Last week the Bank of England's Monetary Policy Committee (MPC) decided to leave rates unchanged at 0.5 percent and its Quantitative Easing (QE) programme, the Asset Purchase Facility, unchanged at GBP 375 bn.
I do still feel that the committee will move to increase its QE facility by at least GBP 50 bn at its next meeting in November, by which time its current programme will have been completed.
Nowadays, the world’s major currencies are all being driven by the same unseen hand - the governments of the US, UK, Japan, Switzerland and the Eurozone are all engaged in money printing of one form or another. OK, the ECB would deny this till its dying day - which will come about two years from now at my estimation, unless the rich, core EU countries agree to bail out the south in a true fiscal union - as it insists that it will sterilize every last cent of OMT bond buying by selling short term instruments, but this sterilization really just moves the money they’ve printed from one ECB account pocket to another anyway. Surely Herren Stark, Weber and Weidmann might not have been so concerned about the ECB’s acronym fest of SMP’s, LTRO’s and OMT’s, if they really believed there was no danger whatsoever of an explosive growth in money supply?
But when asked about the perceived potential benefits of QE, central bankers of the US, UK and the Eurozone will wax lyrical about some combination of improved monetary transmission, improved sentiment through higher asset prices, cheaper government bond rates, leading to lower mortgage rates and project discount rates, fear of inflation which promotes near term consumption. The exact composition of the pot pourri of the benefits cited will depend on their mandates, political constraints and ancestry, but the one benefit that dare not speak its name is currency debasement.
An explicit admission from any of those central banks that a major corollary benefit of their QE programme is a decline in the value of their currency (giving desperately needed help to their export industries) would be tantamount to a declaration of economic war -a trade war - such as the one which so damagingly extended and deepened the 1930’s Depression.
So what about Japan and Switzerland? How come they get away with it? They have even employed direct FX intervention in combination with QE, in an open attempt to weaken their currencies. My response would be that everyone, including crucially the US, realizes that these are extreme cases-the yen and the CHF are incredibly and probably irrationally strong, so any attempt by the US, say, to object would be instantly seen as unreasonable (Uncle Sam has benefited massively from their currencies’ strength for many years).
Turning back to the BOE, the UK could now be said to be somewhat behind the pack when it comes to QE and this is another reason why I expect the BOE (much to the unspoken glee of HMG) to happily reach at least £500bn of QE over time, if not more. In the race to the bottom in the currency wars, sterling looks to me ready to play catch up. Cable looks especially toppish, given the fact that all the good news is out in Europe and the fiscal cliff could lead to market mayhem and USD safe-haven purchases.
I do still feel that the committee will move to increase its QE facility by at least GBP 50 bn at its next meeting in November, by which time its current programme will have been completed.
Nowadays, the world’s major currencies are all being driven by the same unseen hand - the governments of the US, UK, Japan, Switzerland and the Eurozone are all engaged in money printing of one form or another. OK, the ECB would deny this till its dying day - which will come about two years from now at my estimation, unless the rich, core EU countries agree to bail out the south in a true fiscal union - as it insists that it will sterilize every last cent of OMT bond buying by selling short term instruments, but this sterilization really just moves the money they’ve printed from one ECB account pocket to another anyway. Surely Herren Stark, Weber and Weidmann might not have been so concerned about the ECB’s acronym fest of SMP’s, LTRO’s and OMT’s, if they really believed there was no danger whatsoever of an explosive growth in money supply?
But when asked about the perceived potential benefits of QE, central bankers of the US, UK and the Eurozone will wax lyrical about some combination of improved monetary transmission, improved sentiment through higher asset prices, cheaper government bond rates, leading to lower mortgage rates and project discount rates, fear of inflation which promotes near term consumption. The exact composition of the pot pourri of the benefits cited will depend on their mandates, political constraints and ancestry, but the one benefit that dare not speak its name is currency debasement.
An explicit admission from any of those central banks that a major corollary benefit of their QE programme is a decline in the value of their currency (giving desperately needed help to their export industries) would be tantamount to a declaration of economic war -a trade war - such as the one which so damagingly extended and deepened the 1930’s Depression.
So what about Japan and Switzerland? How come they get away with it? They have even employed direct FX intervention in combination with QE, in an open attempt to weaken their currencies. My response would be that everyone, including crucially the US, realizes that these are extreme cases-the yen and the CHF are incredibly and probably irrationally strong, so any attempt by the US, say, to object would be instantly seen as unreasonable (Uncle Sam has benefited massively from their currencies’ strength for many years).
Turning back to the BOE, the UK could now be said to be somewhat behind the pack when it comes to QE and this is another reason why I expect the BOE (much to the unspoken glee of HMG) to happily reach at least £500bn of QE over time, if not more. In the race to the bottom in the currency wars, sterling looks to me ready to play catch up. Cable looks especially toppish, given the fact that all the good news is out in Europe and the fiscal cliff could lead to market mayhem and USD safe-haven purchases.
