economic climate uk

Topics: Inflation, Macroeconomics, Foreign exchange market Pages: 6 (1385 words) Published: November 1, 2013
MATTEO
Exchange rate
Housing issues
Private and public consumption
Investments opportunities: pros and cons

EXCHANGE RATE

Sterling has been floating since the UK withdraw from membership of the ERM in September 1992. Since that moment, the Bank of England has not intervened to influence the pound’s value, as it became independent from the UK government. With a free floating exchange rate, the value of the currency is simply determined by supply and demand of the market. The Central Bank cannot set a target exchange rate and intervene in the market exchange rate for this purpose. The advantages of a free floating rate are several:

No exchange rate target, so the Central Bank doesn’t need to hold foreign reserves; Use of monetary instruments to support expansionary economic policies; Less opportunity for currency speculation;

Freedom for domestic monetary policy, so interest rates can be set by the Central Bank independently to meet its statutory objectives, such as monetary stability and economic growth.1 The sterling is considered a strong currency, as traded on the exchange markets as a reliable safe haven. Among the factors that help to determine this status are included political stability, low inflation, monetary and fiscal policies regular coverage with reserves of precious metals and value against other currencies stable or increasing over the long term. In recent years, however, the sterling has depreciated moderately against the other strong european currency (the euro), consequently the decision of the Bank of England to kick-start quantitative easing operations and APF (Asset Purchase Facility ) in March 2009 with the objective to provide liquidity to the market, promote economic growth and avoid the specter of deflation2. The ECB in fact (which in its charter has the sole objective of ensuring monetary stability but not economic growth) has launched its easing program only in November 2011 and the first months of 2012, with the two LTRO. The QE program allowed UK to improve the balance of payments due to the strengthening of exports.

However, in September 2013 the sterling reached its 8 month peak on the Euro, thanks to the positive signals from the economy. Indeed, an article from Reuters.com claims that: ‘Recent strong UK data has led markets to price in a rise in interest rates well before the Bank of England has flagged. Short sterling futures show the market is pricing in the risk of a UK rate hike as soon as late next year. The pound rose to its highest in nearly eight months against the euro of 83.59 pence per euro. It also hit $1.5872 against the dollar, its strongest since early February. The BoE has said it does not plan to raise interest rates before UK unemployment falls to 7 percent, which it does not forecast to happen until late 2016. "Sterling has been picking up support on the back of stronger UK data," said Ian Stannard, currency strategist at Morgan Stanley. "We have been participating in that move via short euro/sterling positions," he said, adding Morgan Stanley expected the euro to drop towards the 82 pence area. However, he was more cautious on the pound over the longer term as questions marks remained over how broad-based the UK recovery was. The pound was helped by below-forecast U.S. retail sales and sentiment data, which dented the outlook for the U.S. economy and weighed on its currency.’3

Consequently, We expect that the pound will continue to grow in value againt both Euro and US Dollar sustained by the good economic data and the likely future decisions of the bank of england to loosen the quantitative easing program.

HOUSING ISSUES

The economic-financial crisis occured in 2007 and 2008 brought to a huge credit crunch that struck sharply on the housing market. The collapse in mortgages brought also to a deep fall in housebuilding, that is now recovering: according to the Office for National Statistics, Annual housing starts totalled 110,530 in the 12...
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