Must be a slow news day! BOE governor says that there seems to be no case for further QE because based on all the recent evidence, the economy is recovering, and does not need further stimulus. Have I missed something? Does this come as any surprise to anyone?
No great shock to see £ have a knee jerk upwards, that`s how you react to such news as a trader but as my market savvy colleagues point out, equally no great shock to see it come straight back down. This was not a statement designed to disturb markets, and the Governor would be shocked if anything other than this short term spike took place.
Let`s just briefly define what quantitative is, and what it is meant to achieve. As an economy falters, one of the principal catalysts for a recovery is continued low interest rates. When further interest rate cuts become impossible because they are virtually at zero, and an economy is still ailing, further measures are sometimes needed. QE is the practice of buying assets held by the private sector, usually government bonds, thereby injecting cash to the economy, and inflating the store of money in circulation. In turn this makes it more likely that the receivers of the cash from these asset purchases will lend to other sectors of the economy.
So the Governor is right in stating that there is no need for further stimulus in the UK, but in response to a less encouraging trend of economic statistics in the US, the QE debate continues, and continues to be a prime driver of exchange rates.
The Governors statement is completely consistent with his desire not to shock markets – one of the principal reasons for forward guidance. FX volatility is guaranteed when this guidance breaks down, and policy becomes reactive as we have seen in the US. This was not a major policy statement, and the fact that it was delivered to a non mainstream source confirms that.
It`s a storm in a tea cup – brewing up double, all those tiny little troubles.
