QE pause shows there is a long way to go

February 4, 2010

Mark Bolsom1.JPG

- Mark Bolsom is the Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialist. The opinions expressed are his own. -

Thursday’s decision by the Bank of England to keep both interest rates and its asset purchasing programme on hold was hardly a surprise and had been largely priced in to markets.

However, the statement accompanying the decision was hardly a resounding vote of confidence in the British economy. Instead, it would seem that the MPC is in a quandary; on the one hand wanting to stimulate markets, but hamstrung, on the other hand, by the spectre of inflation.

The MPC, along with the rest of the market would have been hugely disappointed at first estimate of 0.1 percent growth during the last three months of the year. That figure is even more disappointing given the huge fiscal stimulus provided by the government, combined with the 200 billion pounds worth of quantitative easing that the Bank has already pumped into the financial system.

Yes – the GDP number was only based on about 40 percent of the available data, but even so, most analysts had forecast growth of at least 0.3-0.4 percent. With that in mind, the actual effectiveness of the Bank’s asset purchasing program has to be called into question. Credit remains tight, and banks still seem to be reluctant to lend to both businesses and consumers. It is clearly going to take more than quantitative easing alone to normalise markets.

One definite consequence of the quantitative easing, however, has been to stoke up inflation again. The annualised rate of 2.9 percent posted in January would surely have surprised MPC members, and almost certainly contributed to today’s decision to pause, rather than definitely end, quantitative easing. Furthermore, those figures relate to data before VAT went back up.

February’s number is likely to be even higher. Given the weak growth, there is no feasible way that the MPC could hope to control inflation through more conventional interest rate hikes. Suspending the asset purchasing programme is one way of putting the brakes on.

So what next? The Bank has definitely sat on the fence, keeping open the possibility of resuming quantitative easing but obviously reluctant to do so. Nevertheless, the fact remains that fiscal tightening is inevitable and will doubtless take hold after this year’s Parliamentary election.

The Bank will want the government to take the lead in determining at what point economic stimulus is withdrawn. But with both the Chancellor and the Shadow Chancellor backing away from outlining definite plans on spending cuts, political leadership on economic issues looks thin on the ground.

The fact remains that for all that policymakers have put in to the economy, the returns, as yet, have been marginal and growth remains weak. There is clearly a long way to go before the recession can truly be said to be over.
What are your thoughts? Post your comments below or on our twitter page – twitter.com/TravelexFX

Comments

I would say the economy will pick up,when the public realise what a ponsky scam scheme is.
The housing market,relative to common salary,has peaked.
This precipitates the awareness,to the scheme.labour is key to the evonomic survival,and most Jobs already put to china,away from home.The equity purchasing programme will not stop,as it is key to the privatisation consuming free enterprise.The vice is squeezed,and its grasp will not ease.Also key to economic revival,is the revival of truth in all matters,a term called transparency;quite a misleading term maybe.
The current buzzwords are to induce panic,as a pose to confidence.
Confidence will prevail as it is hope,fear lends to sickness and failure.
People are realising,to be king of your castle,is oh so similar to being prisoner in your own castle.Few people are willing to part with a lifetime of devotion for either concept.
The FTSE will rise this year,regardless of all the negative analytical hype.And this is really a spin to get people in a spin.Just as the chaos theory was.Goodluck and walk slowly.

Posted by dave evans | Report as abusive
 

Might i add,that the public has now noticed that electing new government makes zero difference to the political agenda.Nothing will change by concentrating efforts in these misconceptions.People are now looking for truth in this chaotic nonsense,its easier to see with your eyes closed than it is to see truth in the government propaganda.As people look for options,they see the government everywhere.This should be a big clue as to what the best options are….

Posted by dave evans | Report as abusive
 

When you invest in the stockmarket,if you do your homework,you notice each companys price drops after a period of four years.It drops to the price it was 4years ago.You get bitten,if you do not notice the cycle.How it is that this happened with all comapies at same time,and thousands of analysts spend 2years scratching their heads is beyond me.All that happened was the usual readjustment,but it was shocking timing for it to happen in sync across the board.This happened because they grouped companies inside the ftse,whereas before,if one company teatered,the others were’nt magnetised to the situation.Confidence maybe comes from knowing you’ve done your homework.

Posted by dave evans | Report as abusive
 

Yes there is a long way to go before JOBS are created for Robots and not humans

Posted by Shoe shine Boy | Report as abusive
 
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