Wednesday, March 20, 2013

BOE worried about inflation and exchange rate

The BOE MPC defeated Governor King's proposal to add stimulus through more QE. There is a fear by committee members as written in their minutes from their last meeting that inflation expectations could change for the worse above the 2% target level. The pound has strengthened at 1.512 after breach in the 1.50 level. The costs may outweigh the benefits at this time and there is growing concern that the exchange rate has fallen too much this year.

The idea that QE is the solution to everything is ending. Policy makers are accepting the fact that fiscal policy is necessary and structural issues are important. This may be good for the UK if they internalize this message.

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