Bank of England Considers Higher Pound as Obstacle to UK Economy Rebalancing

The policy makers of Bank of England have stated that the current level of Pound, the major currency of United Kingdom may prove to be an obstacle for the economical rebalance of the country. Incidentally, the renowned British economist David Miles has again repeated his call for possible expansion of the stimulus.

A voting was held among the members of the Monetary Policy Committee and they voted 8-1 in favor of keeping the bond purchase plan unchanged at $595 billion. Incidentally, the voting was originally held during a 10th January meeting and the minutes of the same was released on today. Members kind of diverged on the possible risks of British economy. Some of the members stated that corporate earnings should pick up, whereas, some believed that the British economy would grow higher without generating any sort of inflation.

According to the minutes, the current exchange rate of Pound is higher than the compatible level required for rebalancing the country’s economy. Apart from that, there are other substantial headwinds as well such as drag to activity from the fiscal consolidation, deterioration in the UK competitiveness resulting in the last 2 years etc. Incidentally, bond purchase program was put on a hold in November and the country is currently relying on the Funding for Lending Scheme for turbo charging the recovery process. Yesterday, the Governor of Bank of England, Mervyn King announced that the credit conditions of UK have shown improvement. He added that if Funding for Lending scheme works, the credit conditions will improve further based on that. Incidentally, after the release of minutes report, Pound rose higher by 0.2% and is currently at $1.5871.

King has already supported the plan of further asset purchase so that more monetary stimulus can be provided. King added that the policy makers are also weighing the potential benefits and losses of the interest rates.

David Miles believes that the monetary policy should be eased down without causing any appreciation of Pound. If this happens, the economy can actually be rebalanced. Miles also stated that the bond purchases should be increased by 25 million Pounds. Even on last month, he made a similar call. Bank of England currently targets to achieve 2% inflation from its current value of 2.7%. Many analysts feel that the factors driving the inflation are pretty persistent.