Central banks lay a false trail
IF CENTRAL banks are trying to be more predictable, so as not to surprise markets, they are not doing a great job of it. Alternatively, overpaid analysts on whose judgments rest tens of billions of dollars of investments may be getting it wrong too often.
Certainly, analysts were wrongfooted by the European Central Bank president Mario Draghi when he unveiled the latest policy decisions.
The lowering of the ECB’s negative deposit rate by ten basis points to minus 0.3pc was less than expected. Negative interest rates are meant to discourage Europe’s commercial banks from parking funds with the central bank and to try to lend them instead. All the predictions that the ECB would at least match the yield on German bonds proved false too.
Similarly, forecasts that the current programme of bond buying or quantitative easing would be expanded from the present figure of €60bn a month also proved wide of the mark. In the market view, Super Mario failed to do what is necessary to pull the eurozone out of its deep slumber.
How wrong the forecasts proved to be was most visible on the foreign exchanges where the euro surged 3pc against the US dollar to $1.0941 – its highest level for a month. Shares in Germany’s key Dax index dropped 3.58pc as the hopes of further monetary easing drifted away.
Draghi is not the first central banker to catch the market on the hop recently. The dovish tone of the Bank of England’s Inflation Report last month led the public to believe that the rate hike that was meant to come into view at the turn of this year had been postponed until 2017. That was until deputy governor Ben Broadbent noted too much faith had been placed in a flat yield curve.
All of this begs the question of what the Federal Reserve, the US central bank, will do at its next meeting on December 15 and 16. Janet Yellen has signalled that the US economy is strong enough to take a rise from the current super low range of 0pc to 0.25pc.
But we have been here before. There was widespread expectation that the first US rise would come in October, but instead there was much hand-wringing about the events of the summer when the Chinese economy fell out of bed.
Arguably the deep recession in Brazil and growing uncertainty in the Middle East could still weigh on the Fed.
The ECB decided from the outset that voting would not be revealed because of potential domestic repercussions so it is a bit of a guessing game as to what happened. You don’t have to be a mind reader to recognise that the Bundesbank’s representative Jens Weidmann, who like most German central bankers has a visceral fear of inflation, would not have been enthusiastic about the ECB going all out for expansion. In the greater scheme of things it might be just as well.
Unless Janet Yellen is engaged in a game of bluff with Wall Street, the Fed likely will move. By restraining itself the ECB may be dodging the bullet of a sharp divergence of policy between Europe and the US which could trigger a currency war.
Last stand
IT may be Jes Staley’s first week at the helm at Barclays but it is his predecessor Antony Jenkins who seems to be making the waves. His effort to rehabilitate his reputation with a prediction that digital disruption of the banking sector could lead to more branch closures and the disappearance of thousands of jobs was not wonderful timing.
Similarly, one must assume that the disposal of Barclays’ 89 branches in Italy to CheBanca!, the retail arm of Mediobanca, at a £200m loss, was well baked in the cake before Staley joined.
Barclays has now retreated from Spain and Portugal as well as Italy. The dream of great banking conglomerates, stretching across national borders, largely has been killed by the financial crisis. That does not mean Barclays is out of Italy. Its investment banking operation will remain in place and it hangs on to a £10bn (€14bn) mortgage book for the time being.
Staley has yet to pronounce on his own priorities. One guesses that his JP Morgan and New York background means he is more favourably disposed to investment banking that Jenkins. He will need to demonstrate that it can be conducted with the integrity that went missing in the recent past.
Last orders
AB InBev is losing no time in offloading SABMiller brands which may cause it problems with regulators. Among the emblematic brands on the block are Grolsch, Peroni and London-based craft brewer Meantime Brewing Company, a very recent arrival in the SAB stable.
Among the interested parties watching the great beer sale from the sidelines will be Guinness owner Diageo which is thought to be interested in anything which might fall off the bar in Africa. Cheers.