Here are some pics from my recent ski trip to Whistler!
Braving the cold after those Black Diamonds
Both the European Central Bank and the Bank of England announced asset purchases today, but the Euro skyrocketed while the British pound fell, leading many currency traders to wonder What Sets the ECB Apart from Fed and BoE?
Before talking about why the euro recovered, here are the 4 key announcements made by the ECB today:
1. Cut Repo Rate from 1.25 to 1.00%
2. Narrow Rate Corridor by 50bp (Marginal Lending Rate Cut by 50bp to 1.75%)
3. Extend maturity of refinancings to 12 months
4. Announced purchases of up to EU60 billion in euro-denominated covered bonds
There is no question that these are unprecedented measures for the European Central Bank. Everyone expected the quarter point rate cut to a record low of 1.00 percent, the decision to increase the maturity of refinancings to 12 months and also the narrowing of the rate corridor by 50bp, but the chance of purchasing euro-denominated covered bonds was low.
Nonetheless, Trichet has resorted to what many consider Quantitative Easing (even though he explicitly denied that this is QE) and rather than punishing the euro, currency traders are applauding the ECB for being flexible and realizing that there is no longer a stigma attached to asset purchases. Also, the amount of bonds that the ECB is purchasing is nominal compared to the rest of the central banks. The ECB plans on buying up to EU60 billion, which is less than half of the BoE’s Quantitative Easing program. More importantly however, Trichet suggested that they may sterilize the liquidity impact of bond purchases, which would limit the impact on the money supply and the pressure on the euro. The Fed and the BoE’s purchases are unsterilized. Finally, this is only an initial announcement. Further details on the bond plan will be released in June. Although rates are appropriate for the current time, the central bank could still take interest rates below 1 percent based upon Trichet’s comment that they have decided if rates have hit their lowest point
ECB President Trichet does it once again. He has under delivered and postponed the inevitable. This morning, the central bank cut interest rates by only 25bp to 1.25 percent instead of the widely expected 50bp cut, sending the Euro through the roof.
Some questions immediately come to mind, which Trichet elegantly answered in his post meeting press conference (disclaimer: these are my interpretations):
Why Did the ECB Cut by 25bp Instead of 50bp?
1. To Maintain Rate Corridor
2. Give Themselves Room to Cut Again in May
3. 6 Month and 12 Month Money Market Rates are Below U.S. Levels
Will Interest Rates Be Reduced Further?
Yes, next month probably by another 25bp to 1 percent. Trichet explicitly said that 1.25 percent will not be the low.
What About Quantitative Easing and Non-Standard Measures?
Brace yourself, full details should come on May 7th (their next monetary policy meeting). The central bank will decide at that meeting if they want to implement new unconventional measures and if so, they will provide full details.
What is the outlook for growth and inflation?
ECB expects inflation to turn negative in the middle of the year and back to positive towards year end. As for growth, it should remain weak in 2009 but gradually recover in 2010.
What does this mean for the Euro?
This is my opinion and not the ECB’s. The Euro could rally a bit further this week because of position adjustments (many people anticipated a 50bp rate cut) but since the ECB will be cutting again and there is still a lot of uncertainty surrounding the scope of nonstandard measures, further gains in the EUR/USD over the next month could be limited.
The job of turning around the global economy lies of the shoulders of just a few people and in this group includes central bank governors. With such a tall task at hand, it leads me to wonder what are the people with such power and responsibility making. Is it enough to compensate for the sleepless nights, grey hairs and anxiety?
Here’s the latest data that I could find on central bank salaries. Some of these are exact numbers from annual reports, some are estimates based upon ranges and publicly available estimates.
**I added SNB President Roth who made a whopping $725,468 last year
Glenn Stevens (AUD): $160,000 (AUD 200,000 in 2008)
Who is the highest paid central banker in the world?
Do you think these central bankers should be paid more or less? Chime in!
The Euro and British pound have come under severe selling pressure after the ECB and BoE cut interest rates by 50bp. Interest rates are now at historic lows for both central banks and even though the rate announcements were negative for both currencies, the Euro has sold off more aggressively than the British pound because ECB President Trichet warned that growth will be signicantly reduced in 2009 and 2010 while inflation will remain well below 2 percent.
More importantly, he admitted that the ECB is studying non-standard measures which include quantitative easing. However, Trichet prefers to use the Fed’s label of credit easing over quantitative easing (What is the Difference Between Credit and Quantitative Easing?). The mere possibility that the ECB could consider Quantitative Easing was enough to drive the EUR/USD below 1.25. With the third highest interest rate of the G10 nations, further interest rate cuts are still possible. By saying that they have not made a decision about whether 1.5 percent is the lowest level makes 1 percent interest rates a real possibility for the Eurozone. In fact, Trichet may opt for another rate cut before credit easing. For the US dollar, British pound and Japanese Yen, no surprises are expected from future rate decisions. However for the Euro, the prospect of lower interest rates and the uncertainty of if and when the ECB will adopt credit easing should keep the EUR/USD under pressure.
Bank of England: Rates May Have Hit Rock Bottom
As for the Bank of England, I believe today’s 50bp rate cut to 0.5 percent is their last. The central bank has been worried that excessively low interest rates would erode profitability of banks, reducing their incentive to lend. Now that they have been given the authorization to begin Quantitative Easing, it will be their new focus. UK Gilts have soared on the announcement that the government will purchase up to £100bn in Gilts and £50bn in private sector assets (syndicated loans and ABS). As we indicated in our ECB and BoE preview, Quantitative Easing is negative for a currency, but if the BoE is done cutting interest rates, further weakness in the British pound may be limited.