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MPC Clashes Over Further QE

by Dave

The minutes from the Monetary Policy Committee’s (MPC) latest meeting show that there is a more sizable portion of the committee willing to engage in further quantitative easing (QE) than was expected. The international monetary markets jumped on this news, abandoning the pound in favour of currencies or materials that are considered to be at less risk of inflation.

The biggest surprise was Sir Mervyn King voting for further QE, which adds a lot of weight to the opinion even if the move for more QE was defeated by five votes to four.

QE allows for banks to offer cheaper loans and mortgages by buying government bonds off them, giving them a quick cash injection without needing to pay out interest rates on people’s deposits. However, it requires printing money, which lowers the value of the pound.

Michael Saunders, who specialises in the UK economy at financial advisors Citi, sums up the attitude of financial investors following the release of these minutes: “A sizeable and important minority on the MPC support further QE. This vote is a clear statement of the MPC’s willingness to look through inflation.” It’s these attitudes which saw the pound drop in value against the dollar and euro today as people jumped from it.

The weakness of the pound is worrying some, even though it encourages foreign markets to buy from Britain, which is considered one of the best ways to kick start the economy. For investors though, it’s bad news, and Investec currency expert Lee McDarby believes that this downward trend will continue: “2013 just goes from bad to worse for the pound. This continues the snowball of gloominess which has been gathering pace against sterling with the downside risk now getting more worrying for the friendless pound.”

There are so many different factors affecting the economy at the moment that making accurate predictions about the future is very hard to do, but it’s clear at least that stability, whether in the value of a currency or financial markets, is unlikely to appear any time soon.

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