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Sterling fluctuated violently today as the Bank of England stoked hopes of “a virtuous upward spiral for the economy” but warned of “false dawns” as the UK pulls out of recession.
Minutes from this month's monetary policy committee (MPC) meeting showed the Bank in more bullish mood than it has been for months — but still cautious on the recovery's strength.
The pound tumbled to a day low of $1.6340 against the US dollar before the minutes were published at 9.30am on fears some MPC members may have voted to pump even more money into the economy through quantitative easing.
But the minutes showed that all nine members backed no further increase, and to keep interest rates at 0.5%, sending the pound sharply higher.
It jumped to $1.6446 before settling up 0.68 cent at $1.6426. Sterling also spiked against the euro.
Currency traders are hanging on every word from Threadneedle Street following a series of shocks in recent weeks.
The pound has been under pressure since the Bank ramped up quantitative easing from £125 billion to £175 billion in August in a sign the economy is still in need of emergency repair.
It plunged again last month when minutes of the August meeting showed Governor Mervyn King, David Miles and the now departed Tim Besley voted for an even bigger increase to £200 billion.
The minutes today showed King and Miles still believe there is a case for further action but agreed now was not the time.
“For those members who had preferred a larger stimulus at the August meeting, a larger asset purchase programme could still be justified,” the minutes said.
“But in the absence of significant news about the medium term, the case for adjusting the programme now was outweighed by the benefits of following through with the programme of asset purchases announced in August.”
Economists said it paved the way for King to vote for more quantitative easing in November when the £175 billion so far agreed has been spent.
The minutes said: “There was a possibility that the recovery in asset prices and confidence could mark the start of a virtuous upward spiral for the economy... But the lesson from previous financial crises was that they were not resolved quickly, and that there could be false dawns.”
In a speech today, MPC member Kate Barker said: “Although there has been quite a lot of positive data, both for the global economy and for the UK in recent months, it remains unclear how far this represents a sustainable recovery.
And even as growth picks up, the likelihood of rising unemployment means that there is no immediate prospect of a feel-good factor.”
Barker said that the recovery depended upon an increase in bank lending to households and businesses.
She also hinted that the Bank was not yet ready to withdraw quantitative easing or raise interest rates, saying: “Monetary policy needs, over coming quarters, to continue to be set in order to sustain confidence, and to support lending and borrowing.”
Reader views (1)
QE is the last refuge of a scoundrel and obviously isn't working though the banks are laughing as taxpayers continue to line their coffers. All the stimulus measures seen over the last year have given an illusion of stability but have actually debauched the economy. Down the line the price will be inflation, soaring unemployment and currency crises.
- John, London, 24/09/2009 07:48
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