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Michael Baxter

Bank of England’s next target: cheaper pound

Written by: Michael Baxter on December 20th 2012

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news: Bank of England’s next target: cheaper pound.   UBS: the fine, the punishment, the lesson. Fannie Mae and Freddie Mac lost $3 billion over Libor. Executive pay: regulators and compliance officers the new beneficiaries.

Something of a bombshell lurked in the latest minutes from the Bank of England’s MPC

Bank of England’s next target: cheaper pound

Initially, the minutes from the rate setting committee seemed to be designed to send us to sleep. “Financial markets…stable…UK government bonds broadly unchanged…” but then they got to the interesting bits.

The first fairly interesting, but not surprising thing is that the minutes said: “It was quite likely that headline GDP would register a contraction in the fourth quarter.” The bank is not saying we are in recession. That will depend on what happens in Q1 next year, but the bank is acknowledging that the UK may be close to suffering a triple dip. To be honest, this is not really a revelation. The data had made it pretty clear that this was the case, and the bank was merely acknowledging the obvious.

But then exports and sterling fell under the bank’s spotlight, which is when things got really interesting. The minutes noted that: “The nominal trade deficit had, however, widened further in October.  And more generally, the extent of external rebalancing over the past two years had disappointed.” So that wasn’t very encouraging.

While acknowledging that the woes in the Eurozone are not helping, the MPC felt that this alone is not a sufficient explanation.

“The gradual appreciation of sterling between mid-2011 and mid-2012, as prospects for the euro area had deteriorated, had been unwelcome,” stated the minutes, and continued: “Although the nominal effective exchange rate remained well below its pre-crisis level, some measures of sterling’s real exchange rate provided a less comforting view of the improvement in UK competitiveness. In particular, a measure  based on relative manufacturing unit labour costs was now only 10 per cent below its level in 2007, and just  5 per cent below its average in the decade prior to the depreciation. It was therefore possible that the real exchange rate consistent with current account balance might be lower than its current value.”

Okay, Bank of England speech is irritating, and full of ‘it is possibles’, and ‘maybes’, but the inference is clear. The bank reckons the pound is too expensive.

Sure, only one member of the committee – David Miles – voted for more QE, but expect the bank to focus on getting the pound down in 2013.

This, of course, has important implications. A lower pound will kick off more inflation. So while the bank pushes for a cheaper currency, the resulting rise in inflation may put off implementing the measures it says are necessary. What the bank needs is a new target, such as… I don’t know, say, to target nominal GDP instead of inflation – that would do it.

But there is a wider point here.

Actually, there are two wider points.

Firstly, inflation is the reason why average workers are getting worse off. On the one hand economists – including Mervn King – say recovery will occur once wage increases outstrip inflation. On the other hand, the Bank of England says we need a cheaper pound, which would kick of another round of so-called one-off inflationary rises.

The other point is even more important. Dr King has previously warned about the danger of currency wars. Sure, it is possible that the UK really does need a cheaper currency. But China thinks much the same thing about its currency, as does Brazil, as does Japan. Some of Obama’s critics say he is trying to destroy the dollar. As for the Euro area, well some countries need a cheaper currency that is for sure.

And it is simply impossible for all currencies to fall. It’s not a new issue. Talk of currency wars pretty much dominated thinking a couple of years ago, and at about that time gold rose sharply.

UBS: the fine, the punishment, the lesson

One question about Libor has not really been answered. How much damage has Libor rigging done to you and me?

That is not to say it can be justified. Take this email. After asking to have the six month Japanese Libor rate rigged, one UBS trader said in an email that he would: “f***ing do one humongous deal with you … Like a 50,000 buck deal, whatever. I need you to keep it as low as possible … if you do that … I’ll pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I’m a man of my word.”

And so it is that UBS has been fined US $1.5 billion. It emerged this morning that regulators in Hong Kong may come after the bank too. A prison sentence may well be on the cards for some. Some say banks should suffer more than fines; they should also have licences removed.

RBS, they say, will be next. And there’s no knowing the extent of the fines it will be charged.

Suddenly, Barclays seems like a goody two shoes. It came clean, owned up, and what with its new really nice boss, is in danger of growing a halo.

But the first question remains. What has all this got to do with the price of bread, or the price of milk, or even, for that matter the price of your credit card bill, or bank loan?

The chances are that the answer to that is very little. Let’s face it, the upwards and downwards manipulation tends to average out, and besides, the cost incurred by individual savers or borrowers as a result will be tiny.

The thing is – as you may have noticed – banks are not very popular these days. We are told we can’t tax ‘em, because that will be bad for competitiveness, or something

So let’s fine ‘em instead. That way, governments can get their money, and no one can accuse them of being anti-business, just anti-corruption.

Fannie Mae and Freddie Mac lost $3billion over Libor

And yet, somewhat contradictory, given the article above, according to the US regulator, Fannie Mae and Freddie Mac may have lost US $3 billion thanks to Libor manipulation.

Apparently this $3 billion figure is an estimate, and the Federal Housing Finance Agency has not decided whether it will be taking legal action against the banks.

Maybe it received one of those phones calls. You know: “Have you been a victim of Libor manipulation at any time over the last one hundred years? If so you could be in line for $3 billion compensation: press 9 now to speak to an advisor.”

Did the banks really cost Fannie Mae and Freddie Mac US $3 billion, or have the accountants being doing some manipulation? Who cares? It’s only banks.

Executive pay: regulators and compliance officers the new beneficiaries

Most compliance officers, especially the ones who read this, are really nice people and probably deserve a much bigger salary. But does Hector Sants, former chief at the FSA, deserve the remuneration package he has been offered by Barclays? Media reports say that Barclays Bank is to pay him £700,000 a year, a bonus potentially worth another £1 million, and a kind of £1.5 million extra pay as a sort of incentive plan to be its new compliance officer – not bad work if you can get it.

Some are suspicious; they say he is being paid so much so that he can use his contacts to pull strings at the FSA.

Maybe that is unfair. Maybe, in this brave new world of squeaky clean banks, compliance officers will be the real bosses. The pay reflects this. And let’s face it, when banks are fined the odd $1.5 billion, paying someone a few million to keep them out of trouble seems like a bargain.

Meanwhile Mark Carney is to be paid £450,000 a year to run the Bank of England, and will receive a £250,000 a year accommodation allowance.

Let’s hope it works out for him, because if he can do a really good job at the Bank of England, he may even be able to land himself a job as a compliance officer next.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Bank of England to target cheaper sterling pound, currency wars, Fannie Mae and Freddie Mac LIBOR, Mark Carney Hector Sants pay, triple dip, UBS fine

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