In a decidedly unexpected move, the Bank of England (BoE) is, on the one hand, raising interest rates to fight inflation and on the other, printing money (which is usually at odds with the previous move) to support the real economy.
New moves for the Bank of England’s monetary policy
The reign of King Charles III, having weathered the change to the country’s government after the resignation of Boris Johnson and to the throne following the painful passing of Queen Elizabeth II who was succeeded by her son, had shown hesitancy when it opted to raise interest rates by only 50 basis points last week, demonstrating that it was afraid of the markets.
Despite the fact that the previous rate hike had also been in line with the last one, investors saw some uncertainty on the part of the British government, a heavier hand in the fight against inflation was desirable given the excellent results the United States of America is achieving to the tune of 75 basis point hikes.
In a turn not seen in decades, the pound had raised rates to 175 basis points overall, recovering somewhat over the dollar and placing itself as third in the special reserve currency which see the US dollar first by a 40% gap, the euro at 20% and the pound at 5%.
The policy direction, albeit tentative, is to fight inflation without ifs and buts, yet a short circuit has occurred.
Perhaps due to divergent views, the expansionary wing got its way by blocking the budget reduction talk scheduled for 29 September and that is how the British government announced the era of Quantitative Easing.
Q.E. (Quantitative Easing) is the practice whereby the state prints currency in order to support the real economy, it is not usually used at the same time as a central bank rate hike phase, in fact the exact opposite of Q.E. is done at this stage, namely, Quantitative Tightening.
The path taken by London is actually, although rare, not new; other governments such as Turkey or El Salvador have followed this path albeit with distinctions.
Erdogan, the president of Turkey, is grappling with record inflation worldwide (over 80%) but nevertheless has decided to leave rates unchanged while El Salvador also gripped by huge inflation has opted to go all in on the systematic purchase of Bitcoin.
Inflation and geopolitical uncertainty
In a situation where the difficulty in obtaining raw materials coexists, the bear market dominates all markets and the high energy price hits households hard, inflation is certainly the starting point, public enemy number one to be annihilated.
To this end, almost all Central Banks in countries around the world, both Western and Asian, have opted for an aggressive economic policy of sharp rate hikes, which from experience and from economics textbooks turns out to be the most effective move in fighting the evil that grips commodity prices.
Inflation can have different causes and different strategies may not necessarily fail, far from it.
The United States of America has been plagued by demand inflation for example, while in Europe the problem is the access to raw materials and the cost of energy, which despite increases all over the world, due to the war in Ukraine is experiencing major spikes especially in the old continent.
Rounding out the picture are countries such as Turkey mentioned above or El Salvador that have been living with this problem for years and have chosen to intervene on problems that are more important to the governments of their respective countries such as public debt, reconstruction of society including employment, and geopolitics.
The case of the United Kingdom, however, is news not only for the strategic choice of printing money to support the economy when the cure would be to raise rates but it is the first time that a country so important to the economy of the European continent and the world (the pound has reached 7% of the world’s economy) has done so.
To be fair, it must be said that a rate hike is not a totally abandoned path on the part of the Bank of England but raising rates by 50 basis points at every meeting is certainly not in step with the actions of other central banks of major countries such as the United States or Europe or China itself.
The priority that the new British government is considering is to save the country’s economy, and for that it is acting in two directions, one will be the one mentioned above of supporting the economic fabric by injecting liquidity, and the other is tax and utility bill easing for citizens and businesses, which will hopefully contribute greatly to boosting the Kingdom’s consumption.
Thus, priorities are dividing the world, a world that in addition to economic problems is also coming to terms with the danger of a third world war in light of the recent events in Ukraine and Putin’s announcement of a partial mobilization of Russian power with the deployment of 300,000 new soldiers in the country east of Europe for the final campaign to conquer the country.