• Mervyn gives Mais Lecture
• Euro central banks sell reserve management skills
• Greenspan's image sags
• Fuss about Bofinger
• Duisenberg reveals political interference -
• - and demonstrates his negotiating skills back home
• Brazil's supreme court upholds partial immunity
• Francophone governors' bash
• IMF adviser criticises Russian banks
• IMF moves into $150m new building
• Ferguson prefers conversation to coordination
• The China connection
• IMF piles in
• Irritation in Beijing
• Entrances and exits
• Fischer starts work in Jerusalem
• Lipstok for Estonia
• Bangladesh bank gets new chief
• Iceland re-appoints Guonason
• HKMA appoints deputy chief executive
• - and new ed for strategy

MERVYN GIVES MAIS LECTURE

Delivering the Mais lecture at the Cass Business School in London on 17 May, Mervyn King, the governor of the Bank of England, was at his most confident and authoritative. The success of the UK’s inflation targeting regime had been a key factor in the economic stability enjoyed by the UK over the last decade, he said. At the same time, there was no room for complacency.

Mervyn King argued that one of the great advantages of an inflation targeting regime was its blending of a rule-based regime with a certain amount of discretion. A pure rule based system, he said, could not be desirable or credible given constantly changing economic conditions and the impossibility of creating accurate models. A purely discretionary approach would also be undesirable, as it is unable to anchor inflation expectations.

Expectations, the governor claimed, are the key to a successful monetary policy framework. If inflation expectations can be anchored, then most of the work of monetary policy is done, and the precise rules or rate changes have only a secondary effect.

Inflation expectations cannot be anchored by a target alone though, he warned. The monetary policy framework must be credible, and must be transparent in explaining why decisions are taken and what the underlying justification is. The framework must encourage private agents to believe that following shocks or deviations, the level of inflation will over time return to its target.

Thus the key objective of an inflation targeting central bank must be to maintain the expectation that inflation will return to target. In this context, the governor would no doubt welcome it if public comment moved away from its obsession with month to month movements in volatile economic indicators, and instead simply kept faith that inflation would revert to its target over time. Of course, if only expected rather than present inflation mattered, this would also, conveniently, help to shield the central bank from criticism over its actual performance.

page top^

EURO CENTRAL BANKS SELL RESERVE MANAGEMENT SKILLS

Although industrial country central banks have for years provided services of various kinds to other central banks, especially from emerging and developing markets, in recent months some of them have started actively marketing their skills.

A new brochure put out by the Eurosystem says it can now offer “the type of services required to support the management of euro-denominated reserve portfolios”. The central banks involved in this initiative are known as “Eurosystem service providers”, offering a “complete set of reserve management services”. The ESPs are named as the central banks of Italy, Spain, France, Netherlands, Luxembourg and Germany.

The brochure says that these central bank ESPs “should not be seen as competing with the services offered by private financial institutions”. It does not mention whether they compete with the services offered by, for example, their very own “service provider” the BIS. But it makes clear they are looking for business not only from central banks but from public authorities, government agencies and international organisation worldwide – a market segment that together accounts for a big chunk of international financial flows.

The services offered are wide-ranging, to include custody and settlement, execution, securities lending, automatic overnight investment facilities, fixed-term deposits, foreign exchange operations and advisory work. The focus is very much on assisting official sector bodies around the world to manage their euro assets.

Why are they doing this? Having fought shy for years from promoting the euro as a reserve currency, saying its reserve currency role is “up to the market to decide”, has the ECB under Jean-Claude Trichet decided to give the market a helping hand? Some central bankers outside Europe mutter this is all designed to give the NCBs more work to do, but Newsmakers rejects such a cynical view of their motives.

FUSS ABOUT BOFINGER

German Chancellor Gerhard Schroeder's government hasn't decided yet who will succeed Otmar Issing, the ECB’s chief economist when he retires next year, in response to a Financial Times Deutschland story naming Peter Bofinger as a favourite to land the job. However, Bundesbank representatives, notably board member Hans Reckers, have already expressed their opposition to this proposal, on the grounds that Peter Bofinger’s views are in his view “not in line with a stability-oriented policy”. Really?

This is the latest in a series of clashes between Schroeder’s government and the Bundesbank. But the fuss about this illustrates the risks faced by academics who could be named by newspapers -- tipped off by politicians, no doubt - for such jobs. Bofinger is a respected monetary economist who once again finds himself at the centre of not a little public criticism for having done nothing at all!

