Back in 2010, when U.K. Chancellor of the Exchequer George Osborne was kicking off his fiscal squeeze, he rarely tired of saying how his “credibleâ€™â€™ plans gave the Bank of England flexibility on policy.
Six years later and the story hasnâ€™t changed much. Cornered by his own pledge to post surpluses from 2020, Osborne must keep tightening the purse strings for the next couple of years. On a cyclically adjusted basis, the big hits are coming up, keeping the burden on the BOE and Governor Mark Carney to drive demand.
Within a 24-hour period this week, the divergence between the monetary and fiscal policy stances will be highlighted, with Osborneâ€™s annual budget on Wednesday and the BOEâ€™s interest-rate decision a day later. The chancellor is seen sticking to his guns to meet his self-imposed mandate, and the central bank will probably leave borrowing costs on hold as Britainâ€™s referendum on European Union membership clouds the outlook. It cut the benchmark rate to a record low seven years ago this month and it hasnâ€™t budged since.
â€œFirst and foremost, the Treasury will still be looking to the BOE essentially to do the heavy lifting in terms of policy,â€ said David Tinsley, an economist at UBS AG in London. â€For now the BOE just have to kind of do nothing until the referendum is more or less out of the way.â€
That dynamic between fiscal and monetary policy is embedded in Osborneâ€™s strategy.
Luckily for Osborne, he doesnâ€™t have any reason to worry about the BOEâ€™s side of the equation. Carney is in little rush to start tightening policy, saying economic conditions donâ€™t justify it, and the possibility of an interest-rate cut has even crept into officialsâ€™ thinking.
â€œIf we were in a position where the economy needed additional stimulus, we do have considerable room,â€ the governor told lawmakers on Feb. 23.
â€œThe U.K. has been on this austerity path for a long time and a loose monetary policy is a counterpart to a tight fiscal policy,â€ said Brian Hilliard, chief U.K. economist at Societe Generale in London and a former BOE official. â€The dynamic of monetary policy at the moment is really a â€˜wait-and-seeâ€™ until we get â€˜Brexitâ€™ out of the way.â€
Pound Traders Await Steer From Budget, BOE
The pound halted its two-week-advance against the dollar on Monday as investors waited for clues from the Bank of England and the government on the economyâ€™s outlook. Sterling reached its highest level since mid-February on March 11, when it posted its biggest gain since January versus the euro. Traders are looking toward U.K. Chancellor of the Exchequer George Osborneâ€™s annual budget presentation on March 16, and the next dayâ€™s Bank of England rate decision and meeting minutes.
The outlook for sterling is threatened by the prospect of Britain voting to leave the European Union in the June 23rd
Sterling fell 0.2 percent to $1.4355 as of 10:59 a.m. in London. It climbed 3.7 percent over the last two weeks, reaching $1.4437 on Friday, its highest since Feb. 16. The pound strengthened 0.2 percent to 77.42 pence per euro, having reached 76.52 pence last week, its strongest since Feb. 4.