UK economy - pushing hard on the monetary rubber

The old monetary adage used to be policy pulling on a rubber band to get the economy working. Pull so hard and the brick would eventually snap forward and hit you in the face. Nowadays the policy adage in Britain's dour economic landscape is pushing hard on the monetary rubber. The brick stubbornly refuses to budge despite best efforts. Given the current economic backdrop of the UK about to slip from double dip to triple trip recession, it may be a surprise to see UK employment growth defying economic gravity and moving higher. But it is no surprise to see the thin end of the wedge for more monetary easing emerging at the Bank of England.

The BOE's monetary policy committee revealed a surprise 6-3 split on more quantitative easing earlier this month, reviving the prospect that the central bank might restart its bond buying programme again to help kick-start the economy. The MPC minutes are very dovish, especially since Governor Mervyn King is in the vanguard calling for more QE to the tune of another £25bn extra stimulus pumped into the economy. What's more there was discussion of other policy options being considered. This included cutting rates again and reducing the marginal rate of remuneration on banks' reserves, in order to help force feed more liquidity more into the economy via extra bank lending. Faint chance of that with UK banks hoarding so much of the BOE's liquidity largesse for their own precautionary purposes.

King's new dovishness is a classic case of the tail wagging the dog and the rest of the MPC should eventually fall into line. The call to monetary arms is bound to be taken up in a bigger way by BOE Governor incumbent Carney when he takes charge in July. His credentials for further measures are already on the table. Bearing this in mind, it is no surprise that sterling continues to take a  steady pounding (down 0.7% today running close to USD1.53). A concerted break below USD1.50 looks on the cards fairly soon and outlier forecasts for a test down to USD1.30 hardly seem that outlandish any more. This is a good thing as far as the BOE are concerned as a much weaker pound is a well proven way of boosting the UK's export industries. The Bank have hardly been a thin red line in the pound's defence and the whispering campaign for a more competitive exchange rate has been pretty clear to the markets.

The problem remains more deeply rooted in the domestic economy. While much welcomed, the 12,500 drop in UK unemployment in January will not hold much water for the BOE. Not when UK wage growth remains so weak at 1.3% yoy, well below the rate rate of inflation. Real incomes are being squeezed hard and it is no surprise to see the disaster zone unfolding in the UK High Street. The Bank of England may push and pull on the monetary rubber till the cows come home, but it will not change the outlook substantively while the government continues to harry the economy with aggressive fiscal austerity.

The US  is already emerging from the economic murk thanks to 4-dimensional stimulus - easy rates, easy money, easy dollar exchange rate and easy fiscal policy. The UK has some hope with 3D easing right now - easy rates, money and currency - but it is up to Chancellor Osborne in next month's budget to have that Damascene moment of clearer vision of economic revivalism. Is that 4th dimension possible? The words 'as much chance' and 'hell freezing over' sadly spring to mind.