U.K. Chancellor Darling Looks to Revise Fiscal Rules as the Economy Faces a Recession

U.K. chancellor Darling says fiscal policy must evolve. In a speech to be delivered this evening, Darling notes that it "is natural that the conduct of policy should evolve. Just as markets change, so should policy" which appear to hint at the Treasury preparing to revise their fiscal rules to allow for increased borrowing. The Treasury's 40% debt-to-GDP ceiling was already broken after taking on Northern Rock's liabilities and will be push higher still once Brandford & Bingley will be taken into the public books, together with the GBP 37 bln so far estimated to be used for bank recapitalization. Further fiscal stimulus to counteract the growth slowdown is likely require further borrowing still. The fiscal rules, which includes a policy to borrow only to invest and to keep the budget in surplus over the economic cycle, have already lost most of its creditability with the market as the Treasury has been seen as shifting the goalposts by re-classifying some borrowing or extending or shortening the length of the perceived economic cycle. There are market expectations that chancellor Darling will announce revisions or a complete abolition of the rules and that details of the new borrowing plan will be included in next month's pre-budget report.

BoE Reiterates Dovish Outlook, Further Easing to Follow

BoE's Sentance's comments late yesterday adds to fuel expectations of further BoE rate cuts near-term. In a speech late yesterday, Sentance, who voted for a rate hike in the July and August, said that upside inflation risk has diminished since last summer but noted that the Sterling depreciation would squeeze people's living standard as imported goods become more expensive. In regards to a looser monetary policy, Sentance noted that a "cut in Bank Rate, on its own, will not be a magic bullet. No single instrument can work to achieve all goals". We expect the BoE to cut the repo rate by another 50 bp next week.

Daily Forex Fundamentals | Written by DailyFX | Oct 29 08 |