Before I go into what Mervyn King and Ben Bernanke had to say, or rather not say, it is worth mentioning CPI in the UK. CPI has continued to track downward, as predicted by the Bank of England, as it fell again today down to 2.4% and looks set to continue to press down to the 2% target by the end of 2012. Well done Mr King!
Many Forex traders accept that this falling inflation will open the door to more Quantitative Easing by the MPC. As inflation falls, the MPC are given greater room to engage in QE which has shown strong success in the past. With the Eurozone slowing down, there is a continual fear that it will swallow in economies already caught in contagion. There was an expectation that Mervyn King would shed light on the possibility of further QE today, instead, however, he was caught up in the ongoing LIBOR scandal. What is interesting to note on LIBOR is that many international banks have pulled out of ‘quoting’ for LIBOR-type lending around the world for fear of the regulatory footprint. This in turn is expected to cause inter-bank lending rates to increase and become less reliable. Behind the scenes, the Bank of England has been making money available to small institutions and private borrowers to ensure a strong level of liquidity in the lending markets.
Over in the US, Ben Bernanke made his formal address. Bernanke, a known supporter of further easing measures in the US, had his shot to push for a pro-active policy in the US today. Instead, he held back and played his hand the same way the FOMC and the FED would have. We all know they are ready to ‘engage’ and ‘take the necessary steps’; the frustration is that they may not see what the steps are.
The week moves on tomorrow with Bank of England minutes and UK Unemployment. Catch the Morning Note on Twitter for up to date commentary. (JKM)