DUISENBERG REVEALS POLITICAL INTERFERENCE -

Wim Duisenberg, the former president of the ECB, has disclosed that Gerhard Schroeder, Jacques Chirac, the French President and Silvio Berlusconi, Italy’s prime minister, all tried to influence the ECB’s monetary policy while he was president.
(Recent events shows that they have not given up – the Achilles heel of the system being the process of making appointments to the national central banks and executive boards).

page top^

- AND DEMONSTRATES HIS NEGOTIATING SKILLS BACK HOME

Duisenberg has shown his diplomatic skills by negotiating an agreement between Dexia, a Franco-Belgian bank, and two foundations representing Dutch investors. Dexia has agreed to pay EUR400m ($516m) in compensation to Dutch customers who are suing it for allegedly mis-selling investment products. If a majority of the foundations' members accept the deal they will drop their lawsuits against Dexia, ending a long-running legal battle that has tarnished the bank's reputation in Holland.

Duisenberg was appointed in February to bring the row to an end and limit the damage done to financial credibility of the Netherlands

page top^

FRANCOPHONE GOVERNORS’ BASH

The Bulgarian National Bank is to host the 14th annual meeting of the central banks of Francophone countries slated for 2006. The decision was taken at the 13th annual meeting in Marrakech, Morocco. BNB was elected as the host after winning a fierce competition with the central banks of Luxembourg and Switzerland. The meetings comprise representatives of more than 30 Francophone countries include several members of the management boards of the eurosystem - France, Belgium and Luxembourg - as well as of Canada. Even Switzerland is represented.

page top^

IMF ADVISER CRITICISES RUSSIAN BANKS

Russians may be keeping savings of between $25 billion and $50 billion in their homes and another $150 billion to $200 billion abroad, Arnaud de Villepoix, an IMF adviser to the Central Bank of Russia, said according to an Interfax news agency report.

This is perhaps not surprising as de Villepoix apparently also thinks that the Russian banking system is one of the most insecure and precarious in the world, being insufficiently capitalised and highly risky. It is seen as also vulnerable to external shocks and potential changes in the government’s policy. As if that is not enough, it is not properly regulated, has a weak legal environment, and suffers from the inadequate bookkeeping and non-transparent structure of assets.

De Villepoix reportedly wrote this in a memorandum published by the central bank. These are presented as his personal opinions and not the IMF’s.

IMF MOVES INTO $150M NEW BUILDING

The International Monetary Fund opened its second headquarters building in downtown Washington, DC on May 16. The new building, which is adjacent to the IMF's existing headquarters building at 700 19th Street, N.W., will house about 1,500 staff.

Occupancy will be complete by early June. With the move to the new offices, the IMF will be able to accommodate all of its Washington-based staff in fully-owned facilities for the first time since 1983, enabling it to relinquish leased space elsewhere in the downtown area. The new building was completed ahead of the IMF's original timetable and within the overall project budget. The construction cost $150m.

page top^

FERGUSON PREFERS CONVERSATION TO COORDINATION

Federal Reserve vice chairman, Roger W. Ferguson, has given a neat summary of the case for scepticism over the prospects for greater international policy coordination:

“Does globalisation imply a greater need for the international coordination of macroeconomic policies? Let me begin my answer by asserting that explicit coordination of policy setting across countries is not likely to happen in the foreseeable future, and I would argue that such explicit policy coordination would not be desirable. Policymakers have to be able to react quickly in many circumstances, and it makes no sense to delay needed actions in order to achieve international consensus, particularly when the potential benefits from coordinated action are small relative to the potential costs of delay”.

“Experience has shown that the best outcomes are achieved when each country's policy focuses on domestic stabilisation”

“Nevertheless, in our interconnected world, it is important for policymakers in different countries to maintain an ongoing conversation. This conversation involves the exchange of information about economic conditions and policy options as well as an opportunity to debate the merits of alternative policies that can lead to improved understanding of the practice of macroeconomic policy. International conversation promotes trust and understanding. It enables us to understand and respond appropriately to developments in each other's economies. Clearly, if globalisation is changing the nature of policy spillovers across countries, that effect would be an important topic for an international conversation”.

(Conclusion of speech to the Association for Financial Professionals Global Corporate Treasurers Forum, San Francisco, California, May 12 2005)

page top^

THE CHINA CONNECTION

TRADING CHAOS FOLLOWS CHINESE TRANSLATION SLIP
People's Daily, the official Communist Party newspaper, caused a bout of chaotic trading on the world's currency markets last week. A report on its English-language website said the government would revalue its currency, the renminbi, this week. Immediately, the dollar sank, the yen rose, and even the Indian rupee rallied, as it seemed as if the Chinese government had finally given in to calls from American politicians to allow the renminbi to float. Eventually, the People's Bank of China had to issue an urgent denial that any such move had been announced.

According to reports, the slip was made by a man referred to only as “Han”, apparently a retired People's Daily editor who supplements his pension translating articles into English for the website. ``We have never had an accident like this before,'' said one editor there.

