As SEB and the market expected, BOE left rates on hold today at 0.5% but chose to expand the Asset Purchases Facility by GBP 50bn to 375bn. The reasons are pretty obvious: the economy is performing badly (recession over the past two quarters and no growth over the past 18 months) with continued deleveraging in the most indebted economy (according to the IMF). The need for more monetary stimulus has been flagged for long by falling money growth (M4 at -4.1% y/y in May). BOE had the aim in 2009 to boost nominal spending in the economy by embarking on quantitative easing. That has not been very successful so far (again due to the need for deleveraging in the private sector) although the UK for sure has benefited greatly from having a “lender of last report” keeping UK rates low. Temporary effects (taxes), high commodity prices / high import prices have previously kept CPI well above target the 2% target for long. Now, BOE says the inflation outlook has improved (falling commodity prices, low wage growth and a steady Sterling exchange rate). Without the APF expansion today, CPI would have undershot the 2% target in two years time. BOE will publish a new Inflation Report next month. The report will signal lower inflation/ lower growth (compared to the forecast in the May BOE IR) but that monetary policy will remain on hold for the time being. The central bank has also announced a “Funding for Lending” scheme aimed to ease the liquidity constraint that banks and companies currently face. The progress and effectiveness of this program look to be more important than the latest APF expansion.
Conclusion: the decision was fully anticipated by markets today. We have to await more details from the BOE Minutes and the upcoming Inflation Report in order to judge whether more QE will be delivered. For now we expect the BOE to remain on hold. Sterling reaction has been muted and we continue to expect EUR/GBP to range-trade 0.79-0.82. Despite a troublesome / weak outlook for the UK, the euro (and EMU) remains more vulnerable.
SEB