Introduction - Trouble With Bubbles by Gordon Platt
2014 Central Banker Summaries | Europe
In the past 12 months, Ermakova and the National Bank of the Republic of Belarus have focused on reducing stubbornly high inflation. The bank’s target at the end of 2013 was for inflation to reach 12%, but in August the inflation rate was around 20%. Ermakova has her work cut out for her, particularly as the central bank has yet to adopt a formal inflation-targeting regime. In its 2013 report on Belarus, the International Monetary Fund stated that “a lack of forward-looking elements and the ad hoc use of multiple instruments—policy rates, reserve requirements and administrative measures—were key weaknesses of an incomplete monetary framework.” The IMF encouraged the NRBB to make progress toward adopting an inflation-targeting framework.
Recent monetary policy decisions by the Bulgarian National Bank have been overshadowed by political controversy, with Bulgaria’s parliament demanding the resignation of the central bank governor and accusing the bank of not properly supervising domestic banks. Bulgarian bank Corpbank (Corporate Commercial Bank) was placed under central bank supervision with deposits frozen pending the result of an audit ordered by the central bank. The central bank is responsible for bank supervision, but Iskrov has found himself between a rock and a hard place, with politicians keen to point the finger at BNB with respect to the uncertainty surrounding Corpbank’s future and its date for commencing full banking operations. Iskrov and the BNB had put forth a rescue package for Corpbank, but it failed to achieve a political consensus.
The past 12 months saw a continuation of the Czech National Bank’s interventions in the foreign exchange markets to try to weaken the koruna. With the bank’s key interest rates remaining close to zero, the exchange rate is being used as an additional instrument for easing monetary conditions. Singer and the central bank have remained resolute in intervening in the FX markets to keep the exchange rate close to 27 korunas to the euro and have said they will continue to do so to avoid undershooting the inflation target of 2%. In a June 30 report, the IMF stated that the tail risk of a self-fulfilling deflationary spiral seems to have been averted, and it supported continuating the bank’s interventionist policy while inflation remains low.
According to the Danmarks Nationalbank, the peg to the euro has served the country well in terms of anchoring inflation expectations. However, more recently, the Danish krone has become a safe haven for international investors, and that development has made supporting the peg more challenging. Rohde has shown he is up to the task, however, wasting no time in taking decisive action. In April the central bank increased the rate of interest on deposit certificates by 0.15 percentage point and intervened in currency markets, selling the krone to temper the impact of higher short-term rates in the eurozone.
At some point Draghi may regret ever saying that he would do whatever it takes to preserve the single currency. Low economic growth, high unemployment and deflationary pressures continue to plague the eurozone, which is putting pressure on the European Central Bank president to embark on a round of quantitative easing. Some pundits, however, argue that Draghi has done as much as he can, given the political constraints he is under, and he has certainly demonstrated a willingness to try new things. In June the ECB became the first central bank to introduce negative interest rates, lowering its deposit facility to -0.10%. Following a meeting of the central bank’s governing council in early September, Draghi did not deliver on the QE front. With some council members in favor of more monetary stimulus and others preferring to do less, Draghi presented a proposal that he said “struck the middle of the road.” The ECB cut three key interest rates: the rate on the main refinancing operations by 10 basis points to 0.05%, the rate on the marginal lending facility by 10 basis points to 0.30%, and the deposit facility by 10 basis points to -0.20%. The ECB stopped short of quantitative easing but decided to launch an asset-backed securities (ABS) purchase program to try to facilitate new credit flows. It will also purchase euro-denominated covered bonds issued by monetary financial institutions in the eurozone. Both programs will commence in October. The question is: Will it be enough to stimulate growth and control inflation?
Matolcsy was only appointed to the top post at Magyar Nemzeti Bank in March last year. His appointment was shrouded in controversy, with a former deputy governor bringing into question the new administration’s qualifications and experience. Questions were also raised about the central bank’s independence, with Matolcsy reportedly being the “right hand man” of prime minister Viktor Orban. Since assuming the governorship, Matolcsy has continued the practice (in place since August 2012) of cutting the key policy rate. But in July he surprised markets with a further 20 bps reduction, leaving the key policy rate at a record low of 2.1%. Critics warned against further cuts, pointing to the fact that the forint had already fallen to two-year lows against the euro.
In June, Olsen’s central bank caught markets by surprise when it revised its economic growth forecasts downward, a move that saw the Norwegian krone fall sharply against the euro and the dollar. The central bank stated that projections for the Norwegian economy show that capacity utilization may edge down in the coming year, rising gradually thereafter. The bank has kept its key policy rate at 1.5% since March 2012, yet when other major European central banks have had rates close to zero for some time, some have asked whether the bank could have shaved a few basis points off the key policy rate now, instead of waiting for things to get worse, as underlying inflation is projected to remain within the bank’s 2.5% target.
Belka slipped from a Grade B last year to a B- this year, largely because of the doubts that have been raised in recent months about the National Bank of Poland’s independence. With headlines such as “Can Belka keep his job?” it seems monetary policy and Belka’s strong economic track record, both at the central bank and as a former director of the IMF’s European department during the European bank bailouts, have been overshadowed by remarks the central bank governor is said to have made on a secret recording published by a Polish magazine. According to media reports, in the recording Belka appears to discuss the Finance minister being fired in return for future central bank intervention in the economy ahead of elections.
