Does the Bank of England disapprove of the European Central Bank?
It’s monetary stick or twist time again. On Thursday the Bank of England will announce its monthly interest rate decision. The markets are also expecting £50bn to £75bn more in asset purchases from the Monetary Policy Committee. The betting is that the committee will discount the recent strong survey data and recognise the need for more monetary easing. What no one expects, of course, is for the Bank to announce that it will be purchasing anything other than Gilts.
The Bank of England has a reputation as being an activist monetary authority, in contrast to the conservative European Central Bank. Markets have long lamented that if only the inflation nutters of Frankfurt would follow the lead of Threadneedle Street the eurozone crisis would melt away like the weekend’s snow from London’s streets.
That’s the perception. In some respects it’s probably true. The Bank of England is on course to own £275bn of gilts, that’s around 30 per cent of the total Gilt market. The ECB’s Securities Markets Programme, by contrast, has brought up €220bn of eurozone sovereign bonds. That’s equal to just 2.6 per cent of the total single currency bond market. In other words, the Bank of England has done around 10 times more monetary easing than the ECB. Some argue that if the ECB closed that gap, most of the eurozone would be enjoying, it not ultra-low UK style interest rates, certainly much more manageable sovereign borrowing costs.
But there’s another respect in which the ECB is the radical monetary authority and the Bank of England is the conservative stickler. Adam Posen, the MPC’s foremost dove, has been pushing since last summer for the Bank to make plans to buy up corporate bonds. He would also like the bank to commit to buying up securitised small business loans in order to stimulate lending to the hard-pressed sector.
The rest of the MPC, however, has said no. The Governor, Sir Mervyn King, argues that to do so would be to expose the Bank to an unacceptable credit risk (in the event that the firm whose bonds the MPC purchased went bust). He also says that buying private sector loans would leave the Bank exposed to charges that it is effectively allocating credit to the real economy.
Yet the ECB has no such qualms. It hasn’t been buying corporate bonds in a UK-style quantitative (or credit) easing programme. But it has allowed continental banks to pledge business loans as collateral when accessing ultra cheap loans from the central bank. If European banks go bust – along with the companies they lent to – the ECB could be sitting on major losses.
And, interestingly, I’ve heard that the Bank of England takes a very dim view of the credit risks being run by the Frankfurt central bank. “The Bank of England would view what the ECB has done with absolute horror, in taking all that stuff onto the balance sheet” Jens Larsen, chief European economist of RBC Capital Markets, who worked for several years at Threadneedle Street, tells me.
Last year Sir Mervyn said that the ECB has gone to the “outer limit” of what a central bank can do. It was presumed he was talking about Frankfurt’s sovereign bond purchases, in particular its acquisitions of Spanish and Italian debt. But it now seems possible the Governor was actually referring to the ECB’s willingness to accept the loans of European businesses, which might or might not survive, as collateral from feeble continental banks.Tagged in: Adam Posen, bank of england, credit easing, European Central Bank, Governor, Jens Larsen, QE, RBC Capital Markets, Sir Mervyn King
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