BoE: Weak GBP can be the reason to hike other than inflation - Nomura
|Richard Koo, chief economist at Nomura, points out that the Fed, BOE, and ECB have all begun a major shift in monetary policy without waiting for inflation to reach their 2% targets and inflation in the UK has in fact risen to 2%, but this is due largely to Brexit-inspired currency weakness rather than to a strong domestic economy.
Key Quotes
“On the other hand, the UK is unique among these economies in that for the first time since the bubble collapsed in 2008 its private sector is now running a financial deficit, currently amounting to 1.73% of GDP. This means the British private sector has finally resumed borrowing, and unless the central bank quickly normalizes monetary policy this could lead to unpleasant acceleration of inflation.”
“Until now, there were few adverse effects from leaving massive quantitative easing policies and ZIRP in place (with the exception of the mini-bubbles described above) since there were no private-sector borrowers and the money multiplier was zero or negative at the margin.”
“But once the private sector resumes borrowing, the money multiplier will turn positive at the margin, and leaving massive amounts of excess reserves in the market under such conditions would enable almost limitless credit creation. Hence the monetary authorities cannot allow this state of affairs to continue.”
“Another reason why the BOE moved quickly to hike rates is probably that the scale of quantitative easing in that country was larger in relative terms than in the US or the eurozone. As a percentage of GDP, the BOE’s quantitative easing was roughly twice the size of the easing programs carried out by the Fed or the ECB, which means a return of borrowers to the market would have that much larger impact.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.