King’s “paradox of policy”
Just as in 2008, there is a deep reluctance to admit the extent of the undercapitalisation of the banking system in many parts of the industrialised world. The verdict of the market is clear – without central bank support banks still find it expensive to borrow.
So the Bank of England, together with the Government, has set up the Funding for Lending Scheme (FLS) which provides banks with access to finance for up to four years at below prevailing market rates for term funding. Since the Scheme was announced bank funding costs have fallen by around 100 basis points (see Chart 1).
“…judging the present state of the UK economy is far from easy. On the one hand, over the past two years total output, or GDP, has been much weaker than expected. In fact, output has been broadly flat over that period. And the zig-zag pattern of quarterly growth rates of GDP that we have seen this year is likely to continue, as we may see on Thursday when figures for the third quarter are released…”
“…In the 1930s, faced with problems of sovereign and other debt similar to those of today, the pretence that debts could be repaid was maintained for far too long. We must not repeat that mistake. It is peculiar, to say the least, that some of the same people who believe that the Governor of the Bank is too powerful also believe that he should stand on the steps of Threadneedle Street distributing £50 notes – a policy which you will appreciate is rather hard to reverse. For the same reason, the Bank could not countenance any suggestion that we cancel our holdings of gilts. The Bank must have the ability to reverse its policy – to sell gilts and withdraw money from the economy – when that becomes necessary. Otherwise, we run the risk of losing control over monetary conditions…”
“As for the MPC, you can be sure we shall be looking for as much guidance as we can find, divine or otherwise.”
- all calling sht £ unch – but I personally thought King’s speech was a little more dovish than could have been expected. I would look for the widow-maker to come in a little better bid. QE will be plentiful if needed…. no chance of selling gilts yet….need those to keep pressure on longer term rates when it comes to exit… – it was almost like he was convinced himself.
Cable has been held in the 1.63~1.54 range recently and that looks set to continue. It is worth noting that Demark highs and wave counts have recently topped on the trend-line resistance and this move lower should be continued to see a 1.55/25 test.
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