Finance on Boe, Ecb and FedEssay Preview: Finance on Boe, Ecb and FedReport this essayIntroductionMonetary policies suggest greater attention over the world by renewed the interest in employing the central banks to control the money supply. Role of monetary policy is important to maintain a low and stable rate of inflation and price stability in the economy.(Rangarajan,1998) Imbalances of the import and export can cause the fluctuation of the exchange rate in the country. Different central bank used different monetary tools to control the money supply and maintain the economic stability of the country.
Monetary Tools Used to Control the Money SupplyBank of England (BoE)BoE used standing facilities (SF) and interest rate (IR) to control the money supply of the countries. SF is used to provide a safety value for the market liquidity management and it provides an arbitrage instruments in a standard market condition to prevent market rates different from Bank Rate.(Red Book-BoE,2010) SF allows bank to manage unexpected frictional shocks which may arise due to technical problems in the bank system or in the settlement infrastructure. IR is used to control the inflation rate by injecting money directly into the economy by purchasing assets and it does not involving in printing more bank notes. This shows many other rates available to savers and borrowers by movements in the Bank Rate affect the spending by companies and their customers and over time the rate of inflation. IR will cause the increase in exchange rates in Sterling relative to overseas and would give investor a higher return on UK assets.
European Central Bank (ECB)ECB used main refinancing operations (parts of Open Market Operation) and minimum reserve requirements as their monetary tools. Main refinancing operations are regular liquidity that provides reserve transactions with a frequency and maturity of 2weeks. The rate of these repos is the greatest signs of the stance of monetary policy in a very short term by the role in fulfilling the aims of Eurosystem (Hann,2002) and provides the bulk of refinancing to the financial division. Minimum reserve requirements is used to stabilise money market IR by the averaging provision.(Scheller,2006). A minimum reserve ratio of 2% (Gray,2011) is applies against overnight deposits, deposits and debt securities within a 2 years maturity and money market paper. ECB is able to broaden the range of financial institution to hold reserves at central bank in order to avoid possible disintermediations and its negative effects on bank activity in euroland. (Hann,2002)
The ECB is also considered to have the capacity to act in a different way from the European central bank by its actions in its periphery. The ECB has the responsibility to undertake a “national security program” across its entire portfolio of foreign exchange holdings. This program was completed in the EU in 2009. The ECB also is responsible for issuing eurobonds. In fact, it was recently suggested that EUR/USD swaps and swaps contracts and the euro and eurodebt markets were being used in the policy of global integration.
Although most of these issues were not discussed in earlier posts on financial institutions, the ECB remains considered a significant member of the European financial market.
Efforts to reach an agreement
As many of you all know, the EUR/USD bond swap program was considered a successful project. However, the decision was made to raise its level at 0.01% and set the level of reserve at 0.03% (Kun, 2010). This has created an even more speculative situation in the Eurozone. It was a serious misalignment of interest rates, raising fears, so the ECB decided to raise its target rate at 3% (Kun, 2010). The market in the euro was raised against an all-time low and ECB, in a meeting called between Chairman Gebhardt and German Finance Minister Wolfgang Schäuble on 15 February 2010, proposed a reduction of EUR/USD bond swaps. The ECB rejected the proposal because it considered it was too risky, leaving the situation unresolved. The ECB will still raise EUR/USD bond swaps at 3% under its existing liquidity management plan of €7 billion, in January 2011. After its meeting, the European Central Bank (ECB) will also issue “non-quantitative easing” bonds. These are highly liquid and have not been manipulated to cause any market decline and inflation. In the past, the ECB held 5.1% of all ECB assets around the world.
The European Central Bank (ECB) will also issue 3.9% of its total holdings of EUR/USD and 5.9% of its foreign exchange holdings. This level is the maximum level for a single currency since the central bank still faces a problem to pay. This implies that the ECB needs to use a different level for its asset classes and hence the target would not exceed 5.5% of all assets of EUR/USD. The German Finance Ministry called for the ECB to increase the target level in the second half of 2011 from 2.05% to 3.3%, assuming an equal amount of capital inflows. These new target levels will go into effect in March 2012, taking into account the interest rate changes and liquidity conditions as of August.
The ECB will be the first of many public bodies involved in implementing monetary policy in the euro area. The Eurozone public and private sectors will be able to offer a variety of products. These include electronic products, exchange contracts, credit products and asset products, as well as products from other global banks and companies such as JP Morgan Chase, American Express, Merrill Lynch, American Express Trust and USBA Capital. The main objective is to ensure a level of liquidity at a reasonable level but at a reasonable pace that does not take up too much currency reserves.
In addition, this new level of liquidity is an important boost for the European central bank’s overall operating performance. Easing quantitative easing increases the ability of the ECB to offer more risk-averse products through the use of bonds (or other currency derivatives). In the case of asset assets, the ECB will need to issue cash to carry out this function. The Euro is a relatively short-lived medium as it is of little immediate demand as it will not be used for central planning purposes. The ECB has no obligation to maintain or increase asset prices, instead it may use the ECB’s reserve money to