The current situation in the banking sector is such that the Bank of England will need to consider its options very carefully when it meets tomorrow to decide about whether or not to raise short term interest rates.

David Blanchflower, a member of the Monetary Policy Committee during the 2008 financial crisis, believes that the Bank should consider radical action at this week's meeting in order to get ahead of the issue.

While the markets see either a further hike taking the base rate to 4.25%, Blanchflower believes that a cut of around 1.5% would send a positive signal that the Central Bank is not prepared to passively wait for the situation to escalate before taking action.

He also believes that the sale of bonds that were purchased during the coronavirus pandemic should also be reversed to boost money supply. This so-called quantitative tightening would increase the size of the Bank’s balance sheet again, but during a time of crisis it needs to be as proactive as possible to boost the markets' confidence.

He labelled the the current action in which the Bank plans to reduce its holdings of bonds by eighty billion pounds over a twelve-month period as lacking imagination. The Bank has few tools with which to affect money supply, and it is not making use of this one.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.