This short document (2 pages) is a synthesis of my macroeconomic views. One page of explanation and one page of graphs – The 2 pages Macro – 15 March 2019
The ECB puts all its energy on it but inflation does not converge frankly towards the objective (2%) it has defined. Can we say, like Mario Draghi, that the Quantitative Easing has worked properly?
Yes probably on the activity. The fall of all the interest rates has modified the inter-temporal trade-off on consumers’ side favoring the immediate expenses to the detriment of the future expenses.
On inflation? Yes, if the recovery helped to avoid deflation but beyond? We can wonder. Convergence towards the ECB’s target is postponed year after year.
Forecasts on growth (convergence towards potential in 2021 estimated at 1.5% by the ECB) and on inflation, suggest, except to change the reaction function, that the ECB will remain accommodative for a extended time.
The ECB will not start the normalization of its monetary policy in 2019. The interest rate level will remain stable, my bet is that the refi rate and the deposit rate will remain at the current level in 2019.
The lack of external impulse, the slower momentum in the manufacturing sector and the convergence of the headline inflation rate to the core inflation rate are three reasons that suggest that the ECB will not take risks in the management of its monetary policy. The monetary policy normalization, even the expectation of it, may weaken economic activity. Therefore it’s not the good policy when the inflation rate is way below the ECB target with no convergence to the target in a foreseeable future.
The framework I have in mind is the following: Due to more heterogeneous behaviors and uncertainty at the political level, global growth will become, in 2019, weaker than in 2017 and in 2018. Inside the Euro Area, there are no coordinated policies that may boost growth, therefore growth trajectories will converge to potential growth. This framework is not a source of monetary policy normalization. But we can add that the dramatic oil price drop in recent weeks (due to excess supply in the US and in Arabia) will push the headline inflation rate to the core inflation rate which has been close to 1% for months. It’s still way below the ECB target and therefore not a source of monetary policy normalization. Continue reading
According to the German newspaper Handelsblatt, Jens Weidmann, the current president of the German Bundesbank, will not be Merkel’s candidate at the head of the ECB in October 2019. Mario Draghi will leave the ECB presidency at this date.
This can be surprising but it is not. It’s the most rational decision for Germany.
The ECB strategy is often looked through the lens of the Bundesbank. We are all attentive to the German point of view. The German central bank is perceived as ultra orthodox on monetary policy and Germany is the largest and the most powerful country of the Eurozone. These two reasons suggest that there is no need of a German president. The Bundesbank president and the accumulated credibility of the Bundesbank are sufficient to condition the ECB’ s behavior. A German president would be redundant.
Germany can therefore choose a German candidate for another job at the top of an other European Institution and extend its influence.
Well done Angela
An interesting point of view on the role and the place of central bankers in the political spectrum.
In an interview with ProMarket, former Bank of England deputy governor Sir Paul Tucker explains why the “unelected power” of central bankers threatens our system of government.
Sir Paul Tucker
The European Central Bank found itself under renewed scrutiny this month, after Italy accused it of buying too few Italian sovereign bonds, allegedly in an effort to pressure the country’s new populist government to adopt more conventional economic policies.
The accusation was yet another example of the curious position the ECB has repeatedly found itself in ever since the central bank’s president Mario Draghi promised to “do whatever it takes” to preserve the euro in 2012. But it was also part of a larger, global wave of populist attacks against central banks. In Turkey, President Erdogan has repeatedly attacked the country’s central bank for raising interest rates, even going so far as to threaten the bank’s independence. In Britain, Environment Secretary Michael Gove has assailed the Bank of England and other central banks for their loose monetary policies, arguing that these policies benefited a small minority of “crony capitalists” who had “rigged the system” in their favor.
This political backlash came as no surprise to Sir Paul Tucker, the former deputy governor at the Bank of England and a research fellow at the Harvard Kennedy School of Government. Central bankers, Tucker writes in his timely new book Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, have emerged from the financial crisis with enormous new powers, entrusted by governments with the ultimate responsibility of making the economic recovery work. This change, he writes, relied on the “false hope” that central banks can create long-term prosperity. It is also fundamentally different than the response to the Great Depression, which was led by elected officials, not central bankers. Their expanded responsibilities, argues Tucker, have also turned central bankers into the “poster boys and girls” of unelected power, a process which ultimately erodes the legitimacy not only of central banks, but also our system of government as a whole.
Tucker, the chair of the Systemic Risk Council, a non-partisan think tank composed of former government officials and financial and legal experts, is a lifelong central banker. His book, an ambitious tome that stretches over 656 dense pages, is both a philosophical treatise on the limits of the administrative state and a passionate call for fellow technocrats to heed the lessons of recent political upheavals, pull back their power, and engage the public in a wider debate.
We recently sat with Tucker, who visited the Stigler Center in May for a series of interrelated lunch seminars, for an interview on politics, regulatory capture, and central banking’s crisis of legitimacy.
Read the interview promarket.org/former-central-banker-tells-central-bankers-stay-away-davos/
Wait and see attitude of the #ECB in the management of its monetary policy. This is a sequel of the cyclical inflection observed since the beginning of the year. Is it permanent or temporary? The answer to this question is essential but it is still discussed by economists.
The ECB does not show a strong will to quickly change its strategy. That’s why we should not be surprised if asset purchases continue beyond the date of September 2018. The central bank is supposed to stop buying assets if the inflation trajectory is consistent with the monetary authorities’ expectations. This will probably not be the case. Moreover, by not creating the idea of a rapid break, the ECB should allow the euro to depreciate against the greenback. This would have a stabilizing effect on the eurozone economic outlook. This is all the more likely as the Fed will be much more active in countering the destabilizing effects of Donald Trump’s fiscal policy.
The minutes of the ECB’s March meeting reflect the central bank’s confidence in economic activity conditions in the euro area. The most noteworthy point reflecting this perception is the removal of APP easing bias i.e. the reference to increasing the asset purchase program if necessary. The bank no longer thinks that economic momentum will require emergency intervention. However, uncertainty remains on inflation trends and the ECB continues to insist that the ongoing reduction of economic slack would allow inflation to converge towards the central bank’s aim. March 2018 projections are still far from the 2% target even in 2020, when headline inflation is only expected to come to 1.7%.