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New Bank of England chief will devalue the pound, Pimco warns
By Philip Aldrick
The Telegraph, London
Wednesday, May 29, 2013
http://www.telegraph.co.uk/finance/economics/10086652/New-BoE-chief-Carn...
Mark Carney will try to devalue the pound by as much as 15 percent after he takes over as Bank of England Governor in July in a last ditch attempt to cement the UK recovery, Pimco, the world's largest bond house, has warned.
As banks and households also grapple with their excessive debts, "that leaves one policy tool outstanding, which is basically the currency," Pimco managing director and sterling bond head Mike Amey said.
George Osborne has pinned his hopes for the economy on Mr Carney, Canada's central bank boss until the end of the week, living up to his reputation as a monetary "activist" to help ease the transition to an export-focused economy less dependent on consumer spending.
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Although economists reckon there is little more central banks can do, Mr Carney has insisted policy is not "maxed out."
"I think a lot of what Mark Carney is going to do -- clearly he's not going to state this up front -- is to try and keep sterling certainly from going up and, probably, he's going to want to see it go lower," Mr Amey said. "On a trade-weighted basis I think another 10 to 15 percent is manageable. Against the dollar we're trading at $1.50 now. The low in 2009 was $1.37. I think that’s eminently achievable. I don't think $1.37 is a big ask."
Mr Amey said the depreciation would be against North American currencies, including Mr Carney's native Canadian dollar, and emerging-markets ones, but not the euro, which is itself expected to fall.
He added that he expected Mr Carney to restart quantitative easing (QE) to buy gilts "as one of the routes to talk the currency down." Andrew Balls, Pimco's European head and a member of its global investment committee, added: "With growth models hampered, lots of countries are looking to the trade channel to try to improve growth -- and that leads you to the exchange rate channel."
Any suggestion that Mr Carney intends to manipulate the currency is likely to inflame the Canadian. Earlier this year he attacked Angel Gurria, secretary general of the Organisation for Economic Co-operation and Development, for accusing Japan of using QE to debase the yen.
The G7 group of leading countries, among which Mr Carney is a leading figure, has also sought to quash speculation that the global economy is facing another "currency war."
Charlie Bean, the bank's deputy governor, separately said the UK's trade failure since sterling's initial 25 percent devaluation in 2008 suggested that the country's exports may have become less price-sensitive, which could prove another obstacle to recovery.
In a speech in London, Mr Bean said "the disappointing performance of net trade is another puzzling aspect of this particular downturn." He argued that, if the weakenss was due to UK companies delaying investment in export markets on concerns about global growth, then improvements can be expected "as recovery here and abroad proceeds."
"But another possibility is that the demand for, and supply of, exports have become less responsive to relative price signals, perhaps reflecting the nature of the goods and services we have a comparative advantage in. That would imply a less optimistic outlook," he said.
Britain's trade problems have largely been a result of the collapse in banking, which accounts for "a large part" of the flattening off in services exports. Goods exports haev "behaved pretty much as expected," Mr Bean added.
Pimco's warning came as it painted a bleak picture for the next few years in Britain, as more austerity is piled on the nation. "Progress on getting the deficit down has been pretty slow," Mr Amey said. "Stabilising the economy has largely happened. However, there remains quite a lot of work left to do.
"There is going to have to continue to be a multi-year resizing of the public sector. So, unfortunately, the growth profile for the UK is going to remain challenged for the bulk of the next three to five years."
The European outlook was worse. Pimco expected growth to average just 0.5 percent in the eurozone until 2018, raising the prospect private sector losses on sovereign debt in peripheral member states and "non-systemic" banks' bonds as countries are unable to grow out of their debt burden.
The removal of the most extreme tail risks, thanks to the European Central Bank's pledge to do "whatever it takes" to keep the currency bloc together, has made the prospect of creditor haircuts more -- not less -- likely by containing the risk of contagion, Mr Balls, the shadow chancellor's brother, argued.
"As you get further away from the most acute phase of the crisis, you are more likely to have haircuts," he said, adding that the Cyprus bailout sent a message that "you can do haircuts" as the market reaction to the losses depositors incurred was muted.
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