Read here. Reuters reports that the "Old Lady" is expected to keep interest rates unchanged. The announcement will come in the early morning hours for those of us on this side of the Atlantic.
Twenty economists in the Reuters poll said the BoE is now done with tightening and the next move in rates will be down, if not for some time. But 23 others said there is at least one more hike to come.
The pound is very strong right now (much to the chagrin of my students planning a January interim in London). If the economists predicting rates to go down in the UK are right, and if the Fed continues to tighten, this will help arrest the dollar's decline.
Not that this news really changes anything. I'm still holding to my prediction of about another year of slow decline in the dollar, mainly because it will take that long for the Fed to get rates up to a neutral position. And I hope it does take a while for that to happen. Brad DeLong and Tyler Cowen indirectly touch on this at the Wall St. Journal today. Mainly, it is one of DeLong's goals for the Treasury Secretary.
Convince foreign-currency speculators that large leveraged bets that the dollar will decline rapidly are risky, and so try to make the forthcoming decline in the dollar gradual and orderly rather than rapid and accompanied by spikes in long-term interest rates.
Precisely.
Meanwhile, in other news, the ECB, which really does not want to lower interest rates any further, is worrying about inflation. Again. Soon, this will cease to be news.
It's a difficult situation for everyone. In the long run, the US needs to get interest rates up about a point or so, but until GDP growth (and job growth) is firmly on track it seems dangerous to be pushing for higher rates too quickly. Europe doesn't want us exporting inflation to them. Exchange rates are the pressure release valve.
America spending money and racking up deficits fighting an unpopular war, Europe worried about our inflation spilling over the Atlantic...sound familiar? It's similar to the situation that led to the demise of Bretton Woods. The dollar devalued suddenly because there was no pressure release valve. As bad as The Economist is making it seem, it's not as bad as the '70s. Not by a long shot. Let the dollar continue its gradual slide until interest rates get back (closer, at least) to equilibrium. That is much better than the sudden devaluation when we broke from Bretton Woods and better than the devaluations in Latin America and Asia in recent years.
I think that we can avoid that outcome if the John Snow follows DeLong's advice. I hope Snow is listening.
Leave a comment