Currency Watch: Will the banks step in?

The developed world is, according to the data, slowly slipping towards another dip in growth.

The debate remains as to whether central banks should once again intervene in the markets in order to inflate asset prices and get demand going again.

All the signs point to a third round of quantitative easing (QE) in the US when the Federal Reserve conduct their newly extended meeting on 21 September.

Last Friday’s horrific jobs number was yet another indication that the US economy is tipping into a period of “jobless stagflation” and as such the Federal Reserve will feel compelled to act.

This will also add fuel to a current fiery political debate in the US over the role of the Federal Reserve in the US economy, with some Republican Presidential candidates calling for a wholesale change in government funding.

It is clear that the economic situation has deteriorated in the UK over the past few months, as it has in most developed nations and with that the conversation in financial circles has shifted to the subject of further asset purchases.

QE, of course, would represent a big shift in policy direction in the UK as it was only four months ago that three members of the MPC voted for an increase in interest rates. This is an indication of just how turbulent a summer it has been.

It is now likely that the MPC will vote for another round of QE here in the UK, but I feel they will wait until they have a better grasp of the inflation picture before doing so.

CPI currently sits at 4.4%, over double the bank’s target. I would expect that the minutes of the next BOE meeting (released in a fortnight’s time) will show that a similar number will have voted for an increase in asset purchases this month.

I therefore don’t think we’ll see any surprises from the MPC today; only Adam Posen voted for more asset purchases last month and while data has been poor globally I can’t see four others switching sides just yet.