A good day for the pound

All things considered, today’s developments have been beneficial for the pound. As expected, the Bank of England decided to lift its asset purchases program by another GBP 50bn to GBP 325bn in an operation expected to be completed over the next three months. In a statement accompanying the announcement, the BoE cited a concern that “a significant shortfall” in the UK economy could persist and that without additional asset purchases, inflation could undershoot the Bank’s target. Moreover, policy-makers expect the economy to remain weak in the near term; as such, in our view further QE cannot be ruled out once this latest batch of purchases is completed in May. In some respects, the BoE’s preparedness to continue to engage in responsible monetary accommodation is gaining it some plaudits at this time of unprecedented fiscal austerity.

Sterling was also cheered earlier in the day by the news that the trade deficit in December was the lowest in nine years. Export volumes in the final quarter of 2011 rose by 3.7%, in contrast to imports which were up by just 0.7%. As a result, the initial GDP estimate for Q4 of -0.2% is likely to be revised higher. Interestingly, particularly given the uncertainties across in Europe, the major contributor to the improved trade picture has been growing export volumes which in the second half of last year rose by 6%. Imports were understandably held back by very weak domestic demand and fell very slightly over the half-year ended December. The Bank will also be satisfied to learn that imports are actually becoming cheaper, which in turn is helping the Bank achieve its inflation objective.

Confirmation that the economy is rebalancing needs to be tempered by the weakness still evident in the industrial sector. Industrial production did manage to rise 0.5% in the final month of last year but this follows a run of four declines in the previous five months. Softening local demand and very mild weather unsurprisingly weighed on gas and electricity production. Manufacturing production is crawling ahead, with growing external demand almost completely offsetting declining domestic demand.

Sterling has made forward progress against most major currencies today, at a time when fresh doubts about Greece have scuppered appetite for the single currency.