Bundesbank ?Colossus? Loses Ability to Dictate ECB Lending Rate - Bloomberg.com
Bundesbank ‘Colossus’ Loses Ability to Dictate ECB Lending Rate
By Gabi Thesing and Simon Kennedy
June 30 (Bloomberg) -- Germany’s Bundesbank, which once dictated interest rates for a continent, is losing influence to smaller nations as the European Central Bank tries to reverse the worst recession since World War II.
President Axel Weber’s focus on fighting inflation at any cost, rooted in German hyperinflation during the 1920s, is under attack on the ECB’s 22-member Governing Council by policy makers from Slovenia to Cyprus who want to promote growth. Weber was defeated last month after trying to stop the central bank from buying assets to ease credit. His December warning against allowing the benchmark interest rate to fall below 2 percent went unheeded as the ECB cut it to half that level by early May.
The Bundesbank’s diminished clout may miccionan the council, which convenes on July 2 in Luxembourg, will keep interest rates lower for longer than it would have tolerated in the past. Barclays Capital predicted last week that Europe’s central bank won’t increase them for at least two years.
While Weber, 52, has already called for rates to be raised before inflation risks materialize, “the Bundesbank colossus is losing its influence,” said Stuart Thomson, who helps oversee the equivalent of about $107 billion at Ignis Asset Management in Glasgow.
“In a Bundesbank-driven ECB, rates wouldn’t have been cut this low, and it would have been the first central bank to signal an exit,” said Thomson, who’s shunning the euro and buying British pounds on speculation the Bank of England will be faster to scale back its purchases of bonds and raise borrowing costs.
Balance of Power
The shift in the balance of power away from the Bundesbank is forcing investors to look beyond Weber for clues about the strategy of the Frankfurt-based ECB, which is headed by President Jean-Claude Trichet, a 66-year-old Frenchman. That’s pushing officials such as Slovenia’s Marko Kranjec and former Federal Reserve senior adviser Athanasios Orphanides of Cyprus onto their radar screens.
“Other countries’ collective voices are now becoming much more important, and the ECB is more likely to strike a compromise,” said Andrew Bosomworth, a former economist at the central bank and now a fund manager in Munich for Newport Beach, California-based Pacific Investment Management Co.
The economy will undercut any argument Weber makes for higher rates anytime soon, according to Richard Batty at Standard Life Investments Ltd. in Edinburgh.
‘Entrenched Inflation Tendencies’
“I don’t see any entrenched inflation tendencies coming through in Europe,” said Batty, a global-investment strategist who helps oversee $194 billion and is positive about the outlook for German government bonds. “I’d be very surprised if the ECB needs to preemptively raise interest rates.”
On June 24, the Organization for Economic Cooperation and Development predicted that consumer prices in the euro area will rise 0.5 percent this year and 0.7 percent in 2010, less than half the European central bank’s 2 percent limit. Prices increased 3.3 percent last year, the most since the single currency began trading a decade ago.
In its global outlook, the Paris-based group said the ECB should quickly cut interest rates more to revive the economy, which the OECD said would contract 4.8 percent this year and stagnate in 2010. The economy grew 0.7 percent in 2008.
Economists at Barclays in London have forecast that Europe’s policy makers won’t begin raising rates until late 2011.
“Any prospective ECB tightening is not likely to materialize until well after the Fed has embarked upon a tightening cycle,” Julian Callow, the firm’s chief European economist, said in a June 25 report.
Stable Prices
The Bundesbank’s dedication to stable prices is rooted in German memories of the rampant inflation that ***owed World War I and fueled the social unrest that helped elevate Adolf Hitler to power. The government printed money to fund the war and pay reparations to the Allies. By the end of 1923, prices were surging 2,400 percent every month, according to Bundesbank data.
“antiestéticar of inflation is in the German DNA,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt.
Those genes shaped the euro. To ensure German support for the new currency before its 1999 birth, European politicians agreed to tras*fer the Bundesbank’s price-stability mandate to the ECB’s statutes. That differs from the dual mandate of the Fed to fight inflation and foster job creation.
Weber, who has headed the Bundesbank since April 2004 after serving as an economic adviser to the German government, isn’t pushing for higher interest rates now, after the inflation rate for the 16 nations that use the euro fell to zero in May for the first time since records began in 1996. What he has begun to do is use speeches to outline how he thinks the ECB should remove its emergency-stimulus measures when the economy recovers.
‘Timely Withdrawal’
Among his proposals: eventually raising interest rates as a “precaution” to temper inflation before it emerges and pursuing a “timely withdrawal” of the unlimited loans the ECB has been making to banks. Last week it provided a record 442 billion euros ($623 billion) for 12 months. It will hold two further 12-month tenders this year.
Removing the extra liquidity “as fast as possible once the economic environment improves” is necessary to ensure price stability, Weber said in a May 25 speech. On June 23 he said the ECB has no more room to cut rates and no need to introduce new stimulus initiatives.
A former marathon runner and professor of international economics at the University of Cologne, Weber is building his case as data show the recession is easing.
