|
| UK nerves jangle again |
| Ian Campbell / Aug 12, 2009, 00:00 IST |
|
Sterling: The UK’s sanguine summer has suddenly turned unsettled. Not for the first time it was the Bank of England that changed the weather. Its decision last Thursday to print another £50 billion has coshed the previously resurgent pound, which fell by 3 per cent against the US dollar in just two trading sessions. The storms could get worse as soon as the autumn.
The central bank’s response to the pound’s immediate fall is likely to be “Oh dear, what a pity, never mind.” Spencer Dale, the bank’s chief economist, described the exchange rate in June as a “key channel through which the monetary easing may be transmitted.” The weaker pound favours exports, tourist visits — and inflation. The UK’s current 1.8 per cent inflation rate is far away from the deflation suffered by the US, the eurozone, Japan and even fast-growing China. Rising prices keep real interest rates low — even negative. That’s impossible if deflation gets a grip.
The bank’s now £175 billion quantitative easing programme is intended to be mildly inflationary, as it stimulates GDP growth. But if growth doesn’t revive, QE, in the context of the huge fiscal deficit, could prove counterproductive. The government’s financing projections call for borrowing of a total £348 billion this fiscal year and next. The danger is that this is beyond what the market will tolerate – especially when plenty of pounds are being printed.
The US dollar was undermined earlier this year when the US central bank, the Federal Reserve, committed itself to buying $300 billion of its government’s debt. That was just 2 per cent of US GDP, far less than the BoE’s 13 per cent of GDP, the bulk to be spent on buying government bonds.
It would be surprising if the pound did not fall further. Sterling could easily return to its $1.40 lows of earlier this year. That would help the UK economy to revive. But if anxiety about the UK ’s finances were to turn to panic — perhaps spurred by government deficits that are even higher than currently projected — the drop could become dangerously steep.
The spring and summer markets have been remarkably buoyant. Autumn ones might not be so sanguine. If emergency fiscal measures are required, the central bank could also be forced into an embarrassing change of course.
|
|
|
|
|
|
|
|
|
|
 Read Business news in |  |
|
|
|
|
|
|
Advertisements |
|
|
|
|
|
|
|
|
|
|
Content Guide
