I don’t declare victory.”
But victory or no victory, he seemed relaxed. He switched into holiday gear during the news conference, saying he was more than happy to retreat to his beloved Saint-Malo in Brittany soon.
“My usual place to rest is the small, but beautiful city of Saint-Malo,” Trichet volunteered.
The sailing mecca, which sees its population swell during the summer, has been close to the central banker’s heart for a long time.
Pass Jean-Claude Trichet a vuvuzela
Give European Central Bank President Jean-Claude Trichet a vuvuzela. Having previously confessed ignorance on all things soccer the ECB chief finally appears to have been bitten by the World Cup bug. He did a Ronaldo-style double step-over when asked who he would cheer for in Sunday’s final between Spain and the Netherlands but admitted he enjoyed Spain’s slick defeat of Germany the previous evening. “The last match was beautiful I have to say,” Trichet enthused at the bank’s news conference. The comments were greeted with laughter by the clutch of international journalists in the audience. Realising that he may have sounded a little too happy about Germany’s loss he quickly backpedalled. “I don’t have any judgment on the result of the match. I said that it was a beautiful match obviously. And the two teams were very beautiful on the field.” Germans called for Paul the now infamous “the oracle” octopus to be thrown on the BBQ after he predicted the defeat. Mr Trichet could be next in line. Then again there are economists who would argue that Spain needs ECB support at the moment.
ECB takes a turn to taciturnity
The European Central Bank’s normally loquacious policymakers have been struck dumb over the last month.
The ECB’s 22 rate-setters generated just 14 Reuters news stories in February, much lower than January’s total of 24 and the 27 stories I count in December. Even the core Executive Board members have managed only four speeches between the six of them, compared to a flurry of 10 speeches and interviews in the previous two weeks after policymakers returned to work from their end-of-year break.
Even the U.S. Federal Reserve, playing two team members short with just 17 policymakers at the moment, has out-talked the ECB with a rough tally of 26 news stories generated so far this month, a 30 percent increase on January.
Sure, the Fed has had to sell its decision to raise the discount rate, assuring markets that the hike is not a monetary tightening. But euro zone investors are arguably in just as much need of reassurance, with the ECB poised to announce a further winding back of its emergency lending steps next week and debt markets in turmoil over fears about Greece and other euro zone countries with massive budget shortfalls.
The one issue which has brought ECB policymakers out fighting has been the suggestion by International Monetary Fund economists in a research paper that central banks consider raising their inflation target from the 2 percent level adoped by many to 4 percent, to give themselves more room to cut rates in case of another crisis.
Diabolical! said Lorenzo Bini Smaghi. Playing with fire! said Axel Weber. Most unhelpful, said Juergen Stark, choosing his words more carefully at an IMF conference in Korea where the paper was discussed , in comments which together account for 20 percent of this month’s public utterances by ECB officials.
Still, ECB President Jean-Claude Trichet may well make up for a month of reticence at his news conference on March 4, when he will announce the ECB’s exit plans as well as new staff economic forecasts, in a hour which may prove to be a bumpy ride for investors if December’s experience is anything to go by.
Never fear, Jean-Claude is here
Any doubts about financial markets’ faith in European Central Bank President Jean-Claude Trichet’s cure-all ability should have been put to rest after a euro flurry over Trichet cutting short a visit to Sydney to return to Brussels for a meeting of European Union leaders.
The euro recovered from 8-1/2 month lows against the U.S. dollar after the Reserve Bank of Australia said Trichet would leave anniversary celebrations early, as traders bet that his rush to Brussels meant an increased chance of European leaders agreeing a rescue deal for struggling Greece.
When the ECB later clarified that Trichet had been invited to the Thursday meeting last month and had adjusted his flight plans at the last minute to make a connecting flight, the single currency slipped back 20 ticks to just under $1.37.
”The whole absurd situation came from the fact that someone in Australia said that Mr. Trichet was cutting short his stay. It became a big story, while Mr. Trichet only chose an earlier flight because he was afraid he would miss a connection,” an ECB spokesman said.
Deal or no deal, by the time Trichet arrives at the Brussels meeting, he will have achieved at least a lot of frequent flyer points. Since leaving Frankfurt a week earlier for a G7 meeting in Iqaluit, near Canada’s arctic circle, he will have circumnavigated the globe and travelled 73,980 kilometres, according to webflyer’s mileage calculator.
Trichet to keep cool at frosty G7
European Central Bank President Jean-Claude Trichet plans to keep a cool head at this weekend’s meeting of Group of Seven policymakers in Canada’s far north.
“I am very happy to go very far up, far up in the north of Canada,” he told journalists before hopping on a plane en-route to frostbitten Iqaluit, some 300 kilometres south of the Arctic Circle.
“We will have all the right environment to be as cool as possible in judging the situation.”
Local police have already said G7 visitors should not worry if they see men with rifles speeding around on snowmobiles, as the town is more usually host to hunters than foreign dignitaries.
