The euro traded lower against the pound, dollar and the yen on Monday in another day of volatile trading as doubts over officials reaching an agreement on a resolution to the long running euro zone sovereign debt crisis bubbled to the surface.
After a weekend of talks, European officials are said to be considering a plan to make sure that Greek default will not spread into the rest of the euro zone’s banking system. Newspaper reports suggest that officials are mulling a plan that would allow Greece to default, recapitalise euro zone banks and increase the European Financial Stability Facility fund way beyond its current €440 billion capacity.
However, with nothing concrete decided, disappointment set in and the euro gave ground again.
This despite the pound coming under pressure as concern mounts that the Bank of England (BoE) could unleash more monetary easing to bolster sluggish growth after policy maker, Ben Broadbent, said the UK’s ultra low interest rates remained a credible policy due to slow wage growth and a weak economy putting downward pressure on inflation.
In a speech at Thomson Reuters’ headquarters in London he said the most important indicator for UK monetary policy was that the international environment was “clearly disinflationary”.
Many analysts now believe that the UK base rate will remain unchanged well into 2012. Broadbent went on to state that, in his opinion, the pound was likely to remain weak for some time but added monetary policy was not to blame for its weakness. Instead he said it was the result of attempts to rebalance the UK away from a dependence on government spending.
Howard Archer, chief UK economist at IHS, said he expected the BoE to announce a further £50 billion of Quantitative Easing (QE) by November, taking the stock up to £250 billion.
“While we currently favour a move in November, it is very possible that the bank could act at the conclusion of the 5-6 October MPC meeting if UK data over the next couple of weeks show further weakness and the global economic environment fails to show any signs of improvement,” he said.
To add to the deteriorating picture of the UK economy, Reuters announced that UK house prices are likely to fall another 4% before stabilising next year. The grim prognosis comes after recent signs of further weakness in the UK housing market. Earlier this month, The Royal Institute of Chartered Surveyor (RICS) said its August UK housing market survey’s house price net balance fell again with survey results showing 23% more surveyors reporting that prices are still falling.
Commentary by Tony Redondo
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