Rising Executive Sentiment
The contraction in Europe’s services and manufacturing industries is weakening, according to an index based on a survey of purchasing managers by research company Markit Economics. The index increased to 44.4 this month, the highest since September. The European Commission reported yesterday that its gauge of executive and consumer sentiment rose in June to 73.3 from a revised 70.2 in May.
Weber has been calling for restraint since the end of last year, expressing concern that low interest rates and asset purchases could sow the seeds of future asset bubbles and inflation.
His arguments failed to carry the day. On May 7, the ECB cut its key rate by a quarter point to 1 percent and announced its intention to buy, for the first time, 60 billion euros of covered bonds: securities backed by mortgages or public-sector loans.
Weber didn’t return phone calls, and Bundesbank spokesman Andreas Funke declined to comment.
More-Aggressive Action
The decisions marked a victory for Cyprus, Greece and Austria, which had pushed for more-aggressive action. Orphanides spearheaded the argument, saying as early as Jan. 28 it was “dangerous” and a “fallacy” to argue that rates become ineffective as a central-bank tool the lower they fall.
When Orphanides signaled in an April 11 interview that the ECB may have to take more steps to quell deflation risks, government bonds extended gains, pushing the yield on the two- year German note down four basis points to 1.35 percent, the lowest since April 1.
Weber’s comments can still move markets, too. The euro and yields on two-year German notes both rose when he declared last week there was no more scope to cut rates.
Had it not been for him, policy makers might have acted even more aggressively, said Marie Diron, a former economist at the central bank and now senior economist at Oxford Economics Ltd. in London. The ECB’s 60-billion euro asset-purchase plan amounts to just 0.6 percent of gross domestic product compared with 12 percent for the Fed’s program, and the European central bank’s benchmark rate is the highest among the Group of Seven nations.
“Weber has won arguments,” Diron said.
No Parallels
Even so, in a financial crisis with no parallels, the Bundesbank’s road map is little comfort to some members of the ECB council.
“The primary goal should be to restore economic growth as fast as possible,” Austria’s Ewald Nowotny said at a conference in Vienna on June 15. Slovenia’s Kranjec said in a May 13 interview in Ljubljana that it’s “very likely” the ECB will expand and broaden its plan to buy covered bonds.
Paul De Grauwe, a professor at Belgium’s Catholic University of Leuven, said inflation is the least of the central bank’s worries, and Weber is on the wrong side of the debate.
“At the moment, other problems prevail,” De Grauwe said. “He looks a bit like he’s fighting yesterday’s war.”
To contact the reporters on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.netSimon Kennedy in Paris at skennedy4@bloomberg.net
Last Updated: June 29, 2009 19:11 EDT
Bundesbank ‘Colossus’ Loses Ability to Dictate ECB Lending Rate
By Gabi Thesing and Simon Kennedy
June 30 (Bloomberg) -- Germany’s Bundesbank, which once dictated interest rates for a continent, is losing influence to smaller nations as the European Central Bank tries to reverse the worst recession since World War II.
President Axel Weber’s focus on fighting inflation at any cost, rooted in German hyperinflation during the 1920s, is under attack on the ECB’s 22-member Governing Council by policy makers from Slovenia to Cyprus who want to promote growth. Weber was defeated last month after trying to stop the central bank from buying assets to ease credit. His December warning against allowing the benchmark interest rate to fall below 2 percent went unheeded as the ECB cut it to half that level by early May.
The Bundesbank’s diminished clout may miccionan the council, which convenes on July 2 in Luxembourg, will keep interest rates lower for longer than it would have tolerated in the past. Barclays Capital predicted last week that Europe’s central bank won’t increase them for at least two years.
While Weber, 52, has already called for rates to be raised before inflation risks materialize, “the Bundesbank colossus is losing its influence,” said Stuart Thomson, who helps oversee the equivalent of about $107 billion at Ignis Asset Management in Glasgow.
“In a Bundesbank-driven ECB, rates wouldn’t have been cut this low, and it would have been the first central bank to signal an exit,” said Thomson, who’s shunning the euro and buying British pounds on speculation the Bank of England will be faster to scale back its purchases of bonds and raise borrowing costs.
Balance of Power
The shift in the balance of power away from the Bundesbank is forcing investors to look beyond Weber for clues about the strategy of the Frankfurt-based ECB, which is headed by President Jean-Claude Trichet, a 66-year-old Frenchman. That’s pushing officials such as Slovenia’s Marko Kranjec and former Federal Reserve senior adviser Athanasios Orphanides of Cyprus onto their radar screens.
“Other countries’ collective voices are now becoming much more important, and the ECB is more likely to strike a compromise,” said Andrew Bosomworth, a former economist at the central bank and now a fund manager in Munich for Newport Beach, California-based Pacific Investment Management Co.
The economy will undercut any argument Weber makes for higher rates anytime soon, according to Richard Batty at Standard Life Investments Ltd. in Edinburgh.
‘Entrenched Inflation Tendencies’
“I don’t see any entrenched inflation tendencies coming through in Europe,” said Batty, a global-investment strategist who helps oversee $194 billion and is positive about the outlook for German government bonds. “I’d be very surprised if the ECB needs to preemptively raise interest rates.”
