News | Wednesday, 11 March 2009

To print or not to print…

After missing one month, last Thursday the European Central Bank (ECB) adjusted its interest rates by 0.5 per cent to a historic low of 1.5 per cent. Speaking during the announcement of the latest interest cut at the end of the ECB Governors’ meeting at the Central Bank’s Headquarters in Frankfurt, President Jean-Claude Trichet did not exclude using other “non-standard” instruments of monetary policy, such as printing more money, to ease pressure on banks, should interest rate cuts alone not produce the desired effect. He also expressed caution against cutting the interest rate in the Eurozone to zero, as in the United States (US). CHARLOT ZAHRA spoke to a panel of experts about the latest ECB rate cut and the possible scenarios that have opened as interest rates keep falling and the recession in the Eurozone shows no sign of abating.

Karm Farrugia: ‘Printing more money’ is not quite what it sounds
Asked for his opinion about the latest ECB rate cut, veteran economist Karm Farrugia told Business Today that “the ECB had no choice but to cut down its rate. A month too late in fact,” he added.
Farrugia said that he agreed with the ECB decision to cut down interest rates by 0.5 per cent, but complained that it was “not enough”.
“I would like it to go down even further to 0.5 per cent like the Bank of England,” he said.
Farrugia explained that as long as there was still room to cut down the rate further, “governments keep hoping that the economy will stir and start up the road to revival.
“When the rate is at its lowest – say, 0.25 per cent – then governments will have to resort to other monetary measures – increasing liquidity in the economy by pumping credit – or fiscal – budgetary deficits – or other instruments, which I believe to be the case in this deepest recession for over 70 years,” Farrugia told Business Today.
Commenting on what had led the ECB to cut the interest rate this time round and whether the worse economic data emanating from the eurozone for inflation and GDP had led to this decision, Farrugia discounted the fear of inflation.
“It couldn’t have been the fear of inflation, naturally,” he said. “Otherwise the cut would not have happened.
“It was simply a realisation that up till now, all the cuts have had hardly any impetus on the eurozone – or even global – economy,” the veteran economist warned.
Farrugia agreed with ECB President Jean-Claude Trichet’s statement on using other “non-standard” measures of monetary policy, such as printing more money, if interest rate cuts alone did not produce the desired effect.
“‘Printing more money’ is not quite what it sounds,” Farrugia said. “It may not even be totally correct, since credit and liquidity in the economy is usually created by a central bank buying bonds from the banks in return for credit balances with it or for currency notes – hence printing – as required,” he explained.
Asked to elaborate on what other measures of monetary policy the ECB should adopt to foster economic demand and consumer growth in the Euro area if not printing money, Farrugia said that the ECB should for a short time do away with the current budget deficit limit as set out in its Stability and Growth Pact.
“The ECB should temporarily raise the maximum budgetary deficit of its members to 4 per cent of GDP – or even 5 per cent – provided the increase from 3 per cent is all for infrastructural capital projects,” he said.
In view of the latest economic data for the eurozone, Farrugia warned that the economic recession hitting the area will be “not a short one for sure. I wish it would, but sadly we would be lucky if the recession bottoms by June this year,” the veteran economist explained.
Asked about how long it would take for the eurozone economy to recover, not even the outspoken Farrugia would venture into answering.
“I prefer not to guess because that depends on how much people in power do believe today about the extent of the recession and the decisions they take accordingly and which will not be likely to impact before the bottom is reached anyway,” he told Business Today.
The veteran economist did not agree with the ECB president’s caution against cutting the interest rate in the Eurozone to zero, as in the US. “The rate in the USA is a little above zero. This, in my view, is the rate the ECB should go down to,” Farrugia told Business Today.
Otherwise the authorities would still withdraw from other remedies. Delay is harmful,” he warned.
Finally, Farrugia was very sceptical about Malta’s chances of being spared from the throes of the economic recession facing the eurozone. “How can we be spared?
“The best hope is that we won’t go down as much as the others; and I think that’s what is likely to happen,” the veteran economist told Business Today.

Lawrence Zammit – Local banks raising interests ‘unacceptable’
According to economist Lawrence Zammit, “the ECB is expecting a further slowdown of the major Eurozone economies”, which is why it “felt the need to ease monetary policy further”.
“The ECB must be feeling that the threat of inflation is still very distant,” Zammit said.
Asked what he believed led the ECB to cut the interest rates this time round, and whether the worse economic data emanating from the eurozone for inflation and GDP had led to this decision, Zammit disputed this assertion.
“If the news on inflation was bad, then the ECB would not have cut interest rates,” Zammit contended. “A cut in interest rates is a signal that there is no threat of inflation in the foreseeable future,” he told Business Today.
Speaking during the announcement of the latest interest cut at the end of the Zammit did not answer directly when asked by Business Today whether he agreed with Trichet’s approach.
“The major issue today seems to be the way banks are dealing with each either and the way banks are viewing any request for credit,” he said. “This has led to a loss in business confidence. Unless this issue is resolved the way out of the recession will be tortuous.”
On the question of the timing when the eurozone would start coming out of the economic recession in view of the latest economic data for area, and whether it will be a protracted recession or a short one, Zammit was relatively optimistic about the matter.
“Since it is a question of confidence, the minute confidence is restored, the eurozone will start moving out of the recession,” he told Business Today.
“There should definitely be no issue with purchasing power given the low level of interest rates and the low level of inflation,” Zammit added.
Zammit was in agreement with the ECB president’s caution against cutting the interest rate in the Eurozone to zero, as in the US.
“For an economy to get to a rate of interest of zero, it must be in deep trouble,” he told Business Today. “Moreover, zero interest rates do not necessarily get economies out of a recession.”
Finally, on the issue of whether the Maltese economy was going to be spared from the throes of the economic recession facing the eurozone, and to what extent Malta will be affected, Zammit told Business Today: “It is still too early to pass judgement on the Maltese economy.
However I sincerely hope that the commercial banks do follow the position taken by the European Central Bank and pass on the interest rate cut to the consumers,” he insisted.
“Raising interest rates or leaving them as they are is unacceptable,” Zammit warned.

