Mark Carney expected to warn markets on interest rate rise timing

Bank of England governor Mark Carney emerges from his election purdah today and his update on the UK economy is eagerly awaited in the City.

Along with other members of the bank’s rate-setting Monetary Policy Committee (MPC), Carney has been banned from speaking in public for the past six weeks for fear any comments might influence the election result.

The bank releases its latest quarterly inflation report, after which the governor will host what is likely to be a very well attended press conference.

The election also skewed the timing of the MPC’s most recent announcement on interest rates and quantitative easing (QE). That announcement had been due last Thursday – the day of the polls – but was shifted to the start of this week to avoid a clash. Not that it really mattered: as widely expected there was no change to Britain’s record low interest rates or to the QE programme.

The governor’s view on rates will be of particular interest to the City following much stronger than expected industrial output figures yesterday. Boosted by a bounce back in oil and gas production, March output rose 0.5 per cent on the previous month, its fastest rate of growth in six months.

After a run of poor economic data in recent weeks, it was encouraging news for the government, just days after the Conservatives’ shock election victory. Sterling romped ahead after the figures but the stock market, already suffering a hangover after last week’s post-election celebrations, went further into retreat.

Greek worries and the continuing rout in the bond market were clearly factors, but the buoyant industrial production data also had an impact as traders speculated that a rate-rise might come sooner than expected; in other words sometime this year rather than in 2016.

Carney had already been expected to take the opportunity of the inflation report to warn the markets that they were being too relaxed about the timing of what will be Britain’s first interest rate rise in eight years.

The governor will also be questioned on what impact the new government’s austerity programme might have on the fragile economic recovery.

Having been in purdah for six weeks, Carney will have had plenty of time to write his open letter to chancellor George Osborne, which will also be published today. In the letter Carney will explain why inflation, currently at zero, is so far from official targets. A formal letter is required from the governor if the cost of living strays more than one percentage points above or below the official 2 per cent target.

Post-election strength

The government has taken advantage of the post-election strength in the banking sector to offload another £500 million of shares in Lloyds Banking Group, taking its stake below 20 per cent.

Bank shares soared last Friday as it became clear there was no chance of a Labour government. Had the party been victorious it was likely that the sector would have been opened up to more competition and there was also the possibility of a bonus tax being levied on bankers.

In total, the government has now raised more than £10 billion by selling Lloyds shares, around half the cash it was forced to pour into the bank to prop it up at the height of the financial crisis. Further sales are on the cards, possibly including a retail offering to investors.

It’s another step on the road to rehabilitation for Lloyds, which has just resumed dividend payments for the first time since the crisis.

Yet the bank’s chief executive, Antonio Horta-Osorio, may find himself in need of some rehabilitation as shareholders are being urged to throw out his lucrative £11.5 million pay package at tomorrow’s annual meeting.

The investor advisory group Pensions & Investment Research Consultants (Pirc) has slammed his remuneration as “highly excessive”, and says it is out of balance with the bank’s financial performance and returns to shareholders.

Given that the bank hasn’t paid a dividend since 2008, Pirc has certainly got a point. Fiona Walsh is business editor of theguardian.com