Unlike some of his more hawkish central bank counterparts, a dovish Isărescu in recent months has demonstrated his willingness to reduce interest rates as inflationary pressures ease. The National Bank of Romania has gradually eased rates since July last year. Since February the main policy rate has remained at 3.5%, but at its August 4 meeting the NBR lowered the rate to 3.25%. Isărescu and the board also sought to shore up financial stability by continuing to carefully manage liquidity in the banking system and maintaining the existing levels of minimum reserve requirement ratios on both leu- and foreign-currency-denominated liabilities of credit institutions. One hopes that Isărescu’s ever watchful stewardship of the economy combined with prudential rules and financial intermediation will safeguard Romania’s economy against any external shocks.
Nabiullina, who succeeded Sergei Ignatiev to become the first woman to run the central bank of a G8 economy, looked set to maintain her predecessor’s hawkish stance when it came to lowering rates to sustain economic growth. Since she took over, of course, the Russian economy has had to withstand sanctions imposed by a range of countries following its military incursions into Eastern Ukraine. The IMF says the Central Bank of the Russian Federation helped contain the heightened currency and liquidity stresses caused by the situation in Ukraine via a succession of policy rate hikes and currency interventions. With inflation in Russia hovering around 6.5%, the IMF also welcomes the central bank’s ongoing transition to an inflation-targeting regime.
In recent months, Stefan Ingves and the Sveriges Riksbank have attracted criticism from some quarters because the country has failed to achieve its inflation target. To address the issue of deflation, in July the Riksbank cut the repo rate by 0.5 percentage point to 0.25% in order to drive inflation up toward the bank’s 2% target. However, ever cognizant of the dangers that lower interest rates pose in terms of rising household debt, Ingves and his first deputy governor voted against the July rate cut, instead proposing a cut of 0.25 percentage point to 0.5% and maintaining the repo rate at that level until 2016. Ingves may not have gained the support of the rest of the Riksbank’s executive board, but he demonstrated his willingness to stick to his guns and his desire to maintain an eye on household debt.
Jordan has restored an era of calm at the Swiss National Bank and taken the personality out of central banking following the scandal surrounding his predecessor, Philipp Hildebrand, who quit as central bank chief in 2012 following allegations surrounding currency trades made by his wife. In an effort to weaken the Swiss franc, which remains stubbornly high owing to its safe-haven status among investors, Jordan continued to defend the currency floor of SFr1.20 per euro and indicated that it would “purchase foreign currency in unlimited quantities for this purpose.” Driving a strong Swiss franc down would also help with inflation, which remains stubbornly low. The SNB expects the inflation rate to be 0.2 percentage point lower for both 2014 and 2015, at 0% and 0.4%, respectively.
The Central Bank of the Republic of Turkey’s monetary policy has always been slightly unconventional, but in recent months Başçi was accused of sending mixed signals to markets and investors by cutting rates even though inflation remains relatively high (in June annual inflation was 9.2%). In July annual food inflation fell to 12.5%, but in processed foods (bread, cereals) annual inflation rose to 12.2%. The central bank, however, pointed to “expansionary effects on global liquidity conditions and a recovery in capital inflows toward emerging economies,” which prompted it to deliver what it termed a “measured cut” in the one-week repo rate in July. The central bank stated that it would keep a tight monetary policy until the inflation outlook improved. Critics, however, suggested that the rate cut might have been politically influenced as then prime minister Recep Tayyip Erdoğan (now president) had called for major interest rate cuts.
GRADE: TOO EARLY TO SAY
Last year, Ihor Sorkin, then deputy head of Ukraine’s central bank, replaced Serhiy Arbuzov (now Ukraine’s first deputy prime minister) as governor of the National Bank of Ukraine. Since then the Yanukovich government has been overthrown and Ukraine is fighting Russian-supported separatists in the east of the country. In June, Ukraine’s new president, Petro Poroshenko, nominated former investment banker Valeria Hontareva as the new head of the central bank, a move that was viewed by international investors as a positive sign, given her knowledge of and experience with financial markets. Hontareva’s immediate challenge will be arresting the fall of the hryvnia.
Carney’s governorship of the Bank of England was one of the most anticipated central bank appointments in a major G8 country in recent history. He has already made his mark by steering the focus of the bank away from inflation targeting, instead focusing on employment as a gauge of what the central bank will do next when it comes to interest rates. Since Carney took office, the base rate has remained at 0.5%. However, divisions are beginning to emerge under his leadership. At the most recent Monetary Policy Committee meeting held in early August, two members of the seven-member committee voted to increase the base rate by 25 basis points, which suggests that some are getting frustrated with Carney’s wait-and-see stance. More recently, Carney has sent mixed messages to markets about when a rate rise is likely. The IMF states in a June report that the BoE needs to reduce the risk of potential market surprises without imparting a false sense of certainty about the evolution of interest rates. “Further, now that the Financial Policy Committee also plays a key role in affecting economic conditions,” the IMF adds, “the bank faces the additional challenge of explaining the coordination of monetary and macroprudential policies.”