Archive - Jun 28, 2011

Despite UK inflation being 4.5% in May, more than twice the Bank of England's target, the BOE’s Posen’s ultra dovish comments are leading to speculation that zero percent interest rates and ultra loose monetary policy will continue for the foreseeable future. This poses risks to those on fixed incomes in the UK, savers, the poor and the elderly, and to countries that export to the UK such as Ireland. Posen said that the Bank of International Settlements (BIS) call for central banks to raise interest rates was “nonsense”. Posen also said there is little risk of a repeat of 1970s-style stagflation. His comments are odd given the fact that the UK is already experiencing high inflation and declining economic growth and looks on the verge of a contraction in economic growth and another recession and possibly a depression. Posen’s lack of appreciation of the real risk of inflation and stagflation both of which the UK is already experiencing leave him open to the accusation that he is talking “nonsense”. These real risks and the BOE’s ultra loose monetary policy will likely result in sterling continuing to weaken in the coming months.

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