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Bank Of England – Pioneer Of “asset Targeting”

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Bank of England – Pioneer of “Asset Targeting”

Just about every major central bank has a big credibility problem, when it comes to maintaining the purchasing power of its currency. The Bank of England, for instance, has tolerated double-digit growth of its M4 money supply for the past two years. The BoE is the “Group of Seven’s” original pioneer in “asset targeting,” or guiding the stock and real estate markets to higher levels, by injecting excess liquidity into the markets, until asset prices reach the bank’s targeted levels.

The BoE has guided the Footsie-100 from a low of 3,500 in Q’1 of 2003, to a 7-year high above 6,600 this month. But the BoE’s monetary abuse that has taken place over the past few years, is taking its toll on the British debt markets, where the benchmark 10-year gilt fell to a 7-year low in June, lifting its yield to as high as 5.55%, before bargain hunters came out of the woodwork..


The BoE is well aware of the inflationary consequences of double-digit money supply growth, and London futures markets are pricing in two BoE rate hikes to 6% in the days and months ahead. But the BoE must still overcome stiff political opposition to higher borrowing costs, namely from newly installed prime-minister Gordon Brown. “Rigid monetary rules that assume a fixed relationship between money and inflation do not produce reliable targets or policy,” Brown argued on June 14th.

Such reckless comments by Mr Brown, are reminiscent of his decision to sell off more than half of the UK’s centuries-old gold reserves in May 1999. The decision to sell 400 tons of gold is seen in City circles as a financial bungle on the scale of the Tories’ “Black Wednesday” that cost the taxpayer 3.3 billion pounds. Brown offloaded the gold at a 20-year low in 17-auctions between $256 and $296 /oz, with an average of $275 /oz. Since then gold has risen sharply and stands around $650 /oz.

Judging from the chart above, the BoE is still far behind the monetary inflation curve, and would have to hike its base rate by 100 basis points to 6.50% or higher, to rein-in M4 growth into single digits. Ultimately though, the pressure on the BoE to hike interest rates further will come from the gilt market, which is in danger of a nasty meltdown, unless the central bank lives up to expectations of future rate hikes.

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Whilst I agree with much of the article, this bit it complete b*ll*cks.

I'm not sure what you mean, the graph comparing M4 growth withe the FTSE 100 looks pretty compelling to me.

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