Currency watch: Sterling tumbles as the Bank gets serious

It has been another tumultuous week for the economy.

Just as chancellor George Osborne took to the stage at the Conservative Party Conference in Manchester this week, a flash came across my trading screens… “S&P AFFIRMS UK AAA; OUTLOOK STABLE”. Convenient timing for Osborne if ever there was.

The ratings agency had called the UK a “wealthy, open and diversified economy, supported by a well-established political system and macroeconomic policy framework”. Osborne claimed the credit in true statesmanlike fashion – the plan was working!

Of course what he didn’t mention was that Standard & Poors (S&P) had tempered this by suggesting that the economy would only grow by an average of 1.8% between 2011-14, as opposed to the Office of Budgetary Responsibility’s expected 2.5%.

Regardless, the stable outlook (i.e. no ratings action planned) was, they said, a result of their expectation that the coalition will implement the bulk of its expenditure-led fiscal consolidation program, which will eventually allow the debt to GDP ratio shrink back to a sensible level.

All good news for Osbourne and Co, and enough, we thought, for the Bank of England to keep us all waiting on any big decisions for a while longer. We were wrong.

On Thursday, Mervyn King and the MPC decided to surprise us all and declared that it was time to get the quantative easing (QE) bazooka out once again.

The reasons are simple and obvious: strains in funding markets, a slackening global economy and consumers who are scared of spending money.

Like many others, we had expected the Bank to hold off on QE for a while longer, with the belief that it would wait on measures from the European finance ministers’ meeting in Cannes at the beginning of November.

Nevertheless, it had obviously had enough of the deterioration in global finances and felt compelled to act.

Sterling, inevitably took a nosedive soon after the announcement and is likely to remain in doldrums for a while longer.

However, the fact that they have gone harder and earlier is a sign that they are very concerned as to how the Eurozone will affect the world economy.

It’s still quite possible that the last dose of QE worked – by preventing a credit-based depression.

There’s no way of telling with any certainty. What is for sure is that we will have to hope that our QE2 works better than it did in the US.

Jeremy Cook is chief economist at World First foreign exchange