Week in FX Europe – BoE’s Carney Proceeds With Caution

The BoE is being prudent and is following in the footsteps of global regulators. Like all good Central Banks, the “Old Lady” is trying to stay ahead of the curve and be proactive, and not be held responsible for a return to reckless housing lending. No one wants to be the architect of another potential bubble. Yesterday, the BoE announced that they have fine-tuned its funding for lending scheme (FLS) – shifting their focus to the SME sector rather than on residential lending for next year. Carney said it would “no longer be appropriate or necessary for us to have our foot on the accelerator” in terms of spurring mortgage lending. “It’s better to shift into neutral.” The sense is that by taking such action it can actually limit the need for direct monetary policy tightening.

The BoE’s concerns are legitimate. The report certainly highlights the potential “hot” spots, putting forward “some evidence” of rising risks. For instances, the UK household sector is already highly indebted – this is very much a global phenomena – and those highly indebted households tend to make up a large share of the mortgage holders – the problem with this it’s a too high a percentage to deal with shocks sufficiently. “We should refocus the FLS so that it continues to support lending to the business sector, without adding further broad support to household lending at a time when that is no longer necessary,” Carney said in a letter to Osborne.UK economic growth in the three-months to September was the fastest in three-years, banks have far easier access to finance, and house prices are rising at their fastest for three years.

The first phase of the FLS is to finish at the end of January 2014 and Carney and company believe that an improvement in the UK housing market and house price inflation means “there is no longer a need for the FLS to provide further support to household lending.” It’s important to note that any change to FLS has no effect on the ‘Help-To-Buy’ program. That particular program is aimed at borrowers without large deposits; the FLS program is designed to improve lending in general.

Lending concerns are not just a UK problem – it’s global. The lack of investment initiatives from the SME’s is causing blockage in the growth cycle. Cash hoarding by companies do not help investment plans, this obviously derails any spin off trimmings, like an increase in disposable incomes that should be passed down to employees, which eventually gets pushed out into the economy, helping economic growth. However, that cycle is flawed, unable to run efficiently. The FLS initiative now focusing on SME lending will hopefully get to improve this economic cycle. A lack of lending to small firms is hampering Britain’s economic recovery.

The pound continues to march towards its outright yearly high on the BoE’s surprise hawkish move yesterday. Solid offers are expected to emerge ahead of the £1.6400 option barrier mark. Against the EUR, tech analysts expect a market close below the 10-DMA, now at 0.8359, weakens the underlying market structure. EUR offers continued to be placed all the way up towards 0.8400.


* USD ISM Manufacturing
* AUD Reserve Bank of Australia Rate Decision
* AUD Gross Domestic Product
* EUR Euro-Zone GDP
* CAD Bank of Canada Rate Decision
* USD U.S. Federal Reserve Releases Beige Book
* GBP Bank of England Rate Decision
* EUR European Central Bank Rate Decision
* EUR ECB President Draghi holds press conference
* USD Change in Non-farm Payrolls
* CAD Unemployment Rate
* USD U. of Michigan Confidence

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell