Independence day for central banks


And it all happened on the Fourth of July. Today the Bank of England and the European Central Bank tried to declare their independence from the US central bank.

Interest rates might be heading up in the US, they told the financial markets, but that does not have to mean that rates are going up in Europe too.

The date was fitting. So was the method, because they signalled their independence by moving to adopt the kind of forward guidance pioneered by, er, the Fed.

I wrote earlier about the change in policy embedded in the Bank of England's "no change" statement. Soon afterwards, we saw the ECB go in for a bit of forward guidance of its own, signalling that rates would not only remain low for an extended period but that the next rate-change was more likely to be down than up.

Both have clearly had a big impact on the financial markets. There was more content in the Bank of England's guidance, because it was responding to a specific set of forecasts and expectations.

By contrast, the ECB's forward commitment sounded pretty non-committal, with little hint of any date. But the ECB's move was, possibly, more historic.

This is an institution, after all, whose watchword has previously been "we never pre-commit".

However, it's hardly a surprise that the ECB felt it had to say something. It's not just Portugal or, even, that long-term interest rates have risen nearly everywhere in response to Ben Bernanke's comments in the US.

Dwarfing all of that, arguably, is the simple and glaring fact that the improvement in sentiment around the eurozone is still not getting through to the real economy in the periphery countries.

This chart, sent to me by Huw van Steenis at Morgan Stanley, puts the problem in stark relief:


It shows that the gap between what German companies pay to borrow, and what Spanish or Italian companies pay to borrow, is now larger than at any time since the eurozone crisis began.

That is partly because things have got better in Germany. But it also because, as Mario Draghi might say, the transmission mechanism for his low interest rate policy is still seriously defective.

Lending to companies and consumers in the southern economies is still falling, and has been since early 2012.

Optimistic souls had hoped that Mr Draghi might say something more about the options the ECB has been considering for several months now, to help get credit flowing to companies in the periphery, especially the crucial SMEs: for example, by encouraging the development of asset-backed securities linked to SME loans.

But I didn't hear the ECB president say anything new on that at all. He and his colleagues are still thinking about it.

Instead, the guardians of European monetary policy produced this historic, small step into the world of forward guidance.

Financial markets are cheering, understandably perhaps. But the ECB has said a lot of "historic" things in the past couple of years. Many people in the crisis economies have yet to feel the effects.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

Read full article


This entry is now closed for comments

Jump to comments pagination
  • rate this

    Comment number 81.

    Banks get money in at on average 1% and pass this on to their borrowers at around 4%+++ and they are insolvent?
    Even a chimpanzee could turn a profit with that sort of racket.
    (excludes bank bail outs, Quantitative easing, fraud, bribery, corruption, interest rate rigging, product mis-selling and drug cartel money laundering etc...)
    Bonuses all round!

  • rate this

    Comment number 80.
    This Comment of mine (throughout below referred to as '43') has been 'referred'. The two Comments below make it clear that 43 IS about the subject of the blog. Comments about the nature of the BBC Correspondents' stances must belong in these blogs - where else do they belong?
    (To be continued)

  • rate this

    Comment number 79.

    Interest rates need to rise.
    House prices need to fall.

    We might wait a year, or after the next election, but at some point the banks are going to have to admit they are insolvent at current mortgage rates. Ahh, 0.5% to keep banks looking solvent. What a load of rubbish for savers, pensioners etc.

  • rate this

    Comment number 78.

    @72 unionrep

    'as are as thousands of people who actually can’t afford the mortgage they have'

    The figure is actually around 8 million according to the statistics. Of course there was a good chance they were able to afford their mortgage prior to the 4 year pay freeze followed by the 15% pay cut.

  • rate this

    Comment number 77.

    Well done Steph. Good to see you read these posts and correct your errors). Yes. It WAS Carney, NOT the Fed, that created "forward guidance".

    Take it easy on Mark. He is the UK's last chance. But his biggest obstacles are your exclusionist establishment and the Media.

    Your debate on whether he is smart or lucky is silly. Anyone prefers lucky leader over a genius. In Carney, you have both.


Comments 5 of 81


Features & Analysis

From BBC Capital


  • Kinetic sculpture violinClick Watch

    The "kinetic sculpture" that can replicate digital files and play them on a violin

Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.