The article translated by Han was all the more believable because of its precision. It said the renminbi would be allowed to rise by exactly 1.26% within a month and 6.03% in a year. China's central bank governor, Zhou Xiaochuan, affirmed later in the week that there would be no revaluation of the renminbi when the country expands its foreign exchange trading system.

"Media reports on the expected appreciation of the Chinese currency, renminbi (yuan), on May 18 are not correct," Zhou was quoted as saying by the official Xinhua news agency. As if that was not clear enough he added that this was “definitely impossible”.

page top^

IMF PILES IN
However, the pressure from abroad has intensified. In Washington on Thursday, the International Monetary Fund got in on the act:

"I can only repeat all we have indicated for some time. A flexible exchange rate arrangement would be in China's interest," Thomas Dawson, IMF spokesman, told reporters.

page top^

IRRITATION IN BEIJING

All this is causing intense irritation, to say the least, in Beijing. The central bank’s new vice governor, Wu Xiaoling, reiterated that China would not bow to external pressure to revalue the currency and blamed the United States for creating a negative environment for any eventual loosening of the renminbi peg. She said the pressure had triggered a flood of hot money into Chinese assets, especially property, in expectation of an appreciation.

This had posed great difficulties for the government's macro-reform policy, especially as it tries to cool down the overheated economy, she added.

page top^

ENTRANCES AND EXITS

NY FED’S GEITHNER APPOINTED CPSS CHAIRMAN
The G10 countries have appointed Timothy Geithner as chairman of the Committee on Payment and Settlement Systems (CPSS) with effect from June 2005.

FISCHER STARTS WORK IN JERUSALEM

Stanley Fischer started his new job as the governor of the Bank of Israel on Sunday May 1. He used his first speech as governor to call for a new Bank of Israel law to preserve the central bank’s independence and “provide a modern legal base” for its activities.

page top^

LIPSTOK FOR ESTONIA

The supervisory council of the Bank of Estonia has nominated Andres Lipstok, the deputy speaker at the national parliament, as the new president of the Baltic country's central bank. Lipstok, 48, will start a five-year term on June 7 if his nomination is approved by the country’s president, Arnold Ruutel. The council selected Lipstok ahead of the well-known incumbent, Vahur Kraft, who has served since 1995. Both Kraft and Lipstok presented their positions on Estonia's monetary and banking policy, obtaining full membership in the European economic and monetary union, and management of the central bank. The discussion was followed by a vote, which resulted in the decision that chairman of the supervisory board of the central bank, Mart Sõrg, would recommend the nomination of Lipstok for a term of five years to the president.

page top^

BANGLADESH BANK GETS NEW CHIEF

The Bangladesh government has appointed Salehuddin Ahmed as the new governor of the country's central bank, the Zee News website reported on Friday April 29. He succeeds Fakhruddin Ahmed. The new governor has previously been associated with the Palli Karma Shohayak Foundation, which deals with micro-credits for the poor.

page top^

ICELAND RE-APPOINTS GUONASON

The prime minister of Iceland has re-appointed Eiríkur Guonason as governor of the central bank for a term of seven years, which began on May 1. Guonason has been governor of the central bank since 1994. He started his career at the central bank in 1969 and has held various posts at the bank, including economist, department director, chief economist from 1984 to 1986 and assistant governor from 1987 to 1994.

page top^

HKMA APPOINTS DEPUTY CHIEF EXECUTIVE

Y.K. Choi is the new deputy chief executive. Choi, who was previously executive director for banking supervision, will be responsible for monetary management, financial infrastructure, reserves management, and strategy and risk. Choi joined the HKMA as head of banking policy in 1993. He became head of administration in 1994 before taking up his present position in 1995. Before joining the HKMA he served in the Office of the Commissioner of Banking from 1974 and became assistant commissioner of banking in 1990 after a one-year secondment to the Bank of England.

- AND NEW ED FOR STRATEGY

Edmond Lau is to be executive director for strategy and risk and Christopher Munn executive director for corporate services. These appointments will take effect on June 1 2005. At the same time, some reorganisation of responsibilities at the deputy chief executive level will take place.

The position of executive director for strategy and risk will be formed by reactivating a frozen executive director post. This position will enable the HKMA to focus on broader strategic planning and risk management in an increasingly complex and unpredictable financial environment. The new position will in particular help the HKMA examine more deeply, and develop strategic responses to, the impact on its policies and operations of such processes as the globalisation and liberalisation of financial markets and technological change.

Munn joined the HKMA in 1998 as senior manager for corporate development and was promoted to his present position as head of corporate development in 1999. He has also previously served as an administrative officer in the Hong Kong government. Munn will take over the position from Raymond Li, who will become executive director for banking development. The present executive director for banking development, Arthur Yuen, will take over as executive director for banking supervision from Y K Choi.