Here's what Draghi meant when he said the ECB would "cope"

Even the ECB is getting creative now.

At today’s  European Central Bank post-meeting news conference, we discovered that ECB President Draghi and his fellow Governing Council members are pulling on their walking boots for a trip into unexplored territory namely, negative interest rates.

We all dozed through his opening, oft-repeated remark that the ECB, "stands ready to act", (if economic developments so-demand), but then, much more significantly, he repeated the phrase in response to a journalist’s question about whether the ECB would ever consider taking the Deposit Rate negative-that counts as a hint in my book, the markets seemed to agree, and everyone sat up in their seats to listen with rapt attention as he pushed home the hint by saying the ECB would "cope" with any unintended consequences of negative interest rates. That removed the last obstacle-hitherto, the ECB’s response to negative rate speculation has always been to refer to such fears. He also repeatedly emphasised the extent to which the Governing Council feels the transmission mechanism from low ECB policy rates to increased and cheaper lending to real people and businesses had healed itself, even in the Periphery, i.e. therefore, conventional policy tools are once again back in play and potentially efficacious.

I was also impressed by the way he didn’t repeat his usual mantra about not pre-committing to interest rate moves-he usually leaps down anybody’s throat if they’re silly enough to try and get him to do that!

Here’s what he meant when he said the ECB would "cope" with any nasty side effects of negative policy rates. The most frequently sighted potential undesirable consequence is an inability on the part of banks to fund themselves adequately, because Money Market Funds will be unwilling or statutorily unable to lend to banks at negative interest rates, for fear of "breaking the buck" in terms of their redemption prices to investors. So, the story goes, banks will become illiquid. Again.

However, the ECB has already proved to us all that liquidity is its party piece-witness its  Long Term Refinancing Operations and Outright Monetary Transactions, (well, witness the latter’s description at least, since it’s yet to be used in practice). Liquidity is what the ECB feels it’s there for, and what its mandate allows, as opposed to anything that smacks of the provision of deficit funding to governments.

This is what Draghi meant when he said the ECB would "cope". Even as he spoke, the ECB’s boffins were no doubt crafting some new, diabolically clever liquidity scheme.

The psychological effects of actually paying money every day to deposit money at the ECB would have quite a dramatic effect upon banks-more than that to be expected from a cut of only 0.25 per cent, and not only would this small move down in interest rates have an amplified effect upon banks’ willingness to lend, it will also lead the man in the street to think again before putting his money on deposit. Why not go and spend it-surely all these weird experiments  monetary policy must lead to inflation at some stage, so maybe better to buy that car now, before it costs more next year?

And if it works for the ECB, why not for the Bank of England and its incoming and undoubtedly imaginative new Guv’, Mark Carney? His defeated  Deputy, Paul Tucker, has already floated the concept.

Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

Getty
Show Hide image

Hilary Benn has been sacked. What happens now?

Jeremy Corbyn has sacked Hilary Benn, effectively challenging his critics to put up or shut up.

Hilary Benn been sacked from the shadow cabinet, following an article in the Observer reporting that the former shadow foreign secretary had told Labour MPs he would challenge Jeremy Corbyn should Corbyn lose the vote of confidence in his leadership that the PLP are due to discuss on Monday.

Anti-Corbyn plotters are convinced that they have the numbers to pass the no confidence motion in Corbyn’s leadership. Passing that motion, however, would not formally trigger either Corbyn’s resignation or a leadership challenge.

The word from Corbyn’s inner circle is that he would remain in post even if he were to lose the confidence vote, and dare his opponents to collect the 50 names they would need to trigger a leadership challenge.

Should that come about, Corbyn’s allies are certain that they would triumph over whoever ran against him. As one senior source said “they lost really badly in September and that’s not gonna change”.

Labour’s rebels are convinced that they have the numbers necessary to trigger a formal challenge to Corbyn’s leadership.

What happens next is fraught as the relevant clause in Labour’s rulebook is unhelpfully vague: 

“ii. Where there is no vacancy, nominations may be sought by potential challengers each year prior to the annual session of party conference. In this case any nomination must be supported by 20 per cent of the PLP. Nominations not attaining this threshold shall be null and void.”

The question that no-one is certain of the answer to: whether the challenged leader would have to seek nominations as well or if they would be on the ballot as by right. My understanding is that the legal advice that Corbyn’s critics have is that Corbyn would not automatically have a place on the ballot. But Jolyon Maugham, a lawyer who writes regularly for the New Statesman, looked over the clause for us and believes that he would.

More important than the legal basis, though, is what the party’s ruling National Executive Committee, which would rule on whether Corbyn had to seek nominations to stand, believes.

Although Corbyn has received the backing of 12 of Labour’s affiliated general secretaries, a well-placed source tells me that they are confident the NEC would rule that Corbyn will need to seek nominations if he is to stand again.

But control over the NEC is finely balanced, and could shift decisively towards Corbyn following this year’s elections to the NEC; one reason why Corbyn’s opponents are keen to strike now.

In that situation, Corbyn’s allies believe they can secure the 50 nominations he would need – the threshold has been raised due to a rule change giving Labour members of the European Parliament the same nominating powers as their cousins in Westminster – thanks to a combination of ideological support for Corbyn and pressure from the party’s grassroots. Senior sources believe that once Corbyn reached shouting distance of 50 nominations, the bulk of the shadow cabinet would quickly fall in line. Another estimates that the “vast majority” of the PLP accept Corbyn requires more time and that the plotting is the result of “a rump” of MPs.

But Corbyn’s critics believe that the European result, which saw Labour voters reject the party line in large numbers, has left Labour MPs with large majorities in the party’s ex-industrial seats more spooked by their voters than by their activists, putting them in the same group as those MPs with small majorities. (The two groups who currently pose the biggest danger to Corbyn are MPs who are old enough to be eligible to collect their pension at or before the next election, and MPs with majorities of under 2,000.) 

Who's right? Much depends on the disposition of Labour's 20 MEPs. Prior to Britain's Brexit vote, they were believed to be the most sensitive to the concerns of the party's activists, as Labour members vote on the order of the party's list, making anti-Corbynites vulnerable. Now all 20 MEPs are out of a job at, or before, the next European election regardless, the question is whether they decide to keep Corbyn off the ballot, or try to curry favour with Corbyn's supporters in the membership prior to making a bid for seats at Westminster. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.