Trapped

The Bank of England sat around mulling the contents of its latest Quarterly Inflation Report with reporters yesterday. They were faced with a mixed bag of results. On the one hand the Bank expects stronger growth, while on the other they remain open-minded about perhaps easing monetary policy further: Not through interest rates, already low enough at 0.5%, but rather through the quantitative method by buying corporate bonds.

That reveals that despite all of their previous efforts, the Bank isn’t yet confident that the economy is yet over the final hurdle. More worrisome is the fact that over the next three years through 2012 the Bank’s monetary policy committee expects the rate of inflation to remain beneath the central 2% rate. That assumes a modest rise in rates throughout the period along the lines of current futures prices.

The worrying thing here is that without the massive rescue effort that has made the ruling Labor party extremely unpopular, having bailed out the nation’s largest banks, the economy would undoubtedly be facing a wave of deflation. The downside inflation “surprise” this week reveals a frightful facet to what the Bank of England must know that the investing public does not – at least yet.

The pound was lower throughout Wednesday and closed at around $1.6580 and was weaker too against the euro. Another negative factor for the British pound was the apparent welcome awarded to the recent currency weakness from the Bank. It hopes that a weaker pound might redress the export and consumer balance back in favor of an export-led recovery.

When it’s all boiled down the Bank of England prepared investors for practically no change in interest rates over the next few years. Of course that puts a virtually zero cost on borrowing the currency in order to sell it short and invest directly into assets of higher yielding currencies and equities.

The dollar also suffered on similar account midweek. More and more investors are becoming attuned to the fact that the Fed is nowhere near putting up interest rates on account of a sluggish return to growth. In fact several Federal Reserve members forewarned that investors shouldn’t expect much action looking ahead. Those comments undermined the dollar Wednesday and sent investors looking once again at the carry trade for fear that holding dollars is merely a trap.

The price of gold and silver both rose as investors continue to face the prospect of ever-weaker paper currencies.

The Supreme Council of the Secret Order of Jurojin

Tyche Research

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