Daily Forex Brief 07h October
Daily Forex Brief The Bank of England decided to increase the size of its asset purchase facility by GBP 75bln at yesterday's MPC meeting, whilst keeping the benchmark interest rate unchanged at 0.50%. The increase in QE was not wholly unexpected, with the debate mainly around whether the Bank was going to wait another month and choose to do it in its inflation report-meeting next month. The increase in asset purchases is perhaps on the lighter side of expectations, with the pace of purchases over the next four months equalling that of the first period of quantitative easing from March 2009 to February 2010. Once again, the Bank is constrained largely to buying government bonds as part of this facility, although the Chancellor did say in his letter to the Bank that private securities may also be purchased. It was only three months ago that there were still members of the MPC that were looking to increase interest rates, so today's announcement marks a notable shift in the collective thinking of the MPC (more on this when the minutes are released in two weeks time). Even though inflation is still likely to nudge 5% in coming months, the reasoning for the move is simply that the MPC now sees inflation coming in below 2% on the two-year horizon over which it sets policy. We've seen the initial impact both on the pound and the bond markets, the former down nearly one big figure, whilst 10yr bonds have around shed 10bp on the announcement. Ultimately, the Bank wants to see the impact via the use of bank reserves to purchase other assets. Whether this will happen in the form desired as the sovereign crisis takes hold in Europe is another matter. Furthermore, when QE started in 2009, there were a lot of assets at distressed prices. This is far less the case this time around, with the main distressed asset (peripheral eurozone debt) looking far from alluring. QE2 is going to be very different to its predecessor. Also in today's Daily Forex Brief:
London: Friday 7th October 2011
