Bank of England Hard at Work Devaluing the British Pound
Our friends across the pond are lost - absolutely and horribly lost - and Simon Nixon gets it in WSJ with one sentence: "If the BOE doesn't like the rate at which the markets will lend to the U.K. government, it should tell the Treasury to cut its borrowing, not write it yet another check."
That sounds awfully familiar, doesn't it?!
The Bank of England's decision to expand its quantitative easing program by another 25 billion pounds will do nothing to enhance the U.K. central bank's diminishing credibility. It may even do real long-term harm to the U.K. economy.
Even by the BOE's recent standards, the case for expanding QE was particularly weak. Inflation is running ahead of the BOE's forecasts, sterling has continued to fall and commodity prices have risen. True, official statistics showed a surprise 0.4% fall in third quarter GDP but few economists attach any credibility to this figure which is entirely at odds with recent survey data. Besides, the BOE's continued emphasis on the output gap to justify its low inflation forecasts no longer looks convincing.
More importantly, the decision to expand QE sends entirely the wrong signal to the UK government whose refusal to set out credible plans to address the country's dire fiscal position is the biggest risk to Britain's economic health and financial stability. It is becoming increasingly hard to avoid the suspicion that the BOE is deliberately supporting the government's borrowing in the name of financial stability. In the short-term, that may be defensible. Long-term, it is the economics of a banana republic.
The BOE should have shown its independence by pausing quantitative easing -- or at least buying illiquid private sector assets rather than over-valued gilts. Sure, that might have rattled the markets, but that would be no bad thing if it forced the government to address its deficit. Already there are signs investors are growing nervous of over-indebted governments. The cost of insuring Japanese sovereign debt has almost doubled in three months, even though Japan, unlike the U.K., can fund its deficits from domestic savings.
The BOE independent?! LMFAO, that's precious. Who wrote the Fed's playbook?