Smoke signals from the Bank of England

May 14, 2014

Given the silence that attends Bank of England policy meetings which result in no change of course, today’s quarterly inflation report is the main chance to hear the latest thinking. Governor Mark Carney will talk to the media for an hour or so after its release.

The ongoing strength of economic data means the odds of a first interest rate rise this year are narrowing and one could certainly come before May 2015 elections, an unwelcome prospect for the government.

The main imponderable is how much spare capacity there is in the economy, which would allow further growth without feeding inflation pressures. There are differing views on that with no one quite sure how much activity was permanently destroyed by the financial crisis.

The Bank is expected to leave its growth forecasts unchanged today and may signal that it is comfortable with the view in markets that rates will start going up in the first quarter of 2015. It may also soon flex its new powers to rein in what is rapidly starting to look like a housing bubble, at least in London and its environs.

Among other measures, the BoE could recommend caps on the size of home loans granted in relation to a property’s value or a borrower’s salary although today’s inflation report is probably not the right forum to make such an announcement. There is also the fact that those measures would do nothing to curb the flood of foreign money pouring into London property and ramping up prices.

One to ponder is whether the government’s “Help to Buy” scheme, which is helping get more people on the housing ladder, is appropriate any more. The opposition Labour party has called on finance minister George Osborne to rein it in, accusing him of leaving the threat of a bubble to the BoE to sort out.

Osborne has given the Bank the right to advise him to shelve the “Help to Buy”. Our latest poll of economists on Tuesday found a consensus that the Bank would try to restrain the housing market when its Financial Policy Committee meets next in June but that even if it did, prices would rise nationally by about eight percent this year.

We also have some key European Central Bank policymakers speaking, most notably Bundesbank chief Jens Weidmann and Yves Mersch.

Their boss, Mario Draghi has put the cat among the pigeons, saying the ECB is ready to take action in June to boost the euro zone if updated inflation forecasts are lowered further and stressing that the euro’s strength was “a serious concern”.

The euro has come off since the master of verbal intervention’s latest feint but this time it may have to be backed up with action to stick. There are various options under discussion but no sign that the economic game changer – printing money – is under serious consideration yet.

German Chancellor Merkel will deliver a speech on Germany and Europe, later.

The Ukraine crisis means the annual meeting of the European Bank for Reconstruction and Development in Warsaw will be unusually interesting. The EBRD has already made a point of basing its new head of Eastern Europe in Ukraine, where it sees investments rising as damage caused by the conflict is repaired.

Its new economic forecasts will show a “significant deterioration” in the outlook for Russia and Ukraine and things getting worse for Turkey too. It is also poised to make Cyprus a temporary recipient of funds and admit Libya as a member.

Pro-Russian separatists ambushed Ukrainian troops on Tuesday, killing seven in the heaviest loss of life for government forces in a single clash since Kiev sent soldiers to put down a rebellion in the country’s east.

Six world powers and Iran launch the decisive phase of diplomacy over Tehran’s nuclear work, aiming to resolve their decade-old dispute by July 20 despite scepticism a deal is possible. After three months of broad discussions about expectations rather than possible compromises, the sides now plan to start drafting the text of a final accord.

Norway’s government releases its once-a-year budget update which will update economic forecasts and spending plans in response to an early year slowdown and oil spending cuts which are affecting public finances.

The death toll from an explosion and fire in a Turkish coal mine has risen above 200 as rescue workers scramble to retrieve dead and injured.  Hundreds more are still believed to be trapped in the mine in Soma.

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