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The Russian Enigma Adds to Central Bank Dilemmas

06/03/2014 12:28 GMT | Updated 05/05/2014 10:59 BST

A month after the start of the second world war, Churchill made his famous comment during a radio broadcast -"I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest".

When it comes to the Russian Bear, plus ca change, plus ca reste la meme chose has never been more apposite apparently.

Stunned at the insolence of President Yanukovych's rapid eviction from power, Mr Putin has felt it necessary to restore Russian pride by invading Crimea, to 'protect Russian citizens'.

Coming in the midst of what was already a challenging time for monetary policy makers, the Ukrainian crisis may have unpredictable consequences, especially with regard to that most inscrutable of institutions, the ECB. One's first reaction may be to think that the crisis makes it more likely that the ECB will ease this Thursday; surely the impact of higher oil and gas prices and the possibility of supply disruption, (Europe gets a third of its oil and gas from Russia, with half of the gas transiting through Ukraine), never mind the general dent to confidence, will make Governing Council members more open to the idea of further easing, although each of the particular methods at their disposal have some shortcomings - please see my 25th Feb Huffington Post blog.

However, it isn't necessarily that simple. This is an institution through which the culture of the Bundesbank runs very deep and it's certainly not beyond the realms of possibility that there are hawks on the Council, (who make Fed hawks look like Turtle Doves, by the way), who start to fear the inflationary consequences of those higher energy prices, not to mention the possibility of wheat price increases. I stand by my call that this ECB meeting will bring no significant new easing moves; with non-sterilisation of the ECB's old Securities Markets Programme the most likely and pretty ineffectual, boring likelihood if we get anything at all.

Of course Thursday also brings the Bank of England MPC meeting, and this should be a calm and uneventful month for the Old Lady. Forward Guidance has been tweeked, and Carney and Co. have been all over the airwaves reassuring us that they will now look at a whole range of economic indicators, (one would hope so all along anyway, wouldn't one?), as they now realise they foolishly chose a flawed single metric in the shape of the headline unemployment rate. They also tell us that rates will never again reach the dizzy heights of 5%.

I would however like to put something on your radar screen for later in the MPC year. Of course rate expectations and the shape of the curve will be subject to incoming data and the global geo-political situation, not forgetting the UK's prospects of continued EU membership, (if UKIP keeps taking voters from Labour, as well as the Tories, then Ed Miliband will also surely announce he'd hold a referendum), and we also have the Scottish referendum in September. As the year unravels though, we will need to keep an eye out each month for the first non-unanimous vote on rates at the MPC. We don't find out if there were any dissenters until the minutes of each meeting are released about two weeks later, (if security stays tight), but this will be a potentially significant market-moving development when it happens-especially if public comments from MPC members have not foreshadowed dissent.

Of the nine members of the MPC , who should we to watch out for? Charles Bean, Paul Fisher and David Miles are all likely to tow Carney's line most vigorously and remain dovish for longest, Ben Broadbent will be closer to stepping out of line, but not overtly hawkish, and we need to study comments from newer members Jon Cunliffe and Ian McCafferty to form a more informed view of their stances, leaving Messrs Dale, Executive Director and Chief Economist at the Bank, and Weale as the most likely suspects for a hawkish dissent. In a recent Sky interview, Mr Weale, has already broken ranks a tad, commenting that, "I think it is very helpful if we try and explain that the most likely path for interest rates is that the first rise will come perhaps in the spring of next year."

Given the asymmetric risk/reward, as this outcome becomes more likely-starting with the June or July meetings, I'd guess, I'll be looking to put on trades before every meeting to capture a surprise dissent vote.

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