Article / 22 January 2013 at 13:44 GMT

The UK’s ultimate weapon in the currency wars

Chairman, Saxo Capital Markets UK Limited / Saxo Bank
United Kingdom

I think it’s fair to say we’re now in the midst of a full-blown currency war. The US can’t complain, as there’s little doubt that the US dollar’s persistent weakness (even in the face of a currency as laden with problems as the euro - I ask you!) has been a welcome but obviously unheralded by-product of the Federal Reserve’s quantitative easing shenanigans; the Japanese are now overtly adopting currency debasement tactics, as have the canny Swiss, whose central bank will shortly be sitting on very nice profits, thank you.

Given the way the European Centeral Bank has been happy to abandon its Bundesbank heritage thus far, it’s highly likely we’ll see much more aggressive, unsterilised quantitative easing from that quarter as the misery of austerity truly bites this year in southern Europe. There’ll be some story to excuse it. It’ll be given a fancy acronym, but if it smells like QE, and looks like QE, it is QE.

So what about us poor Brits? We’re also destined for ‘austerity infinite’, and the Old Lady now owns so much of the gilt market that serious questions are being asked around the monetary policy committee table, meaning that increasing the dose may be tricky. So how can the UK keep its currency weak, with a pea-shooter in our holster, compared to the other kids on the block?

Here’s a thought from left-field. As the year goes on and the British economy wallows in triple-dip recession, thrown into stark relief by what I expect to be a surprisingly robust US recovery, the next general election will start to loom large in the frontal lobes of an increasingly worried conservative leadership - they know, ‘it’s the economy, stupid’. Desperate times call for desperate measures, and, increasingly, credible economic voices have been heard recently suggesting that, whilst independent central banks may have been a great thing when inflation was the real enemy, now that deflation is a more imminent threat, maybe having monetary and fiscal policy under the same roof makes sense. Even the UK’s persistently sticky inflation rate will look less worrisome by the end of 2013.

To take the Bank of England back under the Chancellor’s control would be a radical step, but imagine a world in which Japan’s Prime Minister Abe’s pressure on the Bank of Japan to ease dramatically is successful and the Japanese economy looks like it’s bouncing for the first time in twenty years, come our Autumn, then British spin doctors may be in full flow, advocating a return to Treasury control over the Bank - all the man in the street cares about is economic success and fretting about central bank independence may seem hopelessly arcane by then. Now THAT would get sterling down.

Incoming Governor Carney may not find all of this so alien - before recent events in Japan, the Bank of Canada has notoriously been the least independent of the major developed economy central banks. Was this maybe also part of his famous deal with the Chancellor? 

Follow Nick Beecroft on Twitter @Nick_Beecroft


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