MacroScope

In his valedictory Quarterly Inflation Report, Bank of England Governor Mervyn King shone a ray of light on the British economy, saying it should grow 0.5 percent in the current quarter.

But according to the latest Reuters poll of more than 30 economists, published on Tuesday, that might be too optimistic.

The consensus showed gross domestic product would only expand 0.2 percent, weaker than the 0.3 percent expansion seen in the first quarter when the country missed sinking into an unprecedented triple-dip recession.

“I don’t know where he sees the growth coming from,” said economist Stephen Lewis at Monument Securities, whose forecast is in-line with the consensus.

“Perhaps he is hoping for some strong rebound after the improvement in the weather — although today it doesn’t seem all that improved,” he added from a cold and wet London.

There’s a high degree of battening down the hatches going on before the Greek election by policymakers and market in case a hurricane results.

G20 sources told us last night that the major central banks would be prepared to take coordinated action to stabilize markets if necessary –- which I guess is always the case –  the Bank of England said it would  flood Britain’s banks with more than 100 billion pounds to try and get them to lend into the real economy and we broke news that the euro zone finance ministers will hold a conference call on Sunday evening to discuss the election results – all this as the world’s leaders gather in Mexico for a G20 summit starting on Monday.
Bank of England Governor Mervyn King said the euro zone malaise was creating a broader crisis of confidence.

The central banks acted in concert after the collapse of Lehmans in 2008, pumping vast amounts of liquidity into the world economy and slashing interest rates. There is much less scope on the latter now. The biggest onus may fall on the European Central Bank which may have to act to prop up Greek banks and maybe banks in other “periphery” countries too although the structures to do so through the Greek central bank are in place and functioning daily. In extremis, we can expect Japan and Switzerland to act to keep a cap on their currencies too. As a euro zone official said last night, a bank run might not even be that visible and start on Sunday night over the internet rather than with queues of people outside their local bank on Monday morning.

The focus is already on the euro zone finance ministers meeting in Copenhagen, starting on Friday, which is likely to agree to some form of extra funds for the currency bloc’s future bailout fund. What they come up with will go a long way to determining whether markets scent any faltering commitment on the part of Europe’s leaders.

In the meantime, top billing goes to Bundesbank chief Jens Weidmann speaking in London later. He is heading an increasingly vocal group within the European Central bank who are fretting about the future inflationary and other consequences of the creation of  more than a trillion euros of three-year money. There is no chance of the ECB hitting the policy reverse button yet but the debate looks set to intensify.
A combination of German inflation and euro zone money supply numbers today (which include a breakdown on bank lending) will give some guide to the pressures on the ECB.

Central bankers face a very mixed picture with U.S. recovery and high oil vying with the unresolved euro zone debt crisis and signs of slowdown in China.

The once-good relationship between Bank of England Governor Mervyn King and his most likely successor, Deputy Governor Paul Tucker, is coming  under increasing strain, according to a new book by former Daily Telegraph journalist Dan Conaghan.  It  alleges   King’s management style and and alleged disdain for the financial markets is to blame.

While the Bank of England’s Monetary Policy Committee remains reasonably collegiate, on other matters King more than lives up to the description from former chancellor Alistair Darling that he is ‘incredibly stubborn’, says Conaghan, who now worksas an asset manager.

“The governor can be particularly dogmatic,” he told Reuters. “One of the key things … is the attitude to the capital markets. One of my sources described Sir

Ben Broadbent’s appointment to the Monetary Policy Committee ought to dispel any notions that the Bank of England would be left short of hawks after the departure of Andrew Sentance.

A brief look at the history of Reuters polls shows that Goldman Sachs’ UK economists – led by Broadbent – were uber-hawkish in their outlook for British interest rates early last year.

In January 2010, Goldman predicted rates would rise to 1.5 percent by end of the second quarter of last year, and 2.5 percent going into 2011 — hugely out of step with both the consensus and as it turned out, reality. Rates went nowhere last year, and are still at a record low of 0.5 percent.

As we’ve noted extensively, economists often get it wrong. Leaving aside their collective failure to recognise an impending global recession, you might recall a shock interest rate hike from the Bank of England in January 2007.

This was another event that almost every economist polled by Reuters failed to spot, and there are signs that four years on, economists might be setting themselves up for a similar shock.

The consensus from the last Reuters BoE poll last week showed interest rates would stay on hold into the fourth quarter, even though UK money markets have priced in a 100 percent chance of a rate hike by May. Since the January meeting, some of the bank’s Monetary Policy Committee members have publicly stated their determination to fight strong inflation.

For a central bank that looks certain to bust its 2 percent inflation target for most of the time between now and the London 2012 Olympics, there is still a lot of uncertainty out there.

Bank of England Governor Mervyn King referred to “uncertain” or “uncertainty” about the outlook five times at the May quarterly Inflation Report press conference according to the bank’s transcript, and the latest one didn’t seem much more confident in tone.

“There is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area,” King said in his opening remarks before taking questions from reporters.

Bank of England Governor Mervyn King was on good form when he addressed the Royal Society – Britain’s oldest scientific discussion club – on the vexing issue of communicating complex forecasts to the great unwashed.

Aside from his usual moan about the media’s desire to reduce the BoE’s beautiful but baffling ‘fan charts’ of inflation forecasts to one or two numbers, he made a rare and welcome admission that in past years the central bank had not done as well as it could have to flag up the risk that a financial crisis was about to happen.

The BoE’s financial stability reports – like those from many other central banks – sometimes sounded as if they were crying wolf in the years running up to the credit crunch by warning of pretty much every risk to markets short of Martian invasion.

It may be strictly coincidence but as TV stations are rolling out their latest batch of ballroom shows, Europe’s central bankers appear to have caught the dancing bug.

The Bank of England’s Mervyn King and the European Central Bank’s Lorenzo Bini Smaghi, two of central banking’s more colourful characters, both appear to have it on the brain.

Last week in a speechat Siena University nestled in Italy’s Tuscan hills, ECB board member Bini Smaghi said many bank CEOs in the pre-crisis days were dancing in a suicidal game of musical chairs, allowing their banks to follow the disastrous path of packaging up and buying toxic debt parcels, hoping that a chair would still be left when the music stopped and the stampede for seats begun. He called for a responsible adult to be in charge of the music in future.

Governments threatening to cap the pay of bank bosses in the wake of the financial market crisis might be better off linking their earnings to the more humble salaries of the central bankers now cleaning up the mess.

Politicians from Berlin to Canberra are up in arms about the multi-million dollar bonuses and lavish perks earned by bank executives now that the high-risk debt they allowed to proliferate has brought the global financial system to its knees and forced taxpayers to pledge an estimated $3.2 trillion to fix the mess.

Germany plans to block access to its bank rescue scheme to banks whose executives earn more than 500,000 euros ($673,800) a year — more than the amount earned by the world’s top two central bankers put together.