Today monetary policy is en vogue in several respects. If we look across the Atlantic the Jackson Hole symposium starts later although the main speech from Federal Reserve Chair Powell is tomorrow. Expectations fell when it was noted that neither Christine Lagarde of the European Central Bank not Andrew Bailey of the Bank of England were attending but then it turned out that it was virtual anyway,
The Kansas City Fed announced it will host its 2021 Economic Policy Symposium, “Macroeconomic Policy in an Uneven Economy,” virtually on Friday, Aug. 27.
So no fine wines or food delicacies and now they could tune in anyway although they will not be speaking. Many will consider that a relief. But the event has come under a little more pressure this morning as I note this.
The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 25 basis points, from 0.50% to 0.75%.
So there will be something of a shock effect for Chair Powell who has been playing something of a game about tapering bond purchases which do get a mention.
due mainly to the possibility that the US Federal Reserve would start tapering its asset purchases within the year.
Nice language as we mull whether they mean in 2021 or in the next twelve months? That illustrates the Definitely Maybe situation we are in. Added to that are the reasons for this as we note inflation much lower than in the US.
Consumer price inflation has remained high at the mid-2% level due to the rising prices of petroleum products and agricultural, livestock, and fisheries products as well as the accelerating increase in service prices……….It is forecast that consumer price inflation will increase to the lower-2% level this year, exceeding the May forecast of 1.8%.
So a bit of old-fashioned central banking if you like which is added to by this.
Household loan growth has accelerated and housing prices have continued to increase rapidly in all parts of the country……..the risk of a buildup of financial imbalances,
As you can see Korea seems to be facing more minor problems in the inflation front than the US but has responded with an interest-rate rise. Whereas should we get something tomorrow from Chair Powell it is likely to be only minor and that is if we get anything at all. To my mind he has another issue to sort out first which is where the market has already applied many of the consequences of a taper on him.
US FED ACCEPTS $1147.089 BLN IN DAILY REVERSE REPO OPERATION, AWARDS AT 0.05 PCT TO 77 BIDDERS – NY FED ( @DeltaOne)
Whilst he is still helping the US government by buying their bonds and thus reducing yields in terms of flows of cash he has got over a trillion US Dollars heading in the reverse direction to QE. Ooops!
The Euro and the ECB
This morning’s release from the ECB illustrates it is taking quite a different approach although the headline numbers are a little misleading.
The annual growth rate of the broad monetary aggregate M3 decreased to 7.6% in July 2021 from 8.3% in June, averaging 8.1% in the three months up to July.
In fact the monthly growth rate is very stable. The last three months growth has been 78 billion Euros, 89 billion and now 76 billion. There are always fluctuations due to numbers of days and working days in each month and it reminds us that the ECB is ploughing ahead with its bond purchases.
But in the grand scheme of things, this is a local adjustment. Throughout the PEPP period, we have had a high rate of purchases. Purchases in the second and third quarters were significantly higher than in the first, but even in the first quarter, compared to historical norms, purchases were pretty high.
That was Phillip Lane being interviewed yesterday and out opening theme is that the ECB has in fact increased purchases at a time when the debate in the US is about tapering and now Korea has raised interest-rates. I am a little unclear where Mr. Lane is going with a reference to “historical norms” for a policy which only began less then 18 months ago. But in total ECB bond purchases under QE have so far sung along with the Electric Light Orchestra.
And you and your sweet desire
You took me, oh (higher and higher, baby)
It’s a livin’ thing
It’s a terrible thing to lose
It’s a givin’ thing
What a terrible thing to lose
In fact if we follow his logic and add in the latest economic developments especially coming out of Germany then he will be buying even more bonds.
We’ll have to assess at the September meeting the appropriate calibration for the final quarter of the year, taking into account the movement in market interest rates and the inflation outlook.
We can further break that down because Mr.Lane also said something that if we go back 2/3 years would have people shouting from the rooftops.
A second consideration is net bond supply. You cannot think about the volume of the APP independently of the volume of net bond supply.
I am not sure he could admit they are implicitly monetary financing more clearly. Some of you may recall that Governor Bailey of the Bank of England veered in this direction as the pandemic hit last spring but was not this clear as there is also an indication of permanence in the sentence above. That is added to by the next bit.
The relatively high fiscal deficits that we saw last year and this year will not be lasting in the coming years, but the scale of deficits may remain higher than the pre-pandemic levels.
The growth rate here also fell back in annual terms.
The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, decreased to 11.0% in July from 11.8% in June.
However the monthly rise is similar if we look back over the past six months with one exception which was June’s 121 billion. So we are seeing a pretty direct consequence of the bond buying which creates cash on this measure when we allow for the fact that some months will have 5 weeks of buying and others only 4.
We find ourselves in a position where the same situation is being responded to in about as many ways as are possible right now. We see Korea raising interest-rates in what was called “normalisation”. We see the US discussing a reduction in the rate of bond purchases. We see the Euro area suggesting bond purchases will be higher for longer. I have not mentioned interest-rate cuts because the area that might ( Euro) is obviously nervous about doing so without the protection of an official digital coin.
But as I pointed out the scenarios are similar as he are the producer price numbers for Europe from earlier this month.
In June 2021, industrial producer prices rose by 1.4% in both the euro area and the EU, compared with May 2021,
according to estimates from Eurostat, the statistical office of the European Union. In May 2021, prices increased by
1.3% in the euro area and by 1.4% in the EU.
You might think it would be affecting currencies more, but it is not the only factor in play