--New initiatives will help cushion U.K. economy against crisis
--Preemptive policy coordination should be seen as positive
--Most other major central banks on verge of monetary easing too
By Nicholas Hastings
Selling sterling now is a highly questionable strategy.
The Bank of England and the U.K. government have just introduced
measures to support the U.K. banking system and, if the mechanism
works, ease the country's overall credit conditions.
The plans may not be perfect and they certainly don't reduce the
threat to U.K. growth from a meltdown in the euro zone.
However, the measures are a preemptive step to ensure that the U.K.
economy will be better equipped to weather any euro storms ahead.
And, on that point alone, the pound should look more attractive now
that it did before the measures were announced.
The decision by Chancellor George Osborne and Bank of England Governor
Mervyn King to jointly announce the new policy initiative came as a
bit of a surprise.
Not only is this high level of coordination of fiscal and monetary
policy very unusual, but the central bank had only just left its
policy unchanged last week.
Some would suggest that this element of urgency could well indicate
that the state of the U.K. economy is worse than expected and that the
chancellor and the governor were forced into action.
With the country's trade gap in April opening up to over GBP10
billion, the second largest on record, and with construction output
falling over 13% on the month, this view certainly appears justified.
Nevertheless, there are some pockets of hope with some signs of
consumer resilience showing through in retail sales despite the
continued squeeze on salaries.
But it is fear of the future that appears to have prompted the
official action late Thursday. If the debt crisis in the euro zone
continues to drag on, the U.K., as one of the region's largest trading
partners, will doubtlessly suffer.
As a result, the authorities decided on a two- or even three-part package.
The first, the so-called "extended collateral term repo" facility, is
an extension of a year-old method of injecting more liquidity into the
U.K. banking system. This will be through regular auctions at which at
least GBP5 billion will be made available each month.
The second part is the one that should cheer financial markets the
most, however. This, the "funding for lending" package, is geared to
providing funds to banks on condition that the money is then lent into
the economy. In other words, unlike the long-term refinancing
operation provided by the European Central Bank over the last six
months in the euro zone, which appeared to have a limited trickle-down
effect to the consumer level, this U.K. operation should have more of
a direct economic impact.
Of course, critics have been quick to point out that this part of the
package will only work if there is demand for credit and demand could
become more scarce if the euro-zone crisis depresses U.K. economic
sentiment any more.
Also, the banks themselves may be reluctant to utilize the facility if
they are worried about taking on even more risk at this stage of the
economic cycle.
The possible third part of the package is the likely introduction of
more quantitative easing, in which the Bank of England provides more
general liquidity into financial markets through the purchase of more
government bonds.
An initial fall in sterling when the initiative was announced
suggested that investors were more concerned about the additional
monetary easing that might take place rather than the possible
stimulus that the package as a whole represents for the U.K. economy.
However, with most other major central banks, including the ECB, the
U.S. Federal Reserve and the Bank of Japan, all seen on the verge of
easing their monetary policies too, there appears to be little reason
to sell the pound.
If anything, the preemptive move and the coordination between the U.K.
Treasury and the Bank of England should be seen as the U.K. moving
ahead of the game and a reason for buying, not selling, the pound.
Bloomberg TNI FRX POV
Reuters USD/DJ
Thomson P/1066 or P/1074
(Nicholas Hastings is a Senior Correspondent in London for Dow Jones
Newswires who has written about foreign exchange for more than 20
years. He previously covered a variety of markets, including equities,
fixed income, commodities and energy. He can be contacted on
+44-20-7842-9493 or by email: nick.hastings@dowjones.com or on twitter
@NickHastingsDJ)
(END) Dow Jones Newswires
June 18, 2012 01:45 ET (05:45 GMT)
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