ECB wind down of QE threatens £

Great short article encapsulating monetary policy impact on exchange rates - indirectly. This could form a solid paragraph in any analysis of UK national debt, interest rates, sterling, external shock:

From The Sunday Times

A “tsunami” of cash flowing from the eurozone into Britain is set to dry up as the European Central Bank winds down its quantitative easing (QE) programme — potentially placing the pound under greater pressure.

According to Oxford Economics, about €50bn (£44bn) a year has been pouring into UK debt for the past few years as a response to the ECB’s bond-buying programme, which has pushed up asset prices across Europe, making British debt more attractive for continental investors. The consultancy’s analysis predicts that the volume of cash will halve next year.

The ECB’s huge programme of asset purchases has crowded out private investors in eurozone bond markets, causing them to look overseas to countries, including Britain, for better returns, according to the Oxford Economics research by Guillermo Tolosa, a former senior economist at the IMF.

With the Frankfurt-based central bank set to halve its monthly bond buying to €30bn from next month, Tolosa expects that flow of cash to slow. Once the ECB stops buying, eurozone investors will stop pumping cash into overseas markets altogether, he said. That process could be more disruptive to financial markets than the US Federal Reserve’s own exit from QE, according to Tolosa.

The shift could be felt acutely in Britain. Figures due this week are set to show the UK is on course to run up a current account deficit of £90bn this year, down from last year’s all-time high of £115bn. The deficit means that Britain earns less from exports and income from overseas investments than it pays for imports and dividend payments to foreign investors.

Last year’s widening was partly a result of the fall in oil prices, which meant UK oil companies earned less from their operations worldwide. A rebound in oil prices, along with the fall in the value of sterling since the EU referendum, has helped close the gap slightly, but not by as much as many economists were expecting earlier in the year.

Funding the deficit requires a constant stream of foreign cash flowing into UK assets. Bank of England governor Mark Carney has previously warned that this leaves Britain dangerously reliant on the “kindness of strangers”.

If the eurozone cash dries up, British assets may need to get a bit cheaper before other foreign investors step in, according to Tolosa. That could put pressure on the pound and on the price of UK government and corporate bonds.

“It’s likely there will have to be an inducement for investors from elsewhere,” he said.