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Sep 3, 2020, 9:52 AM GMT
#MonetaryPolicy

Broadbent's Defence of BOE's Monetary Policy Exacerbates the Pound's Fall

Yesterday, the Deputy Governor of the Bank of England Ben Broadbent discussed 'monetary finance' at the 2020 annual meeting of the Central Bank Research Association.

He tried to defend the BOE's monetary policy stance by discussing in length the hot-button issue of monetary finance by drawing a dividing line between the functions of monetary and fiscal policies.

Chiefly, Broadbent addressed the popular criticism of quantitative easing that central banks use QE to monetise Governments' comprehensive fiscal policies which typically lead to high budget deficits.

BOE's Deputy Governor pointed to the 'cyclical behaviour' of monetary and fiscal policy, stressing on the common conditions that typically necessitate them. A good example of this was the coronavirus crisis this year, which incited governments and central banks to act promptly in order to protect the fragile financial systems.

Broadbent alluded to the fact that simply because the two policies seldom are used simultaneously to tackle common issues, they are not the same thing. MP is used to control inflation, and to ensure that tight FP does not lead to 'wholesale loss of monetary control'.

That is why it is essential that an independent authority administers MP as opposed to FP, which is settled by the government.

"As for the “money” created by QE – reserve deposits held by commercial banks at the central bank – there’s a very important difference between this and the “money” in simple textbook accounts of inflation: those reserves pay interest. If QE had been financed by the zero-interest money of the textbook, and if inflation subsequently went up, the real value of the public sector’s liabilities would decline. […] When reserves pay interest that’s no longer the case. This is why it’s not strictly correct to say that QE “monetises” the government’s debt. The policy is more accurately seen as a maturity swap, in which one (longerterm) interest-bearing liability of the state is replaced with another, shorter-term version of the same."

Broadbent's vindication of QE did not thwart the slide of the pound, which continues to tank against the greenback following Tuesday's publication of the better-than-expected manufacturing data in the US.

As can be seen on the hourly chart below, the GBPUSD broke down below the lower boundary of the ascending channel, which was first demonstrated in our analysis from yesterday.

The price action currently remains concentrated below the three moving averages – the 10-day MA (in red), which trades below the 30-day MA (in green). The latter is also positioned below the 50-day MA (in blue). This perfect descending order demonstrates the promptly rising bearish bias in the short-term.