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February 22, 2021
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Vlieghe - An update on the economic outlook

  • "where the economy ended up in 2020 Q4 was exactly in line with our May scenario, but somewhat weaker than in our August projection, and somewhat stronger than in our November projection."
  • "for those who insist, in the lexicon of recovery shapes we are experiencing something between a swoosh-shaped recovery and a W-shaped recovery, as Chart 2 shows. We are clearly not experiencing a V-shaped recovery."
  • "In our central forecast, a successful vaccine rollout allows social distancing restrictions to be lifted in the coming quarters, and voluntary social distancing is also eased as health concerns fall back significantly. That is projected to drive rapid economic growth over the course of this year."
  • "variants add downside risk to the success of the vaccination programme: vaccines may be less effective, may need to be modified (which takes time), and their impact may be less long-lived than initially hoped. This risks delaying the point at which the economy can be largely free of social restrictions and voluntary social distancing. Covid is unlikely to just go away. It will be with us for years. The question, for the MPC, is whether it lingers as a health risk that does not otherwise affect the economy, and it therefore ceases to be a factor influencing monetary policy. Alternatively, it could continue to weigh on the economy to some extent, via uncertainty, or persistently elevated unemployment as the economy reallocates resources away from sectors that are affected by lingering health risks."
  • "In the period between March and November 2020, excess accumulated savings were estimated to be around £125bn, worth around 8% of annual household income. Significant further savings are likely to have been accumulated since then, possibly doubling or tripling the accumulated amount by the middle of this year."
  • "It is mostly households in the top 40% of the income distribution that have experienced marked increases in savings, as their incomes have been largely maintained while consumption has fallen sharply."
  • "The propensity to spend out of wealth is estimated to be quite small, with international estimates centred around 5%. That would suggest a boost in the level of consumption of around 1 to 1 ½ %, and this is what is already factored into our February projection. The propensity to consume out of additional income, rather than wealth, is significantly higher than that, with estimates ranging from 10% to 50%. But the higher estimates relate to households that have low income or low liquid assets. The households that have actually accumulated the savings last year have both high incomes and are likely to have high liquid assets, so would tend to have a lower propensity to spend."
  • "It is only thanks to the substantial fiscal and monetary support that the disinflationary impact is expected to be temporary, and inflation is expected to return sustainably to target."
  • "pay settlements, which had risen to around 3% in the past few years, are expected to fall back to around 2%, close to where they were in the long period of weak wage growth after the financial crisis... It is important to distinguish these shorter term temporary fluctuations in price and wage data from underlying inflationary pressures. With the economy and the labour market running so far below its medium-term potential, we will ultimately need to close that gap to get inflation sustainably back to target."
  • "I have on many occasions explained my view that QE works primarily through expectations and liquidity channels, with only small and temporary term premium effects. As a consequence, when long term yields are already very low (close to the ELB) and there is ample liquidity in markets, there is little QE can do to add further stimulus to the economy."
  • "when market functioning started improving, the QE buying pace slowed significantly, and is now well below the pace of government issuance. We are not simply buying what the government is issuing. We are buying much less. This shows clearly that the driving force behind the decision of how much to buy is what we think we need to buy to return inflation to its target, not how much the government happens to be issuing."
  • "with long term interest rates already very low, we need to look for tools other than QE to deliver further stimulus if required. It is therefore an important and welcome development that the MPC will be adding negative interest rates to its toolkit from August, once banks have made the necessary operational adjustments. The six-month period for operation readiness was the time frame recommended by the Prudential Regulation Committee."
  • "in previous years, when there was not a live discussion about the possibility of negative interest rates, the actual level of Bank Rate tended to act as a lower bound for forward interest rates. I have previously observed that the question of negative rates can be broken down into whether they are feasible, effective, and appropriate. From August 2021, negative rates will be feasible. I also conclude from the large amount of evidence gathered from countries that already have negative rates, that negative rates are effective."
  • "Banks might not pass on the rate cuts in full, but even a partial pass-through would be stimulative. Importantly, the transmission of monetary policy is much broader than just via the interest rate on bank loans. The cost of market financing (bonds, shares) would fall as normal, the exchange rate would fall as normal. The final question then remains in what circumstances negative interest rates are appropriate, meaning when are they needed in order to return inflation sustainably to target?"
  • "If the economy evolves broadly in line with our February central projection, then in my view it is likely that no further monetary stimulus is required... Given how low I think the neutral rate of interest is, there is no hurry at all to remove stimulus. This view of a low neutral rate is further supported by the fact that, immediately before the pandemic, our policy rate was just 0.75% and we were discussing whether it should be cut because inflation pressures were a little too weak. Given these considerations, my preferred path for policy would be to keep the current monetary stimulus in place until well into 2023 or 2024"
  • "I think removal of monetary stimulus is unlikely to become appropriate until well into 2022. Such a strong economic scenario would be a nice problem for the MPC to have. We have all the policy space we need in order to tighten monetary policy. And given low neutral interest rates, is likely we would not have to tighten all that much. There is also the possibility of a weaker scenario, and my own view is that risks remain skewed in this direction... In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus. The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year. After the further boost delivered by negative rates to eliminate slack, interest rates can begin to return to positive [-0.75% for 2yrs then to zero in projection]."

