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What's the Status of the Bank of England?

Central bankers around the world are in a quandary when it comes to finding the “magic formula” that will jumpstart the global economy. Last week’s lack of action from either the Bank of England or the European Central Bank has led analysts to speculate that so-called “stimulus tools” at their disposal will be left in the toolbox, at least for the next several months. Neither regulatory body elected to modify interest rates or expand any quantitative easing efforts in the near term, actions that would have been welcomed heartedly by both the business community and investors, as well.

The overriding issue, apparently, is globalization. Our economies are so entwined with the commercial affairs outside of our borders that domestic policy changes have only illusory impacts. Increasing liquidity in bad times only works if banks have a lending appetite to feed. Presently, the world remains gripped by uncertainty, which leads to risk aversion, which leads to more inertia, especially in the developed countries in the West. Asia has geared back due to declining demand from the North America and Europe. All eyes now fall upon the United States and the continuing drama in the EU.

What does this mean for Great Britain? In order to answer this question, one must view our current situation in the proper context by comparing it with other related economic data. How a nation’s currency performs over time is often a good “barometer” for this type of comparison, and the previous six months is helpful in making this evaluation. If one measures the returns of the British Pound, the Euro, the Aussie Dollar, and the Japanese Yen, along side stocks like the S&P 500 index, a proxy for global economic performance, then the following observations can be made:

• Values for all five items moved within a tight 10% band. These “tight” correlations are indicative of globalization and how interconnected our domestic economies are with economic activity outside of our borders;
• The Pound and Euro appear to have been on the same “rollercoaster” ride, each within one or two percentage points of the other for six months. At least 50% of England’s trade is with its European partners. There has been a slight “dip” over the past week, but this move was a response to the “holding pattern” exhibited by both central banks;
• The Aussie Dollar was the leading performer for the period, appreciating 4% while the Yen flat lined. Australia benefits enormously from regional demand for its raw materials from China, India, and other developing economies in Asia;
• Aside from the Aussie Dollar, the remaining four items have trended downward for the past two months. These declines can be attributed to U.S. election results and concerns that their Congress will remain deadlocked when trying to resolve crucial deficit, tax, and stimulus issues in the next few months. A number of legal agreements expire in January, the infamous “fiscal cliff”. Inaction will generate more uncertainty and tepid economic growth, leading to another recession according to some economists;
• Lastly, the optimism in Europe from a few months back has faded. Greece is in dire need of money to pay its bills. European finance ministers are reluctant to respond, and the press is once again raising a potential Greek exit from the EU as a real possibility.

The Bank of England cited 1% GDP growth in the third quarter as its reason for staying pat. Economists, however, believe the picture is much bleaker than this one stat might indicate. According to Vicky Redwood of Capital Economics, “We are pretty sure that the economy will need more stimulus in the months ahead, and we do not think that the committee is out of firepower yet.” Only time will tell.

This has been a guest article provided by ForexTraders.com. For more information about foreign exchange trading in your area, visit ForexTraders.com’s UK broker section.

This was posted in Bdaily's Members' News section by Forex Traders .