Daily Archives: March 15, 2011

Chris Giles

Courts are supposed to be tough, distinguishing right from wrong, and imposing penalties for misdeeds. But not at the Bank of England.

The Court of Directors at the Bank is the central bank’s governing body and it is supposed to “manage the Bank’s affairs other than the formulation of monetary policy”. Of course, anyone who knows anything about the Bank knows it does no such thing. Executive power rests with the governor, Mervyn King, not the chairman of Court, Sir David Lees, and there is precious little oversight.

When the Treasury Select Committee questioned Court non-executives this morning, it is no surprise they stumbled over basic facts. Sir David did not seem to know that the Bank had massively diverted resources away from financial stability to monetary policy in the years before the crisis. It is not surprising Andrew Tyrie, chairman of the Committee commented: Read more

Markets predict Europe and the UK will start to raise interest rates later than they did before Japan’s earthquake. The delay is roughly three months for the Bank of England and three to four months for the ECB.

Markets now expect the UK’s first rate rise – quarter of a point to 0.75 per cent – to occur in August. Last week they averaged on June. Several factors had led markets to bring forward their expectations before the quake. Rising inflation in the UK, hawkish voting patterns and some ambiguous comments from Mervyn King led many to think a rate rise would happen as early as May, after GDP figures are due out. The base rate had been expected to reach 1 per cent in October; now it’s more like early February 2012.

In Europe, too, rising inflation and comments from the central bank governor had made a rate rise from 1 per cent seem likely earlier. Many analysts were predicting April 7 for the first rate rise, prior to the quake. They are still pricing in a 25bp rise by June and two more before the end of the year. Read more

Smartphones and the applications that run on them have been added to the basket that makes up the consumer price index, along with fees paid to dating agencies.

The Office for National Statistics on Tuesday unveiled changes to the composition of its CPI and retail price index baskets, intended to represent a “typical” shopping basket for households – an exercise it undertakes every year. Because shopping habits change, items are constantly being added and removed from both indices. Read more

Irish banks may need more than the €10bn set aside for them in the bail-out, the Irish finance minister has said.

Michael Noonan said in Brussels today that recapitalising Irish banks could not take place till stress tests were completed, but that he would be “surprised” if €10bn were enough. The Irish Independent claimed over the weekend that “a further injection of between €15bn and €25bn could now be needed”. Mr Noonan told reporters he expected the size of the shortfall to be revealed by stress tests, whose results are due to be published by the end of March. Read more

European Central Bank hopes of an easy exit from government bond purchases have been dashed by the deal on the eurozone’s future, which left it the precarious task of deciding when its action to boost investor confidence can be halted for good. Jean-Claude Trichet, ECB president, lobbied hard for European Union rescue funds to be given powers to buy bonds in the open market. If he had succeeded, the ECB could have formally ended its programme, contentious since its launch, which has seen it spend €77.5bn ($108bn) since May of last year.

In the face of German resistance, eurozone leaders agreed only that EU rescue funds could buy bonds directly from distressed governments in restricted circumstances. “The ECB is not a winner in this deal,” said Gilles Moec, European economist at Deutsche Bank. Read more

The Bank of Japan offered to pump ¥8,000bn ($98bn) into the banking system on Tuesday, following a record ¥15,000bn ($182bn) auction on Monday. The offer in same-day market operations drew bids of ¥5,400bn ($66bn).

But the Bank can do little directly to slow the rapidly falling stock market, which is reducing companies’ market capitalisation so significantly and so rapidly it imperils some companies’ survival and could lead to a credit crunch. Finance Minister
Yoshihiko Noda tried to counter this yesterday by saying the factors behind the fall were “temporary”.

The Bank is prohibited from buying shares directly. There are rumours that it might intervene in currency markets, however, to weaken the yen. (A strengthening yen necessarily reduces the number of yen per stock.) Yesterday there was at one point a spike in the dollar – apparently the result of a one-off trade. Mr Noda declined to comment. Read more