UK Quantitative Easing Will Increase

Another rough day for precious metals and commodities yesterday, with the Organisation for Economic Cooperation and Development predicting a fall in global growth and arguments flaring between European leaders on the question of Eurobonds. On top of this, former Greek prime minister Lucas Papademos stated in an interview that “preparations were being made” for a Greek exit from the euro, which – though surely a statement of the blindingly obvious (it would be more of a story if the European Union wasn’t making some sort of Grexit contingency plan) – spooked the markets.

The euro slipped to a 21-month low in Asian trading this morning following publication of Papademos’s comments, and is now at $1.264. The EUR/USD got as low as $1.199 on May 31 2010, the lowest this rate has been since early 2006, so $1.20 is worth keeping an eye as an important support level for the euro.

Sterling also fell against the dollar following remarks from IMF head Christine Lagarde that recommended the Bank of England lower interest rates and engage in more quantitative easing in order to support the UK economy. Interest rates are at 0.5%, so there’s not much further for them to fall, but of course there’s no limit to the amount of electric money the Bank can magic out of thin air.

New inflation figures out yesterday from the UK’s Office of National Statistics showed the Consumer Price Index fell to 3% in April – its lowest level for more than two years. The Retail Price Index (which includes mortgage interest payments in its inflation calculations) was only down from 3.6% to 3.5% March to April, but has still been seized upon by newspapers as evidence that the BoE has room for more money printing.

Recently the Bank’s Monetary Policy Committee voted 8-1 in favour of limiting quantitative easing to £325 billion. This is the softest of soft “limits” though, with several of the eight said to be “finely balanced” on the question, while Deputy Governor Charlie Bean said in a speech yesterday that QE may need to resume if the economy deteriorates. Given the worsening conditions in the eurozone, and the slowing US economy, further economic deterioration in the UK seems highly likely, so expect more QE from the BoE before too long.