The UK economy has officially emerged from a deep recession, but is it really smooth sailing ahead now? With stronger than expected manufacturing figure released this week it would appear that there has been some effect of the Bank of England’s QE program, but the central bank is now faced with the issue of weaning the UK economy off of this artificial stimulus. Britain has exceeded expectation in areas like manufacturing and price are rising on the high street, but house prices and our services sector have yet to catch up with the levels of growth being experiences elsewhere, which means that the Bank of England cannot afford to loosen its grip on the weak pound just yet.

Some analysts have suggested that the only way the UK is to avoid a Greek or Spanish style economic crisis would be to increase income tax by 10%, VAT to 20% and the privatisation of the health service. Although there is always a threat of the double dip, it must be remembered that Greece and Spain had issues because of their ability to finance their debt. As the head of sovereign risk strategy at HSBC pointed out the cost of insuring a British government bond (gilt) means that there is ‘zero percent’ chance of Britain defaulting on her loans. Credit may be slow moving domestically, but internationally our debt is still an appealing investment.

Arguably the most important dates over the next two months will be 10th February and 15th March because on these days are scheduled for the Treasury’s Inflation Report Hearings. During these hearings the BOE Governor and several MPC members testify on inflation and the economic outlook before Parliament’s Treasury Committee. The hearings are a few hours in length and can create market volatility for the duration. Especially noted are the direct comments made about the currency markets; BOE MPC members vote on where to set the nation’s key interest rates and their public engagements are often used to drop subtle clues regarding future monetary policy, such as Quantative Easing.

If the MPC’s comments are more ‘hawkish’ than expected we would expect a positive improvement in the value of sterling. Hawks carefully monitor and control economic inflation through interest-rate adjustments and monetary-policy controls. In general, hawkish investors prefer higher interest rates in order to maintain reduced inflation. With inflation over 1% above the 2% target the hawks will vie for an increase in interest rates if consumer spending remains low, which would make investment in the UK and lending more appealing, but could stunt domestic borrowing because of an increase in costs to the consumer and therefore tighten up the property market.

Please feel free to contact me at keith.s@currenciesdirect.com and I will reply to all your questions promptly.

Visit us in our Spanish offices in Costa del Sol, Costa Almeria, S. Costa Blanca and N. Costa Blanca
Telephone: UK 0845 130 8148 • SPAIN 902 310 444 • Email: costadelsol@currenciesdirect.comwww.currenciesdirect.com

Leave a Reply