- British pound rose on reports that Boris Johnson was in the Intensive Care Unit (ICU)
- The pound rose even as the number of Coronavirus cases increased and Debenhams went into administration.
- The pound rose after Andrew Bailey, BOE Governor, ruled out printing of money
The British pound rose against the euro and the US dollar as the market ignored news that Boris Johnson’s health was deteriorating. The prime minister, who was diagnosed with Coronavirus two weeks ago, is in an intensive care unit of a London hospital.
While he is alert, government business is being carried out by Dominic Raab, the Foreign Secretary. The British pound index, which measures the strength of the pound against other currencies rose by more than 1%.
More bad news from the UK
The pound rose in a day that the UK received significant bad news. The number of Coronavirus cases continued to rise. According to World of Meters, the UK has confirmed more than 53k cases and more than 5,000 deaths. The number of infections is rising, albeit at a slower rate.
Meanwhile, more UK companies are getting into trouble. Yesterday, Debenhams, the famed retailer, announced that it would move into administration. The company, which has more than 22,000 employees said that it hoped that the action would help it remain afloat. This announcement came a week after BrightHouse and Carluccio’s moved into administration.
Experts believe that many retailers will be forced to go out of business unless the government intervenes. This is because while most of them are not doing any business, they are continuing to accrue costs like insurance and rent. In fact, some retailers like JD Sports, Primark, and Burger King have said that they won’t pay rent. If the cycle continues, it could affect the banking sector, and possibly lead to a bigger financial crisis.
Why the British pound is rising
The reason why the British pound is rising is that Andrew Bailey has committed not to print money to support the economy. Andrew is the new Bank of England governor.
In an opinion piece in the Financial Times yesterday, the governor said that it would not be beneficial for the bank to print money. He argued that this would increase inflation, which would go against the mandate in which the central bank was created. He said:
“Some MPC actions result in the creation of central bank reserves. These reserves are not being created with the aim of paying for the government deficit, as under monetary financing. They are a consequence of independent central bank policy actions to deliver monetary and financial stability.“
A number of central banks, including the Federal Reserve, have been criticised for printing money to support the economy. Two weeks ago, the Fed launched its open-ended QE program. The new program has seen the bank expand its balance sheet by more than $2 trillion. In contrast, the central bank increased its balance sheet by just above $4 trillion in the past financial crisis.
Some quarters in British press and academia criticized this position. The Financial Times dedicated its editorial page arguing that printing money was a valid reason for the bank to print money. The paper argued that while printing money would stir inflation, the bank had tools to lower it. They said:
“If trends restraining inflation go into reverse, central bankers have tools to combat rising prices. They can achieve this by raising interest rates or unwinding QE.“
This thinking was supported by Sir Charles Bean, of the London School of Economics, who argued that printing of money would help prevent large-scale unemployment. He also argued that the plan would not lead to significant inflation since the BOE, unlike the Bank of Zimbabwe, is an independent organization.
Lord King, the former BOE governor, also supported printing of money. He said that that the problem with inflation would happen if the government determined the amount of money to be printed and how it should be used.
By Crispus Nyaga
Source: Invezz