If one is asking about Cunard's flagship ocean liner that crisscrossed the Atlantic Ocean for nearly forty years, then the answer is NO. She was in fact retired from active service on November 27, 2008 (I only mention the day because that's my birthday), and now she sits moored in a Dubai shipyard waiting for a new assignment possibly as a floating hotel.
If one is asking about the possibility of a second round of quantitative easing (QE) by the Bank of England (BoE)in another attempt to stimulate the British economy, then the answer is maybe, but probably not.
Up until a few weeks ago, market expectations were very high that the BoE would follow the Fed's lead and jump aboard the QE2, probably sometime early next year. However, like bumping into an iceberg in the middle of the ocean, the market was caught completely off-guard by two economic reports: 1) U.K. Q3 GDP, and 2) the BoE's Quarterly Inflation report.
Better-than-expected economic growth
On October 26, the U.K.'s Office for National Statistics reported that Britain's third quarter gross domestic product grew by 0.8 percent over the previous quarter. Compared to the same period last year, GDP grew 2.8 percent. Market expectations were for a 0.4 percent quarterly increase and a 2.4 percent rise over Q3 last year.
"Such growth makes another round of quantitative easing unnecessary," according to the National Institute of Economic and Social Research (NIESR), a highly regarded and independent research firm in the U.K.
The Bank of England promptly revised their economic growth expectations following the release of the report. They now forecast 3 percent growth for 2010, up from 2.2 percent at the start of the year and 3 percent for 2011 and 2012!
However, one has to admit that the BoE's forecasts are fairly optimistic given the prospect for several years of fiscal austerity about to be implemented. Furthermore, the GDP figures are based on a limited subset (about half) of the data which ultimately becomes available, hence the need to closely watch the upcoming revision, on November 24 and December 22.
The Bank of England published its quarterly Inflation Report, predicting that inflation may continue to accelerate above its 2 percent target through 2011. In fact, September's inflation figure was 3.1 percent, far exceeding the government's target for the seventh month of the year. Governor Mervyn King has already written three letters this year to the Chancellor of the Exchequer George Osborne (as per protocol) to explain the excess in the inflation rate, and he forewarned Governor King that there is a "high probability" he will have to write another one shortly.
Both these reports had the effect in the marketplace of reducing speculation that QE2 will be implemented by the Bank of England any time soon.
Lower unemployment in the UK
There is another aspect of the UK economy indicating that the BoE may not need to provide additional stimulus like the Fed — unemployment. In the UK unemployment stands at 7.7 percent, much better than in the U.S. (9.6 percent) and significantly better than in the euro zone (10.1 percent).
BoE and Fed have different mandates
While the Federal Reserve has a dual mandate to maximize employment and maintain price stability, the Bank of England has just one: to keep inflation at 2 percent. So, even if domestic demand growth in the U.K. were to slow to U.S. levels, the Bank of England would not necessarily react the same way as the Fed. The U.K has seen CPI inflation over 3 percent throughout most of 2010, making it difficult for them to justify adding more stimuli.
The British pound rallies
So, how has this change in expectations with regard to QE2 in Britain impacted the value of the British pound?
Here are the performances of the G-10 currencies versus the U.S. dollar from the beginning of the year through the release of U.K.'s inflation figures on October 12. One can easily see the strong demand for safe-haven currencies — Japanese yen and Swiss franc — as well as for high-yielding, "commodity" currencies: the Australian and New Zealand dollars. The British pound and the euro showed relatively small losses against the dollar.
However, since the release of the Inflation report, the GBP rallied and has become one of the best performing currencies versus the dollar (up through Nov 15).
Overall, by buying the pound, traders are giving us as a strong signal that they like what they see in Britain's economic data and they like the fact that the BoE may not have to resort to QE2-type stimulus. We may in fact be seeing the early stages of a decoupling of Britain's economy and the U.S. economy, which of course would suggest that the Fed and BoE should pursue different approaches to economic stimulus. The fact that Britain is already embarking on aggressive fiscal austerity, unlike the U.S., does give one cause for concern that that austerity may lead to a double-dip recession in the U.K. but the Bank of England may believe that interest rates are low enough and the lagged impact of QE already undertaken is sufficient to provide the stimuli necessary for sustainable economic growth. By buying the pound, traders are showing that they think so, implying that the QE2 should not be sailing to Britain anytime soon.
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