Can Central Banks save the world?

6th September 2012

Today sees the policy meetings of the Bank of England and the European Central Bank of which one at least is hotly awaited! They come hot on the heels so to speak of an announcement by the Swedish Riksbank that it is reducing the official interest-rate by 0.25% to 1.25%. Interestingly, though no-one seems to be suggesting that there will be a concerted interest-rate cut today. In some ways that is a sign of the times itself.

In addition there are signals of action by other central bank going on. For example today is the first anniversary of the 1.20 cap against the Euro established by the Swiss National Bank. In a possible early birthday celebration the Swiss Franc fell from its usual 1.201 to 1.204 yesterday as the SNB stoked rumours that it could act further. Today the celebrations have continued as it is reached 1.205 which must give the often hard pressed foreign exchange buyers (of Euros) at the SNB some relief. Not only have they been buying Euros but they have then often been involved in selling them to buy other currencies to diversify the portfolio which now amounts to 406 billion Swiss Francs something which for example was noted by the Reserve Bank of Australia when it was discussing prospects for the Aussie dollar. It is one of the themes of central bank action that there are unintended consequences of their action which they mostly do not plan for.

What intervention is happening right now?

I have described the currency intervention in the Swiss Franc by the SNB above. In addition to this three of the worlds main central banks are engaged in Quantitative Easing  type policies.

Bank of England: It is currently buying £3 billion of UK Gilts a week on its way to purchasing some £375 billion of UK government debt. At this rate it has eight more weeks of purchases to complete.

Such purchases have seen the size of its balance sheet rise to £386.7 billion.

Bank of Japan: It too is currently purchasing its own  government bonds and now plans to have purchased a total of 40 trillion Yen of them for this purpose by the end of the year. I say for this purpose because in Japan matters are rarely that simple as another 21.6 trillion Yen are bought each year as part of its "regular purchases".

US Federal Reserve: This is not currently making outright purchases but is selling shorter-dated Treasury Bonds to buy those with longer maturities in an attempt to reduce longer-term interest rates. This is to help mortgage rates and commercial borrowing rates. The planned total size is US $667 billion and purchases are continuing at a rate of approximately US $45 billion per month.

The European Central Bank: This is not carrying out any activities as I type this but this is rather a moot point with a probable change expected at 1:30 UK time today. However past activities have seen its balance sheet push above 3 trillion Euros.

What good is all this doing? Continue reading…


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