The market reaction to the latest expansion of the Bank of England’s quantitative easing programme was rather muted on Thursday, despite the £25 billion increase being just half that expected by most economists.
The Bank announced soon after midday that it will increase its asset purchase facility by £25 billion to a total of £200 billion so far—the first increase since August but the third since the programme was first initiated back in March.
The UK economy’s failure to climb out of recession in the third quarter of 2009 will have weighed on the Monetary Policy Committee’s decision, though more recent economic data pointing to improvements in the housing market and manufacturing and services sectors will likely have played a role in persuading the nine-strong committee to opt for the lesser level of expansion.
Surprise at the Bank’s decision to inject only an additional £25 billion at this stage boosted sterling immediately following the announcement and caused a slight sell-off in gilts.
"The MPC has been concerned that the need for household deleveraging and the banking system’s paralysis would lead to an unsustainable recovery once fiscal and monetary stimulus is withdrawn,” commented Azad Zangana, European economist at Schroders.
Indeed the UK has been particularly prone to ‘double-dip’ recessions in the past, but Schroders sees this as a step too far. “Barring any major negative shocks in economic data, the Bank of England will enter a ‘wait and see’ period for the next few months before considering raising interest rates from the current emergency low levels," Zangana believes.
The Bank today opted—as widely expected—to keep its current base rate at the current record low of 0.5%. Charles Davis, senior economist with the Centre for Business and Economics Research, expects the Bank rate to remain unchanged through 2010 and into 2011 due to the sluggish nature of the economic recovery.
“Going forward, we expect the UK economy to return to growth in the final quarter, with the possibility of at most £25 billion more quantitative easing to boost recovery in the coming months,” Davis said following the Bank’s announcement. “However, when the extent of fiscal policy tightening and the drag that this will impose on the economy becomes clearer, this could prompt the Bank of England to further expand their asset purchases.”
The Bank’s latest move comes after recent industrial production data revealed downward revisions to the weak August data, while retail sales growth was shown to be weak in both August and September. But on the flipside, the October Purchasing Managers’ Indices for the service and manufacturing sectors both painted a picture of economic activity starting to pick up. “The monetary policy committee has had to balance concerns over underlying weakness in the UK economy with some of the more recent upbeat data—prompting them to choose the less aggressive £25 billion increase in asset purchases,” Davis concluded.
Next week’s Inflation Report from the Bank is expected to shed some more light on the MPC’s current thinking with regards to the UK’s economic recovery and outlook.
