King….decisive action

UK GOVERNMENT NOW ‘IN IMPOSSIBLE SITUATION’ CLAIMS TOP WEALTH MANAGER

In the wake of rising inflation and anxious signs from both the IMF and credit agencies, the Bank of England shocked the markets today by withdrawing all future QE. At the time of posting, the FTSE has been slashed by 2.35%, and the Gold price is in freefall down a staggering 42 bucks in two hours, to a new low of $1069.
The Slog has also learned that Number Ten’s anxiety is set at ‘headless chicken’, where the BoE move is seen as a major victory for Chancellor Darling’s tough line on deficit reduction.

What was supposed to be good news turned rapidly to bad on the London markets today, as the trading floor clearly didn’t buy the Bank of England line that QE was ‘no longer needed’. So why did the bank really cancel money-volume support for the economy?

As The Slog exclusively revealed earlier in the week (2.2.10) sources close to credit ratings agency Fitch suggested that lowering the UK’s credit rating was a done deal. In the face of both indecisive political responses to debt management, and lack of Treasury firmness on immediate debt reduction, it was also strongly hinted that S&P would follow suit.
I understand that the Money Policy Committee received similar intelligence over last weekend, and moved swiftly to quell international doubts about spending cuts.

Rumours of the move began circulating in the Square Mile yesterday, but were only taken seriously today. Once confirmed, the Bank’s decision brought a swift wave of selling in both equities and (as you’d expect on strong signs of QE reduction) gold papers.

Commenting this afternoon, Chairman of Full Circle Wealth Management John Robson told The Slog:
“From now on the trapped position of the UK’s economic and fiscal managers is going to be thrown into sharp focus. The full withdrawal of QE must, in our view, show that the private sector’s response will be woefully inadequate – hence the MPC’s talk of ‘a pause’.”
Mr Robson’s company is a leader in its field and arranges the influential Annual Investment Seminar. Last year speakers included US investment guru Woody Brock, and the FT’s Deputy Editor Gillian Tett.

Robson’s view is supported by an Institute of Fiscal Studies analysis featured in today’s Financial Times, where the bottom line recommendation is a reduction in UK public spending immediately by between 18-24%.
A 24% cut in MoD budgets is equivalent to doing without an army. In the Prison service, it would mean closing two-thirds of all prisons. The Ministry of Justice would have to wind up the criminal Courts entirely.
In short, today’s FTSE response is a rare sign of stark reality hitting the trading floor.

Meanwhile, Treasury sources told The Slog within the last hour that Ten Downing Street is already showing signs of concern. “Once the response was bad in the City” said one spokesperson, “they went into headless chicken mode…which is their normal reaction to any serious problem”.
Perhaps this time they’re justified in so doing: Mervyn King has, effectively,just handed the election to David Cameron.

More on this as news comes in.