Sterling outlook gloomy

The Pound continued its poor start to the week yesterday with exchange rates continuing to slide across the board. These losses can be attributed to a number of factors but especially the run up to this weeks Bank of England interest rate announcement on Thursday. The likelihood of any interest rate rise is minimal but the rumours of a second phase of Quantitative Easing measures being announced are getting louder and louder.

Quantitative Easing

What is the reason for and impact of Q.E.?
The idea behind Q.E. is simply to increase the amount of money in the UK economy in the hope of, amongst other things, it filtering through the system and reigniting the housing market, increasing retail sales and in turn reducing unemployment. The problem so far has been UK banks reluctance to lend out this extra money with the aim of improving their own financial position and balance sheets, hence why further measures may be necessary.

The impact of Q.E is fairly serious, with this huge volume of extra money available in the system people, in time, will have more money to spend. The theory of supply and demand tells us that the more people have the more they want things, the more people that want things the more expensive they become............inflation!!!

The principal way of controlling inflation is to increase interest rates and with such a huge volume of extra money in the system, inflation could climb rapidly meaning that interest have to climb equally steeply!!!