Quantitative Easing, Bank Results and Exchange Rates

Increased Quantitative Easing Weakens Sterling
Sterling fell across the board yesterday after the Bank of England said it would pump more funds into the banking system than was expected, citing subdued inflation and fragile financial conditions.

The central bank stunned market players by extending its quantitative easing programme to 175 billion pounds from 125 billion, beyond a previous limit of 150 billion pounds. It also held interest rates at 0.5 percent, as expected.

Economists had been evenly split on whether the BoE would effectively choose to print more money to buy assets such as government bonds and corporate debt.”That they expanded quantitative easing by 50 billion pounds is more dovish than expected, so sterling is weakening accordingly,” said Daragh Maher, senior currency strategist at Calyon in London.

Weak Pound good for UK recovery
“Since the BoE has frequently addressed the positive impact of currency weakness in stimulating the economy, it is unlikely to close the door on quantitative easing,” said Ashraf Laidi, chief market strategist at CMC Markets.

The central bank said it expected the increased asset buying programme to take another three months to complete, and the scale of the scheme would be kept under review.
It also said past sterling depreciation continued to put upward pressure on prices, although spare capacity in the economy was likely to keep inflation low in the medium term.

“The BoE must be well aware of sterling’s resurfacing positive response to improved risk appetite,” he added.

UK Bank Results
Sterling extended its slide on Friday, hitting the day’s low against the dollar after Royal Bank of Scotland posted losses during the first half of 2009 and said it anticipated tough times in the next two years.

The statement from RBS was downbeat, highlighting the £1bn loss after paying tax and dividends to the government and describing the results as “poor”.

Summary
So, we’ve had some positive figures from some parts of the UK economy, which helped the pound make significant gains against both Euro and US Dollar. However due to very poor bank figures, and a surprise increase in Quantitative Easing the pound is under pressure again.

The UK is likely to be the last economy to see light at the end of the tunnel in terms of coming out of the recession, and due to the enormous levels of debt, which are forecast to get to over 100% of GDP, it’s unlikely that the pound will continue rallying.

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