Don’t blame BOE if sterling weakens
In October the Bank of England (BOE) announced its decision to increase the Asset Purchase Facility (APF) by GBP 75bn to GBP 275bn for a period of four months ending only a few days ago. There were several reasons behind its unexpected move to expand the facility when it did despite headline inflation continuing to increase above 5%, much higher than the BOE’s own inflation target. In view of the current weak growth outlook, enormous unutilized capacity and inflation set to fall below the BOE inflation target over the medium-term, we see a strong case to expect further QE from the BOE as early as this week’s meeting. While this is likely to have a negative effect on sterling, the experience of previous QE initiatives shows no clear relationship between QE itself and the value of the currency. Recently, there have even been signs that the opposite has occurred. Consequently, while the outlook for the GBP remains negative and further weakness seems likely, additional expansion of the asset purchase facility by the BOE on Thursday will probably have only a marginal impact on the value of the GBP. Page 5
REFLATIONARY CENTRAL BANKS The determination of central banks to keep their feet firmly on the accelerator has ensured continued robust risk appetite and flight to fundamentally strong currencies. Most significantly however, expanding the ECB’s balance sheet has highlighted the increasing risk associated with the present much expanded role of the central bank. This is in our view the biggest and most negative factor for the euro going forward. Page 3
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SEB tech team