By far the most important event in the financial markets this week was the unexpected release of oil stocks by the IEA, which almost immediately reduced the global oil price by about 8 per cent. The motivation for this intervention might well have been Washington politics but, if the fall in the oil price persists, it will have a very useful effect on global economic activity, just when it is most needed.

Former US vice president Dick Cheney used to describe the release of oil stocks by the IEA as a “nuclear option”, which could almost never be used. The FT’s commodities editor Javier Blas says that it is now viewed as a “smart bomb” aimed mainly at oil speculators. But others, including this FT editorial, see the IEA’s tactics as pointless or self-destructive. So is it just a damp squib? Read more

The Bank of England’s latest Inflation Report was certainly a downbeat document. Mervyn King, Bank governor, said there are “difficult times ahead”, because the economy is still undergoing a slow adjustment to the impact of the financial crisis. By reducing its GDP growth forecasts while simultaneously increasing its inflation projections, the Bank has signalled that it believes the UK is now facing a series of supply side problems – and those are always the most difficult for any central bank to handle. Read more

The data on global economic activity published last week have raised doubts about the strength of the world recovery at the beginning of the second quarter, and there have been some moderate downward revisions to GDP growth forecasts in recent days.  Read more

The behaviour of the world’s two main central banks, and the relationship between them, have profound effects on global financial markets. As a broad rule of thumb, the ECB (and the Bundesbank before it) have tended to act in a very similar manner to the Fed, except about 6-12 months later. In fact, that is one of the most well established rules in the analysis of monetary policy making.

It does not imply that the ECB deliberately “copies” the Fed, which it clearly does not do. But it does imply that circumstances have usually produced this symbiotic relationship between the two key central banks. When this relationship has been broken in the past, it has usually spelled trouble. Read more