The past couple of decades or so have seen an extraordinary rise in the power of the technocratic central banker. At first they were given power over interest-rates and then post credit crunch many moved into the world of large-scale asset purchases. More latterly the mission creep has really picked up pace as they have also moved into this arena.
We need to intensify the greening of our economies despite the energy crisis. Hastening the process will reduce the costs of transition and help to ensure price stability in the long run
That is from the ECB Blog on the 9th of November. Those of a cynical nature may conclude that central bankers are desperate to deflect attention from their failure at their day job which is controlling inflation.
Humanity must act today to mitigate the devastating effects of climate change[1] and the earlier the green transition takes place, the lower the ultimate costs will be. For central banks globally, fighting climate change and fighting inflation can go hand in hand.
As they are in the process of making quite a hash ( “Transitory” and “hump”) of fighting inflation that is an unfortunate combination. But the arrogance of people who are presently failing in their main role claiming “humanity must act” is almost off the scale
Returning to monetary policy they have presented themselves as masters of the financial universe and controllers of bond yields via trillions of spending. But now according to the ECB we need an “explainer” about profits and losses and you needn’t worry about the first bit as they have gone.
It is important to remember that central banks are not like ordinary companies: they can lose money and still operate effectively.
However in the very next sentence they do not seem quite so sure.
Still, the principle of financial independence implies that national central banks should be sufficiently capitalised.
On reading that my mind turns to the Bank of Italy as this morning the Italian ten-year yield has passed 4.5% meaning that its BTP holdings to use a technical term look simply awful. The ECB bought them and passed 82% back to Italy.
Moving on there is the simple issue of being wrong illustrated by the Reserve Bank of Australia last November.
“I’m sorry that people listened to what we said and then acted on that and now find themselves in a position they don’t want to be in,” he said.
“But at the time, we saw that as the right thing to do.” ( Sky News )
Even in his apology he is claiming he was right to be wrong! For newer readers it was about this.
Mr Lowe has been under increased pressure in recent months over the comments he made in 2021 where he indicated rates would not increase until at least 2024, given there have been seven consecutive hikes this year. ( Sky News)
This is particularly important because central bankers had spent nearly a decade proclaiming the benefits of their Forward Guidance in this area. Whereas it had exactly the reverse effect.
Bank for International Settlements
The quarterly review of the BIS has noted the consequences of all this in several ways.
Expectations of significant rate cuts in the near term appeared to firm up, despite cautious central bank communication about the policy outlook.
Essentially what faith there was in the promises of central bankers has evaporated. The next bit is a case of read this and weep for central bankers.
Investors’ expectations about future policy rate paths stood in contrast to central bank communications. While several major central banks slowed the pace of monetary tightening, they remained cautious about the interest rate path going forward, particularly in view of the persistent strength of labour markets. Nevertheless, interest rate futures continued to relay market participants’ expectation that rate hikes will end this year, followed by steep rate cuts stretching well into 2024.
Central bankers are paying the price for their past behaviour where they have cut interest-rates time and time again. For example at the Bank of England the previous Governor issued Forward Guidance that interest-rates would not only rise but faster than markets were expecting at Mansion House in 2013. Hie next move was an interest-rate cut! He also assured investors that the “lower bound” for UK Bank Rate was 0.5% and then later in his tenure cut to 0.1%.
The next part of the BIS review continues the same theme whilst trying the central banking game itself.
Signs of abating inflationary pressures kept a lid on bond yields, while expectations of rate cuts in late 2023 firmed up in derivatives markets. By contrast, central banks remained cautious in their guidance about the policy outlook, against the backdrop of persistently tight labour markets.
This “persistently tight labour” markets theme has become a central banking mantra. But this ignores the falls in real wages that have been especially severe in Europe. Also it ignores other data as for example hours worked in the UK have not yet regained pre pandemic levels. This is an important thematic issue because we have seen central bankers consistently prefer theoretical models over reality and then the models go wrong whilst reality just continues.
Next up is the fact that some central bankers did blink.
In sharp contrast, central banks remained much more cautious in their communications throughout the review period. Admittedly, most central banks did slow the pace of tightening, including the Federal Reserve and the ECB. Moreover, some EME central banks, which had started tightening much earlier, paused.
Who after recent experience would doubt that investors would prefer actions to words? Indeed the BIS, which is the central bankers central bank seemed to feel the need to rally the troops.
LONDON, Feb 27 (Reuters) – Central banks need to “get the job done” when it comes to getting inflation back under control, the Bank for International Settlements has said, urging them to avoid the mistakes of the 1970’s by declaring victory too early.
Don’t pause or indeed pivot seems to be the message here and it continued.
The BIS, dubbed the bank for central banks, said it was vital authorities didn’t repeat the stop-start cycles of the 1970s when interest rates had to be hiked to painfully high levels after attempts to lower them resulted in an inflation surge. ( Reuters)
There will be more than a few who think that interest-rates are already at painfully high levels.
Comment
This wider loss of faith in central bankers has been reinforced only this morning. Let me first hand you over to the chief economist of the ECB Phillip Lane.
FRANKFURT, Feb 28 (Reuters) – Euro zone inflation pressures have begun to ease, including for all-important core prices,
Now let us look at the actual numbers released by France and Spain this morning.
Inflation in France was 7.2 per cent in the year to February, up from 7 per cent the previous month. Economists had predicted no change. In Spain, consumer prices rose 6.2 per cent in the year to February, higher than 5.9 per cent in January and well above the fall to 5.5 per cent economists had forecast. ( Financial Times)
Perhaps the economists who write the expectations had been briefed by Phillip Lane. But more important than that is the fact that inflation rose in both countries. In fact if we look at the same measure as in the UK ( CPI for us HICP for them) the monthly increase was 1%.
As you can see central banking rhetoric has collided with reality again. Or as The Whispers put it.
And the beat goes onJust like my love everlastingAnd the beat goes onStill moving strong on and on