On June 24, the Organization for Economic Cooperation and Development predicted that consumer prices in the euro area will rise 0.5 percent this year and 0.7 percent in 2010, less than half the European central bank’s 2 percent limit. Prices increased 3.3 percent last year, the most since the single currency began trading a decade ago.
In its global outlook, the Paris-based group said the ECB should quickly cut interest rates more to revive the economy, which the OECD said would contract 4.8 percent this year and stagnate in 2010. The economy grew 0.7 percent in 2008.
Economists at Barclays in London have forecast that Europe’s policy makers won’t begin raising rates until late 2011.
“Any prospective ECB tightening is not likely to materialize until well after the Fed has embarked upon a tightening cycle,” Julian Callow, the firm’s chief European economist, said in a June 25 report.
Stable Prices
The Bundesbank’s dedication to stable prices is rooted in German memories of the rampant inflation that ***owed World War I and fueled the social unrest that helped elevate Adolf Hitler to power. The government printed money to fund the war and pay reparations to the Allies. By the end of 1923, prices were surging 2,400 percent every month, according to Bundesbank data.
“antiestéticar of inflation is in the German DNA,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt.
Those genes shaped the euro. To ensure German support for the new currency before its 1999 birth, European politicians agreed to tras*fer the Bundesbank’s price-stability mandate to the ECB’s statutes. That differs from the dual mandate of the Fed to fight inflation and foster job creation.
Weber, who has headed the Bundesbank since April 2004 after serving as an economic adviser to the German government, isn’t pushing for higher interest rates now, after the inflation rate for the 16 nations that use the euro fell to zero in May for the first time since records began in 1996. What he has begun to do is use speeches to outline how he thinks the ECB should remove its emergency-stimulus measures when the economy recovers.
‘Timely Withdrawal’
Among his proposals: eventually raising interest rates as a “precaution” to temper inflation before it emerges and pursuing a “timely withdrawal” of the unlimited loans the ECB has been making to banks. Last week it provided a record 442 billion euros ($623 billion) for 12 months. It will hold two further 12-month tenders this year.
Removing the extra liquidity “as fast as possible once the economic environment improves” is necessary to ensure price stability, Weber said in a May 25 speech. On June 23 he said the ECB has no more room to cut rates and no need to introduce new stimulus initiatives.
A former marathon runner and professor of international economics at the University of Cologne, Weber is building his case as data show the recession is easing.
Rising Executive Sentiment
The contraction in Europe’s services and manufacturing industries is weakening, according to an index based on a survey of purchasing managers by research company Markit Economics. The index increased to 44.4 this month, the highest since September. The European Commission reported yesterday that its gauge of executive and consumer sentiment rose in June to 73.3 from a revised 70.2 in May.
Weber has been calling for restraint since the end of last year, expressing concern that low interest rates and asset purchases could sow the seeds of future asset bubbles and inflation.
His arguments failed to carry the day. On May 7, the ECB cut its key rate by a quarter point to 1 percent and announced its intention to buy, for the first time, 60 billion euros of covered bonds: securities backed by mortgages or public-sector loans.
Weber didn’t return phone calls, and Bundesbank spokesman Andreas Funke declined to comment.
More-Aggressive Action
The decisions marked a victory for Cyprus, Greece and Austria, which had pushed for more-aggressive action. Orphanides spearheaded the argument, saying as early as Jan. 28 it was “dangerous” and a “fallacy” to argue that rates become ineffective as a central-bank tool the lower they fall.
When Orphanides signaled in an April 11 interview that the ECB may have to take more steps to quell deflation risks, government bonds extended gains, pushing the yield on the two- year German note down four basis points to 1.35 percent, the lowest since April 1.
Weber’s comments can still move markets, too. The euro and yields on two-year German notes both rose when he declared last week there was no more scope to cut rates.
Had it not been for him, policy makers might have acted even more aggressively, said Marie Diron, a former economist at the central bank and now senior economist at Oxford Economics Ltd. in London. The ECB’s 60-billion euro asset-purchase plan amounts to just 0.6 percent of gross domestic product compared with 12 percent for the Fed’s program, and the European central bank’s benchmark rate is the highest among the Group of Seven nations.
“Weber has won arguments,” Diron said.
No Parallels
Even so, in a financial crisis with no parallels, the Bundesbank’s road map is little comfort to some members of the ECB council.
“The primary goal should be to restore economic growth as fast as possible,” Austria’s Ewald Nowotny said at a conference in Vienna on June 15. Slovenia’s Kranjec said in a May 13 interview in Ljubljana that it’s “very likely” the ECB will expand and broaden its plan to buy covered bonds.
Paul De Grauwe, a professor at Belgium’s Catholic University of Leuven, said inflation is the least of the central bank’s worries, and Weber is on the wrong side of the debate.
“At the moment, other problems prevail,” De Grauwe said. “He looks a bit like he’s fighting yesterday’s war.”
To contact the reporters on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.netSimon Kennedy in Paris at skennedy4@bloomberg.net
Last Updated: June 29, 2009 19:11 EDT
