Comment: Markets looking forward to Carney’s guidance

George Kerevan

George Kerevan

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WEDNESDAY sees the publication of the latest Bank of England quarterly inflation report, normally a dull event.

This time there is more at stake. Mark Carney, new governor at the Bank, was hired to get the economy moving again while Chancellor George Osborne struggles to hold down the deficit. But Carney can only do this (through printing money) if inflation is moderating. Otherwise he risks boosting prices, which will curb consumer demand.

The bad news is that the benchmark consumer prices index jumped to 2.9 per cent in June, reversing a deceleration earlier in the year. If this trend continues, Carney will not be able to persuade his fellow members of the monetary policy committee to expand the Bank’s £375 billion programme of quantitative easing (QE).

The Bank has a poor track record of anticipating inflation. Former governor Sir Mervyn King was forced to write no fewer than 14 times to various chancellors explaining why he had missed the official inflation target of 2 per cent. One reason is that domestic UK prices are heavily influenced by the value of sterling, which governs import costs. If, for instance. the euro goes down then sterling can go up. But the Bank has no control over the euro.

UK inflation moderated in 2011, partly because the euro crisis bolstered sterling in relative terms, sending import costs down. This might explain the deceleration of inflation in the spring. However, sterling has since dropped back, after the markets panicked that the US was about to wind down its own monetary expansion.

Even if the inflation picture is deemed more optimistic in Wednesday’s report, my hunch is that it is unlikely all six MPC members who have consistently voted against more QE will change their minds. More likely Carney will use the inflation report to announce new “forward guidance” rules; ie: spell out for the markets the exact improvement he needs to see in the UK economy before the Bank withdraws support. That alone should boost investor confidence and growth.

RBS needs release from Treasury yoke

New boss elect of Royal Bank of Scotland, Ross McEwan (an import like Mark Carney), has just found out how hard it is to head the semi-public bank.

As McEwan’s appointment was announced, the bank’s shares dropped sharply following the publication of weak first-half results.

True, there was a welcome return to profit, at the pre-tax level, of £1.4bn for the half year to June. And true, some of the share fall was a correction from the inflated price reached on Thursday, following leaks about McEwan’s appointment. But the fact is that when you burrow down into the latest earnings statement it is clear that RBS is not performing as well as its rivals.

Total income has fallen substantially. Core (ie: the good bits) operating profit is down 17 per cent from 2012, due to a fall in income in the markets division. It may be acceptable to downsize RBS into a modest domestic UK bank but don’t expect flashy returns.

The RBS management team remains obsessed with obeying its Treasury masters – no wonder after Stephen Hester’s axing. The report’s key headline trumpets that the core tier 1 capital ratio has increased to 11.1 per cent. Undue prudence does not make for profits. The sooner RBS is out of the clutches of the Treasury, the better.

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