Week in FX Europe – BoE’s Carney Proceeds With Caution

The BoE is being prudent and is following in the footsteps of global regulators. Like all good Central Banks, the “Old Lady” is trying to stay ahead of the curve and be proactive, and not be held responsible for a return to reckless housing lending. No one wants to be the architect of another potential bubble. Yesterday, the BoE announced that they have fine-tuned its funding for lending scheme (FLS) – shifting their focus to the SME sector rather than on residential lending for next year. Carney said it would “no longer be appropriate or necessary for us to have our foot on the accelerator” in terms of spurring mortgage lending. “It’s better to shift into neutral.” The sense is that by taking such action it can actually limit the need for direct monetary policy tightening.

The BoE’s concerns are legitimate. The report certainly highlights the potential “hot” spots, putting forward “some evidence” of rising risks. For instances, the UK household sector is already highly indebted – this is very much a global phenomena – and those highly indebted households tend to make up a large share of the mortgage holders – the problem with this it’s a too high a percentage to deal with shocks sufficiently. “We should refocus the FLS so that it continues to support lending to the business sector, without adding further broad support to household lending at a time when that is no longer necessary,” Carney said in a letter to Osborne.UK economic growth in the three-months to September was the fastest in three-years, banks have far easier access to finance, and house prices are rising at their fastest for three years.

The first phase of the FLS is to finish at the end of January 2014 and Carney and company believe that an improvement in the UK housing market and house price inflation means “there is no longer a need for the FLS to provide further support to household lending.” It’s important to note that any change to FLS has no effect on the ‘Help-To-Buy’ program. That particular program is aimed at borrowers without large deposits; the FLS program is designed to improve lending in general.

Lending concerns are not just a UK problem – it’s global. The lack of investment initiatives from the SME’s is causing blockage in the growth cycle. Cash hoarding by companies do not help investment plans, this obviously derails any spin off trimmings, like an increase in disposable incomes that should be passed down to employees, which eventually gets pushed out into the economy, helping economic growth. However, that cycle is flawed, unable to run efficiently. The FLS initiative now focusing on SME lending will hopefully get to improve this economic cycle. A lack of lending to small firms is hampering Britain’s economic recovery.

The pound continues to march towards its outright yearly high on the BoE’s surprise hawkish move yesterday. Solid offers are expected to emerge ahead of the £1.6400 option barrier mark. Against the EUR, tech analysts expect a market close below the 10-DMA, now at 0.8359, weakens the underlying market structure. EUR offers continued to be placed all the way up towards 0.8400.

• Eurozone Youth Unemployment Hits 24.4 Percent –
• Italian Unemployment Stable at 12.5 Percent –
• ECB Member Says Eurozone on The Mend But Not Out of Crisis –
• PWC Warns European Banks About Cash Crunch in 2014 –
• Netherlands Downgraded to AA by S&P –
• Spain’s Outlook Upgraded to Stable by S&P –
• Berlusconi Out Leaving Troubled Coalition Behind –
• Bank of England Says Housing Market Does Not Need Further Funding –
• UK ThinkTank Warns Debt Levels Could Trigger Crash –
• Former Spain PM Criticizes “German” Euro –
• Germany Could Announce Grand Government Coalition Soon –
• Italian PM Letta Wins Confidence Vote –
• Greece Loses Developed Market Status –
• ECB To Include Lending Conditions on LTRO –
• ECB Confident Stress Levels Are Back to Pre-Crisis Levels –
• EZ Looking at Role Reversal –
• London Fix Under Review –
• BoE Governor Says Unemployment Does Not Dictate Rate Hike –
• UK Chancellor Asks BoE To Take More Control of Banking Sector –
• BoE Carney Troubled by RBS Lending Practices Allegations –
• ECB’s Coeure Says European Inflation Will Recover to 2 Percent Target –

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