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pressures. Such interventions are usually effective in devaluing the currency but lead to a build-up of foreign exchange reserves beyond what the central bank may need’ (Basu,2009). China did this which has left it with a foreign reserve of $2.6 trillion.

 

The above discussion suggests that the central bank has many tools to intervene in the exchange rate market.

 

DEPRECIATION OF STERLING AND UK ECONOMY

 

As we have already established that currency value plays an important role in an economy’s growth and that is why we are experiencing a ‘Currency War’. Now we would critically evaluate the Bank of England’s view on the effects of the depreciation of sterling on UK economy.

 

The sterling has depreciated a lot since the financial crisis in 2007. It was down by 30% though it has again regained 10% but it is still a lot low then what it was.

 

Cumulative change in selected sterling exchange rates since August 2007

 

Source: Interpreting recent movements in sterling

 

Weak currency has some reactions in an economy. Two things immediately come in mind – inflation and export. Bank of England, the central bank of England, having a targeted inflation policy has monetary policy committee (MPC) to work on this. ‘The impact on inflation of sterling’s depreciation has been larger than the MPC had initially anticipated. In part, that may reflect the recognition by market participants and businesses that a substantial decline in the real value of sterling was necessary to re-balance the economy and the fall was consequently likely to be permanent’ (Bean, 2011). The depreciation in sterling has contributed to increase in inflation which at the moment is 4% that is higher than the BOE’s target of 2%. This depreciation has led to the increase in export which is represented by the good performance of the manufacturing sector. ‘The manufacturing and construction sectors were estimated to have grown strongly during the second quarter and manufacturing year-on-year growth was now at its highest level for over fifteen years’ (MPC,2010).

 

As we know that inflation and exchange rate is very closely related. Here comes an issue of the depreciation of sterling. On one hand it has contributed to the rise in inflation which is above the target rate and on the other it has led to an increase in export. The near term and long term inflation rate is uncertain. ‘Near-term prospects for inflation remained unusually uncertain and sensitive to the impact of a number of factors whose impact were difficult to evaluate accurately’ (MPC, 2010). Also the benefit of depreciation of sterling is not all that great. As has been seen the export has not increased to the extent it should have 本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。