John A. Consiglio: Expecting turnaround from cuts was ‘bound to fail’
Veteran banker and University lecturer John A. Consiglio said that central banks around the world – particularly the ECB and the Federal Reserve – “never take interest rate decisions in a static context, that is on the basis of an economic situation as it stands at the moment of the decision.
“Rate changes always have incorporated within their backing reasoning a view of where the economy will be at set points in the future.
“So in a sense, every rate is a ‘flowing’ decision, and this historic low must be seen both in the context of what has happened in the EU economy over the past months, as well as what the ECB sees coming down the road...but how far down the road they would be looking is usually a very closely guarded secret,” Consiglio told Business Today.
Consiglio said that the fact that the ECB had gone as far down as 1.5 per cent “could represent a view that this is as low as we’ll go. From now on rates will either stay put to have a long term beneficial effect on new investment, or we see signs that suggest to us other tools than just rates will need to be used to bring about change for the better, that is, different monetary policy tools,” the veteran banker told Business Today.
Consiglio explained that there used to be an old monetary theory, called “liquidity preference theory”, which essentially implied that there was a particularly low point – in his past banking days it was around three per cent – where people’s preference for holding or borrowing money would no longer be effected in either way if rates went below it.
“So at that level the monetary authorities will see that, to take a hypothetical example, bringing borrowing rates down to even lower levels does not mean that more borrowing will in fact be taken up, more investment happen, more demand and more jobs will be created just because you did only just that, that is, reduce ever lower,” he warned.
Consiglio said he was “bemused” by ECB President Jean Claude Trichet’s reference to “non-standard” instruments of monetary policy.”
“Does he mean a moving away from the seemingly modern central banks’ ‘fad’ of interpreting monetary policy only in terms of the exchange and interest rates?” he asked.
If, for example, Trichet was thinking in terms of central banks becoming more actively involved players in general economic direction, and so using “old” tools like qualitative and quantitative lending controls or stimulants, more active institutional reserves’ management, and so on, “then, provided the rights sectors of the European economy are focused on, it will be interesting to see then the outcome of direction in these senses,” Consiglio explained.
“Of course the ECB as such may well just limit itself to making certain right ‘noises’ to individual national central banks – possibly even through the European System of Central Banks (ESCB) — and then expect them to carry on with it,” Consiglio told Business Today.
The veteran banker said it was “very hard” to say when the European economy, and not just the eurozone, would start coming out of this “really bad conjuncture.
“If one wants to wax lyrical, or be poetic about the whole thing, one might even resort to the words of the poet ‘If winter’s here, can spring be far behind?’
“But, like the cold weather, and the rain, and the winds, there are no sings of spring sprouting out of neither our own yards or those of our US and Asian counterparties, that is, the EU’s trading partner blocks,” the veteran banker warned.
Unemployment in the US had reached, in some sectors, the lowest levels in a quarter-century, manufacturing industry there as well as in Europe was in crisis, while stock markets “splutter like some car whose petrol tank is at its bottom completely dry point,” Consiglio told Business Today.
“In this sense, of course, I agree with the ECB’s Governor’s caution against cutting eurozone rates to zero,” the veteran banker insisted. It was not just the “zero level” per se that Trichet was cautioning against.
“He is warning the markets, and the governments that ultimately have the responsibility for their good functioning, that expecting a turnaround sourced only from that tool is simply bound to fail. It will not work,” Consiglio told Business Today.
“Much more will need to be done in other areas, not the least of which is the realm of fiscal policies and public investment in different countries,” he explained.
Finally on the issue of whether the Maltese economy would be spared of the throes of the recession that was hitting the entire euro area, Consgilio said: “We would be hoodwinking ourselves in thinking that the Maltese economy – as we always rightly keep saying one of the most open economies that one can imagine – can be completely spared from the vicissitudes of the international – and not just the eurozone — recession,” he warned.
Consiglio said that the Maltese economy was already being impacted upon. “Look at tourism, manufacturing export, falling retail demand, retail markets’ demand expectancies.
“The extent to which Malta will be affected is, in my view, highly dependent on how capable we all are in thinking out of conventional modes or boxes – including political ones – about issues, situations, achievements, or even failures,” Consiglio told Business Today.


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11 March 2009

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