Monday, April 20, 2009
Led by Trichet, the ECB remains to be behind the curve on all things monetary; but there is growing divide among the ECB governors:
Policy makers on the ECB’s 22-member council are divided over the best way to stem the euro region’s worst recession since World War II. Germany’s Axel Weber has ruled out cutting the ECB’s key interest rate below 1 percent and said he doesn’t want to buy debt securities. Greece’s George Provopoulos and Athanasios Orphanides of Cyprus want to keep open the option of deeper rate reductions and asset purchases to fight the risk of deflation.
Trichet said there was no split among the Governing Council. He declined to comment on any possible non-standard measures the bank may decide at its May 7 meeting.
We will have to wait until May 7 to see if the ECB will engage in QE policy. But don't hold your breath: if it took this long for the divide to surface, I imagine it will take longer to redefine the majority. Therefore, nothing of interest is likely to come on May 7 other than another 25 bps cut in its refi rate and likewise downward momentum in alternative policy rates.
The ECB is behind the times. The chart (above) illustrates annual real money supply growth through February 2009 in the U.K., the Eurozone, and Japan, and through March 2009 in the U.S. The ECB is facing a two-month decline in its annual real money growth rate. If this continues, the effects will be restrictive on the economy. Interestingly, the U.S. is still struggling against a
falling historically low money multiplier amid its quantitative easing measures as its annual growth rate bounces around 9.5%-10%.
The 6-month annualized real money supply growth illustrates better recent monetary policy shifts (graph to right). Clearly, the U.K. and the U.S. are actively engaged in QE; and to a lesser degree, I believe that the Bank of Japan is as well. However, it is obvious that the ECB is not; its 6-month annualized growth rate is just barely breaking trend since January 2007.
And finally, nominal money growth in the first three months of 2009 paints a similarly dark picture for the Eurozone.
The U.K. and the ECB have not recorded their March aggregates yet, but the trend is likely to follow this one: the ECB is lagging, allowing its money supply growth rate to fall in spite of the February bounce. This is dangerous. Falling nominal money will eventually drop prices, even core prices.
Perhaps the ECB wants relative prices to change - all QE economy prices rise or at least fall less quickly compared to those in the Eurozone - in order to stimulate exports. I don't know, seems rather masochistic, don't you think?