Pound tanks to €1.14 as Bank governor Sir Mervyn throws his weight behind more QE despite inflation risk

The pound slumped against the euro and dollar as it emerged Bank of England governor Sir Mervyn King now favours more emergency money printing to save Britain from a triple-dip recession.
Sterling fell nearly 1 per cent to a 15-month low against the euro of €1.14 (87p to the euro) and hit a fresh seven-month low of $1.53 (65p) against the US dollar. The pound has now dropped a startling 7 per cent versus the euro and 5 per cent against the US dollar since the start of the year.
Sir Mervyn's change of heart was revealed in the latest monetary policy committee minutes, which showed that he and fellow rate-setters David Miles and Paul Fisher called for another £25billion in quantitative easing after growth figures showed the economy shrank at the end of 2012. 

Sterling tanks: Pound fell off a cliff after Sir Mervyn's surprise change of heart on QE was revealed in the latest BoE minutes (Source: Yahoo! Finance)

A triple-dip recession would be confirmed if there is another decline in the current quarter, but the trio were outvoted 6-3 as the MPC decided more targeted measures would be more effective - particularly as the Banks latest quarterly forecast warned that inflation was set to rise above the current 2.7 per cent and remain above the 2 per cent target until early 2016.
The last time there was a similar 6-3 split on the BoE's monetary policy committee was in June 2012, and the following month a majority backed a £50billion pound increase in asset purchases.

In recent months, only Miles has supported an increase in QE from the current £375billion level.
Today's minutes said regarding inflation: 'The committee agreed that, as long as domestic cost and price pressures remained consistent with inflation returning to target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation.

IS THE POUND NOW TOO LOW?

Currency expert Chris Towner of foreign exchange broker HiFX writes:

'Sterling is weakening on the back of sentiment which is often the case in the FX markets.
'Today sterling weakened against the US dollar and the euro as it was unveiled in the MPC minutes that three of the members, including the Governor, voted to increase the quantitative easing programme by £25billion to £400billion.
'However because of all the negative sentiment surrounding sterling, some missed the good news released at the same time. Record levels of employment in the UK.
'If one looked at a chart since the beginning of the year one would imagine that the UK economy compared to Europe was falling off a cliff.
'However structurally things are quite sound in the UK as within a sovereign debt crisis record levels of employment should be seen as a positive for a currency as this means less money spent by the Government to pay for jobless claims and more tax revenue.
'In the bigger picture FX is a ratio market which is a barometer for comparing the state of one economy against the other.
'It’s good to see that Europe has managed to survive the sovereign debt crisis; however structurally they still have lots of high hurdles and one of these is the level of unemployment up at 11.7 per cent at the last count.
'Sentiment can turn like the tide; however structural issues are harder to turn. At some stage sterling will reach a point like an elastic band when it has stretched too far!'

'Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term.'
Economists polled by Reuters had not expected the central bank to restart QE due to persistent inflation and its hope that other stimulus measures like the Funding for Lending Scheme will prove sufficient.
When the latest inflation forecasts were released, Sir Mervyn did not rule out more QE but said the benefit they could provide to the economy was getting smaller.
He predicted a slow recovery over the next three years after two years of stagnation due to a mix of eurozone turmoil, government austerity and high inflation hurting on consumer spending.
At its February meeting, the MPC also voted unanimously to keep rates at a record low of 0.5 per cent, and to reinvest the first proceeds of the QE programme which amount to around £6.6billion.
It is the first time since QE was launched in 2009 that any of the Government bonds, or ‘gilts’, purchased under the scheme have reached maturity. If the BoE didn't reinvest the proceeds they would be cancelled given that all the money in the QE programme was conjured out of thin air in the first place.
Although the pound took a battering at the prospect of more QE - indicating currency traders believe an interest rate rise that would revive enthusiasm for sterling remains a very distant prospect - stock investors welcomed the news and pushed the FTSE 100 up 32.7 points to 6,411.8 by early afternoon.
Howard Archer, economist at forecaster IHS Global Insight, said: 'With economic activity likely to remain fragile and limited, we believe that the BoE will eventually decide to give the economy a further helping hand with some more QE.
'This could very well happen in the second quarter or shortly after Mark Carney takes over as BoE Governor in July.
'Unless the news on the economy is really dire over the coming weeks, we suspect that the MPC will prefer to hold fire on any more QE until at least well into the second quarter given that consumer price inflation is set to hit 3% in the near term.
'Meanwhile, we expect interest rates to remain at 0.50% through 2013, and highly likely through 2014 as well.'
Archer added: 'Although the minutes of the February MPC meeting did not state that the pound may need to fall further to support exports and help the economy rebalance, the increased prospect of more stimulative action is likely to keep sterling under pressure.'

Rate prediction: Plunge in pound indicates currency traders believe an interest rate rise that would revive enthusiasm for sterling remains a very distant prospect

Samuel Tombs, economist at Capital Economics, said: 'February's UK MPC minutes provide another clear demonstration of the committee's increasingly flexible approach to inflation targeting.
'No member voted for tighter policy, despite the fact that the latest inflation report forecasts showed inflation on track to be well above the 2 percent target in two years' time.
'Today's minutes have therefore made us more comfortable with our view that more QE is likely this year, particularly if GDP growth continues to fall short of the committee's expectations.'
Alan Clarke, economist at Scotiabank, said: 'This kind of signal is designed to quash people speculating about rate hikes.
'When you've got the Bank of England forecasting inflation above target for the two years ahead, you don't want people to start speculating about rate hikes or tightening or the end of stimulus.'
Chris Saint, senior currency analyst at financial service firm Hargreaves Lansdown, said: 'The pound has now dropped a startling 7 per cent versus the euro and 5 per cent against the US dollar since the start of the year, amid growing fears the BoE might inject more monetary stimulus to guard against the threat of a triple-dip recession.
'The Bank’s latest policy meeting minutes vindicated these fears this morning.'