February 22, 2021
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Lane - Interview with Expansión

  • “The effect of the lockdown on economic activity is less than it was last year. The European economy has had to learn to live with these measures.”
  • “China is growing at a good pace, which is good news for the world economy.”
  • “We think a lot of the pandemic shock will have been offset by the end of the year.”
  • “We are looking very carefully at measures of inflation compensation. What we are seeing is a mix of a rise in expected inflation and an increase in the inflation risk premium. And this is actually good news, because it shows that scenarios of the world economy heading into deflation are much less likely.”
  • “What we’re seeing now is not a significant and persistent change in the path of inflation. At this stage, an excessive tightening in yields would be inconsistent with fighting the pandemic shock to the inflation path. That’s what we said, and that’s what we will be continuing to keep an eye on day by day.”
  • “Here [in Europe] there’s no risk of overheating the economy with the stimulus. A lot has been done on the monetary policy side and fiscal policy has been very active, but at levels that are nowhere near the scale of the US stimulus.”
  • “This is the paradox of the financial markets and the overall economy. It can be problematic if market optimism moves ahead of the current state of the economy. We are carefully monitoring the rise in yields. These questions all come into sharp focus, especially when we have a new inflation forecast.”
  • “it is crystal clear that we are not engaged in yield curve control, in the sense that we want to keep a particular yield constant. With the purchase programme we are trying to move the curve in a certain direction and with enough force to support inflation dynamics.”
  • “Once the pandemic is over, there should be a discussion about reducing debt ratios. But the important topic is not the preferred debt-to-GDP levels, it is the speed of adjustment, the measures taken and the macroeconomic context in which they take place.”
  • “Spain’s path to recovery will look different from that of countries with economic structures that are not so focused on these sectors [like tourism].”
  • “With the private sector saving a lot, we are not seeing the current account deficits we saw in the mid-2000s. So from a macroeconomic point of view, this situation is totally different. And, because this debt has been raised at very low interest rates, the financing of it is being absorbed by investors. It is not creating, at the moment of issuance, a significant immediate burden, in contrast to previous episodes. So in a lot of the debates progress has been made in updating beliefs about deficits and debt, but that conversation is not yet over.”
  • “The recovery will be faster and the efficiency will be better if fiscal policy makes its contribution. In a low interest rate world (enabled by the ECB), fiscal policy is more effective in dealing with adverse macro shocks.”
  • “When we say that we can move rates lower [the deposit facility rate is currently -0.5 per cent], we do all sorts of calculations and analytics to make sure that it’s a credible and honest statement. What we have been saying all year is that, in the context of the crisis we have been going through, protecting credit through the TLTROs and making sure that the yield curve is at a low-enough level through the PEPP is the best combination. That logic still holds but the pandemic is of course not the only shock that could hit the economy and we have to be prepared. All the tools are available.”

February 18, 2021
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Olsen - Economic perspectives

Annual address by Governor Øystein Olsen to the Supervisory Council of Norges Bank on Thursday, 18 February 2021.