The announcement of a GBP 50bln increase in asset purchases from the Bank of England was no great surprise, not least after last month’s vote in which four members (including the BoE governor) voted for more QE. The last program of asset purchases ended early May, so the intervening two months have constituted the longest period without weekly bond-buying by the BoE since QE2 started eight months ago. But the Bank’s statement underlined its thinking, namely that the economy has stalled, inflation is falling and there is more slack in the economy (although the impact of this in terms of bringing down inflation is highly tenuous and has not been as great as the Bank calculated).
But with interest rates near to zero and asset purchases well advanced, policy-makers are becoming more concerned with the channel by which such efforts help the real economy. In terms of feeding through to businesses and consumers, there have been few signs of improvement. The 2Y fixed mortgage rate has increased 0.75% over this time, according to Bank of England data, whilst the Bank’s credit conditions’ survey has shown no real pick-up in corporate credit-availability, regardless of the size of the firm. As such, the ‘funding for lending’ scheme currently being worked on by the Treasury and the Bank could end up being just as important as today’s expansion of QE. Indeed, it was welcomed in the Bank’s statement today. There’s also the impact on other asset markets to consider, the so-called ‘portfolio-rebalancing’ effect as other assets are purchased with the money advanced from gilt sales. Over this time, stocks (FTSE All Share) are up 8%, although is this only half the gain experienced by the S&P500 over the same period.
Sterling is modestly firmer on the announcement, reflecting short-covering activity on the back of some expectations of a greater increase in asset purchases vs. the GBP 50bln announced. The impact of QE on currencies is far less clear cut than before, so the main challenge for sterling continues to be whether EUR/GBP can manage a sustained break below 0.8000 level which, independent of a fresh round of euro-crisis fears, is looking a tough barrier to break.