It was a surprising move today for investors when the Bank of England, after 2 meetings of leaving things unchanged, decided to expand its quantitative easing program through government and corporate debt purchase by another£50bn to £175bn. Also coming from the meeting is an unchanged interest rates of 0.50 percent.
This comes even after some better economic data came out in the weeks leading to today, only proving that the stabilization that has been perceived by some to have already begun may not be quite there just yet. The UK’s Monetary Policy Committee (MPC) said that completion of the asset purchase might take three more months.
The release from the BoE also stated that recession is deeper than initially thought, although pace of contraction has moderated and the trough in output may be seen soon. The country’s CPI also fell below its target of 2% to 1.8% citing lower food and energy prices as well as the pressure coming from currency. Taking these two into consideration, the Bank of England said in its report:
The future evolution of output and inflation will be determined by the balance of two sets of forces. On the one hand, there is a considerable stimulus still working through from the easing in monetary and fiscal policy and the past depreciation of sterling. On the other hand, the need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending. While some recovery in output growth is in prospect, the margin of spare capacity in the economy is likely to continue to grow for some while yet, bearing down on inflation in the medium term. But the recession and the restricted availability of credit are also likely to impact adversely on the supply capacity of the economy, moderating the increase in economic slack.
For these reasons, the Bank has decided it might be appropriate to expand further its quantitative easing program, through the issuance of central bank reserves.
See the official release HERE.
The news has put downward pressure on the yield of gilts as well as the sterling, falling after hitting a 10-month high against the greenback.