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A BoE bombshell, sterling battered ... again - analyst

02/20/2013 | 10:35am US/Eastern
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Sterling tumbles and the FTSE hits a 5-year high after BoE minutes stun UK markets - King votes for more QE and a rate cut is discussed. Robert Wood, UK economist at Berenberg Bank, believes further monetary stimulus is on the way.

SHOWS: LONDON, ENGLAND, UK (FEBRUARY 20, 2013) (REUTERS - ACCESS ALL)

1. BERENBERG BANK UK ECONOMIST, ROBERT WOOD, SAYING:

'Well the minutes today were obviously extremely dovish with 6-3 vote against more QE. Mervyn King and Paul Fisher joining David Miles in voting for more QE. To be honest, I would rule out a further interest rate cut but it does look like further monetary stimulus is on the way which will be supportive.
(QUESTION: So higher FTSE, probably higher stocks but the flip side of that, of course, is a lower Pound. The Pound has been battered today again. But you're still quite bearish on it.)
Yes, we are, yeah. I don't think the fall in Sterling is at all unwarranted actually, with monetary policy likely to remain very stimulative, with interest rates likely to remain low for - I mean, frankly, years, and the ECB looking a bit more hawkish, tail risks in the euro zone receding a bit then safe haven flows reversing weak monetary policy, I think - I think further falls in Sterling are likely.
(QUESTION: Against the Dollar back in 2009, if I'm not mistaken, fell down to what, 1.38?)
That's right.
(QUESTION: Is that a target?)
I'm not sure I'd call it a target. I mean I wouldn't think it would go that low but certainly lower from where it is here.
(QUESTION: Okay. And as such, the equities and the foreign exchanges. Now what about the bond market? It seems a little bit harder to call.)
Yeah, I think that's right because you've got the Bank of England essentially committing to keep interest rates low for the foreseeable future even if inflation runs above target. So no interest rate increases coming - I mean at least until 2015. We think 2016. But yet inflation, as I say, is likely to run above 2%, probably peak above 3% this year. So you've got forces pushing in both directions.
(QUESTION: All this central bank stimulus has obviously seen a sharp move lower in the Pound. That's not done much good for the UK economy, has it? I mean the trade balance is still pretty dire, there's no growth.)
I'd have to disagree with you there a bit. I think the fall in Sterling originally did do quite a lot to the trade balance, so it fell by more than half from before the crisis to mid-2011. That was until the euro zone crisis really kicked off in the summer towards the end of 2011 and then through the summer of 2012. Sterling appreciated, exports to the euro zone fell and I think that really harmed the trade balance. So further falls in Sterling should help. I mean let's keep it in perspective, the effect of the exchange rate is down not more than 5% over the past couple of months. Obviously a lot more against the Euro, but less against the Dollar. So I think it will help a bit but that's one reason why we think Sterling probably has further to go. The UK is running a current account deficit of 3.4% of GDP which clearly isn't sustainable in the long run.'

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