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More up than down

10 June 2013 By Ian Campbell

Is Mark Carney really Mr. Easy Money, about to devalue the pound in a bid for growth? The incoming head of the Bank of England has spoken of the need to attain “escape velocity”. But the logical deduction – that he will open the monetary floodgates and send the pound down to $1.40 – ignores the latest economic news and the new international mood on monetary policy.

The case against the pound starts with weak British GDP growth. But the economy is picking up. Overall consumer expenditure grew by 1.3 percent year-on-year in May according to Markit, the best annual rise since October 2010. Positive surveys of construction and manufacturing, as well as the dominant services sector, suggest growth is broadening. Second quarter GDP could increase more than the first quarter’s 0.3 percent rise.

The first step to weaker sterling would be a vote by the central bank’s Monetary Policy Committee in favour of more quantitative easing. But Carney replaces Mervyn King, whose proposal for increased QE has been consistently outvoted by a 6- to-3 margin. Carney might have dominated the Bank of Canada, where he was governor, but relatively good economic news will stiffen resistance at the British MPC.

Also, he would be fighting an emerging international consensus on QE – that it foments more asset price inflation than GDP growth. The UK is nowhere near the desperate straits that might justify a more aggressive experiment.

An improving economy and money printing on hold would make the pound a buy, not a sell. Against the recession-afflicted euro zone, the British economy offers much faster GDP growth. Against the dollar, at $1.55 sterling is fairly cheap. Though a recovering U.S. economy and less QE from the Federal Reserve would be positives for the dollar, there’s no good reason for the pound to slide against the greenback.

Against most other currencies, the Fed’s role will be influential. If it eases back on money printing, global commodity price falls could hurt the previously high flying Australian and Canadian dollars.

The Carney pound might even fare better than the Canadian dollar. Well, of course, he’s paid in sterling now.

 

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