Merkel Lashes Out at Central Banks

In an unprecedented attack on the world's central banks, the German Chancellor, Angela Merkel, has called on them to end their current "unconventional" monetary polices—expanding money supply though purchases of government and private sector bonds.

Mrs. Merkel suggested that the central banks may end up doing more harm than good. She told a conference in Berlin: "What other central banks have been doing must stop now. I am very sceptical about the extent of the Fed's actions and the way the Bank of England has carved its own little line in Europe," she told a conference in Berlin. She said she views "with great scepticism what authority the Fed has and the leeway the Bank of England has created for itself."

The attack on the US Federal Reserve and the Bank of England shocked many observers. More radical still was the assault on the European Central Bank. Ever since the foundation of the Federal Republic 60 years ago, no German leader has publicly rebuked the Bundesbank or its successor, the European Central bank. Freedom from political independence has been a cornerstone of economic policy for decades, yet Mrs. Merkel was unabashed and unrestrained: "Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds. We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years' time."

On Thursday the ECB is expected to unveil details of its programme to buy covered bonds, securities "covered" by a dependable source of income and collateral behind them. It is the ECB's version of the more extensive "quantitative easing" pursued in recent months by the Bank of England and the US Fed.

The German Chancellor's attack comes at a time when voices in the City are questioning the effectiveness of the Bank of England's policy.

Analysts claim that a "disappointing" increase in the money supply will add to pressures on the Bank of England to step up its programme of "quantitative easing" in coming months. The Bank's Monetary Policy Committee will meet today and announce its latest decision tomorrow.

Figures released by the Bank of England yesterday showed that the benchmark M4 figure is still sluggish.

Money supply rose at an annual rate of 17.4 per cent in the year to April, but lending to households grew by a mere 0.2 per cent on the month, or 3.4 per cent on the year. To non-financial companies, lending fell by 0.9 per cent in April, and was up by just 0.8 per cent on 2008, itself a depressed figure.

Philip Shaw of Investec said: "Given that quantitative easing was launched in March, we consider this to be somewhat disappointing. Admittedly it is a little early, but we might have hoped to see some initial signs. Accordingly we expect the MPC to announce a further increase in its quantitative easing target next month."

Economists at Credit Suisse echoed those concerns: "The Bank bought gilts from the foreign sector (which would have no effect on the money supply), not from domestic non-bank holders of gilts (which would).

"It suggests that, for now, much of the first £45bn they spent has—so far—had little apparent effect on the UK money supply."

The MPC had an initial "budget" of £75bn, and at its meeting in May the MPC said it would purchase a further £50bn of securities.

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