Bank of England Widens Asset Purchase Scheme by Another Gbp 50 Billion, Sterling Softer on News

August 6, 2009

The BOE Bank Rate was kept at 0.5% as expected and where such has been since March.  This was expected.  But in a somewhat surprising move, the Monetary Policy Committee also extended its program of asset purchases (mostly gilts) to Gbp 175 billion.  This was the second expansion.  A Gbp 75 billion program was outlined initially in March and extended to Gbp 125 billion in May.  Those purchases were completed at the end of last month.  In the meantime, authorization by the British Treasury had put a ceiling on this program at Gbp 150 billion.  In order to raise the total now to Gbp 175 billion, Bank of England Governor King had to request additional authorization for another Gbp 25 billion from Chancellor of the Exchequer Darling, which he was granted.  Today’s accompanying statement from the Bank of England includes the letters exchanged by those two men accomplishing that technicality.

The central bank statement is longer than usual.  It admits that Britain’s recession was deeper than thought previously and observes that lending to businesses is lower and that spreads on bank loans are still elevated.  Broad money growth has picked up but remains weak.  Although the recession is now ending, spare productive capacity will continue to swell, and credit will remain less available than in normal times.  These deflationary forces will mitigate the inflationary medium-term tendencies stemming from the stimulus of sterling depreciation and loose fiscal and monetary policies.  Officials had to act further because it wasn’t clear that inflation would rise back to the 2% medium-term target within the prescribed time.  The extra Gbp 50 billion of quantitative easing will be done in August-October and will entail an increase in the range of maturities of government debt that the Bank of England is willing to purchase.  The total Gbp 175 billion size of the program translates to roughly $300 billion, matching the $300 billion of longer-term Treasuries that the FOMC announced in March that it planned to buy over the coming six months.  Britain’s is a much smaller economy, so its program represents a comparatively bigger stimulus.

The pound has weakened against the dollar and euro since the Bank of England announcement some 30 minutes ago.  The further easing was contrary to rising speculation that the Bank of England might start raising rates ahead of either the Fed or ECB.  Sterling had been appreciating in recent weeks, and one of the stimulus channels of the central bank’s action today would be to blunt, or reverse, some of the currency’s gains.  It remains to be seen if that happens over the month ahead.

Minutes of today’s meeting will be released on August 19th.  Even sooner, the quarterly Inflation Report from the bank will be eagerly awaited.  It’s due August 12th and presumably includes the quantitative forecasts that justified today’s announcement of extra quantitative easing.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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