Evan Soltas
Jul 4, 2013

Forward, Central Bankers?

I'll have much more to say about this next week, but I didn't want to let the announcement of forward guidance from the European Central Bank and the Bank of England pass without immediate comment.

Here are the key paragraphs from the Bank of England's monetary-policy statement:

[I]n the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.

And here's the key excerpt from the European Central Bank's statement:
Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics.
A few quick comments, revised partially from earlier today.

(1) This is long overdue. The ECB has allowed macroeconomic conditions to get entirely out of hand. This is, in fact, not enough -- it's just a big step forward. It's worth noting that Draghi said the decision was unanimous to go forward with forward guidance. That suggests some major internal changes in the ECB, perhaps driven by new concern that they are finally finding macroeconomic conditions in Europe as worrying as they in fact are.

(2) I suspect that the Germans are coming around because they are now concerned about demand. They had not been before, setting them at odds with the rest of Europe. Why? China, first. Germany manufactures billions of dollars in industrial equipment for the Chinese import market. And Chinese demand looks like it could weaken over the next six months, what with financial turmoil and their general slowdown. Domestic demand also looks unsteady in Germany.

Now, back to hot dogs and hamburgers.