Comments: Despite headaches, King should stay

Did the BoE end up providing liquidity after all? I thought that they held an auction, but by that time every other bank was so scared of being seen taking cash from the BoE that there were no bids. Meanwhile the ECB has injected hundreds of billions of euros, and continues to do so (115bn in the last few days being the latest apparently).

Posted by Minh at November 18, 2007 10:22 AM

You're thinking of the term auctions, for which there was no take-up. When the Bank was concerned with keeping the overnight rate down, it provided plenty of liquidity, during both August and September. As I understand it, the ECB provided no net additional liquidity during August, for example, though many market participants concentrated on the daily announcements, which implied they were sloshing huge sums in. Most of that liquidity was overnight and additional liquidity at the start of the month was offset by smaller than usual provision at the end. This is from the ECB's November bulletin:

"In order to alleviate tensions in the money market in August and September, the ECB conducted a number of additional open-market operations with varying maturities of up to three months.
The additional operations changed the timing of liquidity provision within the maintenance period, as well as lengthening the maturity of the Eurosystemís outstanding operations. It is
important to note that these operations did not change the total amount of liquidity provided in the respective reserve maintenance periods."

Posted by David Smith at November 18, 2007 02:49 PM

Is there not a danger that the 'promised' rate cuts next year will quickly be factored in by the markets before the cuts actually are made? And that if eg only two cuts were made that this would be seen as a sign of fears about the stagflation which some commentators are predicting?

Posted by John Rees at November 18, 2007 04:26 PM

(a) It is a bit daft to talk of stagflation with inflation at current levels
(b) If the Bank cuts by less or not at all it will probably be because growth has turned out stronger than it feared.

Posted by David Smith at November 18, 2007 06:50 PM

Dear David,
Interest rate changes have been twice as frequent in Inflation Report months as in other months. Just a statistic, which might (or might not) be informative on what to expect in the forthcoming months.
With best wishes,

Posted by cmilas at November 18, 2007 07:08 PM

Oh, ok, on overnight money the BoE defended their target rate, just as all the central banks did, and continue to do. The ECB might not have needed to do net-adds to defend theirs. But the biggest liquidity problems were in 3-month money, and King explicitly said the Bank wouldn't tamper there. By the time he changed his mind, and held the auction, there were no takers.

The ECB did some longer maturity operations, but you're probably right about net-adds - I don't have the data, but the press frequently misunderstand the way the system works. They are still doing so, in fact, with talk of the Fed injecting some $40bn or so on a single day. What they failed to mention was that there was a similar amount maturing on that day, so overall there was no net-adding of liquidity. The Slosh Report is a good resource for seeing what the Fed is up to - it's a pity there isn't a similar tool for the BoE/ECB.

From what I understood at the time, the Fed also went much further in relaxing their collateral requirements. They even said at one point they would take boat loans as collateral, although I don't know if they actually took any.

Posted by Minh at November 19, 2007 01:01 PM

Of course he should stay. King is the only one who did the right thing in this whole fiasco.

As for where interest rates are going. Surely they should be held or even raised with inflation going berserk. Anyone notice food and petrol costs stagnating or falling recently? Thought not, and I don't expect this to change much over the short to mid term.

Posted by Kev M at November 19, 2007 09:44 PM

Diesel now up over 10% in 2 months! Fact!
Food? At least up 5% in 2 months.

Life's essentials - who cares about ipods getting cheaper.

Posted by Kev M at November 26, 2007 09:11 PM