UK Faces Volatility as Carney Rejects Use of Rate Hike to Cool Housing Bubble

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UK Faces Volatility as Carney Rejects Use of Rate Hike to Cool Housing Bubble

UK Faces Volatility as Carney Rejects Use of Rate Hike to Cool Housing Bubble

You don't have to spend the afternoon limbo dancing at a UKIP carnival to realise that the UK is facing a volatile period in its history.

As Nigel Farage's anti-European party continues to make gains across the country, we are also facing the prospect of Scottish independence and a Labour Government led by Ed Miliband, who continues to win few friends in the City.

With this backdrop, most policymakers I know are keeping their fingers crossed that the economy keeps on growing and employment keeps on rising.

One thing that looks unlikely to happen for at least another year is an interest rate hike.

The Bank Can't Build Houses

Bank of England Governor Mark Carney has made it clear that rates will not be used to take the heat out of the housing market.

Instead the fresh powers handed to the Bank's Financial Policy Committee to impose restrictions on the mortgage market will be deployed as a first line of defence if and when necessary.

But Carney stressed that the Bank can't work miracles, nor can it build the thousands of additional homes needed in the UK to address the huge imbalance between supply and demand that has pushed prices 10% higher over the past year in some areas.

Meanwhile, it seems the Bank's other crisis tool, quantitative easing, will be with us for even longer.

The message from Carney and his colleagues is that the £375bn of bonds purchased by the Bank will not begin to be unwound until it has raised rates to such a degree that they can be cut significantly to boost demand if necessary.

On the flip side of the coin, over at the European Central Bank, President Mario Draghi is pondering when and how to loosen monetary policy further amid the threat of deflation and slowing economic growth.

Economists I know believe he will make his move next month, most likely with a cut in the main interest rate, already at 0.25%, and possibly a cut in the interest rate paid on bank deposits, taking it into negative territory.

Will the Indian Election Make Gold Shine?

In terms of commodities, the price of gold has been treading water for the last month or so and this is likely to continue unless Russian President Vladimir Putin decides to increase the pressure in Ukraine.

One potential uncertainty for gold investors came in the form of the recent Indian election.

Indians are some of the biggest buyers of gold on the planet and the previous government introduced measures to try and cut purchases.

This was because gold purchases were adversely impacting the country's balance of payments.

Import duties on gold were increased to 10% from 2% and an 80:20 rule was introduced, making it compulsory to export 20% of the gold that was imported by a dealer once it was processed.

However, many observers think the new government could scrap these requirements, which would be bullish for the price of the yellow metal.

Unfortunately for the bulls, any radical moves are not likely to come swiftly.

Elsewhere, the main commodity beneficiaries of the current crisis in Ukraine are wheat and corn, because of the country's vast agricultural capacity.

Prices of these grains have risen since the start of the crisis, but there are no major concerns about a global supply shortage just yet.

Having said that, it is almost impossible to predict what Mr Putin will do next and if the situation does escalate then all bets are off on this front.

That's all for now, I'm off to the Monster Raving Looney Party's Mardi Gras in Croydon.

Until next time...




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