Bank Of England Expands QE By £75 Billion To A Total Of £275 Billion, Keeps Rate Unchanged

As many expected, the Bank of England has followed in Bernanke's footsteps and proceeded with extra QE, 75 billion extra, or about 25 billion more than consensus - this is the first expansion in the British QE since November 5, 2009 when it did the latest  £25 billion expansion. Unfortunately, this is just the beginning: much more global QE is coming down the line as the "monetary authority" realizes it only has itself and its printers to rely on in a world rapidly reentering recession.

In summary:

  • BOE raises asset purchase target to GBP275b
  • Will keep scale of asset purchase program under review
  • Expects purchases to take 4 months to complete
  • Sees GBP1.7b auctions in each maturity sector
  • BOE keeps benchmark rate unch. at 0.5%, est. 0.5%
  • BOE says inflation likely to rise above 5% next month or so
  • Sees inflation falling back sharply in 2012
  • Sees inflation undershooting 2% target in medium term
  • BOE says margin of slack likely to be greater than expected

From the just released BOE Statement

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £75 billion to a total of £275 billion.

The pace of global expansion has slackened, especially in the United Kingdom’s main export markets. Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.

In the United Kingdom, the path of output has been affected by a number of temporary factors, but the available indicators suggest that the underlying rate of growth has also moderated. The squeeze on households’ real incomes and the fiscal consolidation are likely to continue to weigh on domestic spending, while the strains in bank funding markets may also inhibit the availability of credit to consumers and businesses. While the stimulatory monetary stance and the present level of sterling should help to support demand, the weaker outlook for, and the increased downside risks to, output growth mean that the margin of slack in the economy is likely to be greater and more persistent than previously expected.

CPI inflation rose to 4.5% in August. The present elevated rate of inflation primarily reflects the increase in the standard rate of VAT in January and the impact of higher energy and import prices. Inflation is likely to rise to above 5% in the next month or so, boosted by already announced increases in utility prices. But measures of domestically generated inflation remain contained and inflation is likely to fall back sharply next year as the influence of the factors temporarily raising inflation diminishes and downward pressure from unemployment and spare capacity persists.

The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term. In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the Committee judged that it was necessary to inject further monetary stimulus into the economy. The Committee therefore voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £75 billion to a total of £275 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take four months to complete. The scale of the programme will be kept under review.

And the detailed release:

 

Following is the text of the BoE's statement issued after the meeting:

1. The MPC has decided on a further Stg 75bn of gilt purchases as part of its programme of asset purchases financed by central bank reserves. Asset Purchase Facility (APF) gilt-purchase operations will therefore resume in the week beginning 10 October 2011.

2. The range of gilts eligible for purchase will remain unchanged.

3. The Bank will, normally, conduct three auctions a week: gilts with a residual maturity of 3-10 years will be purchased on Mondays; of over 25 years on Tuesdays; and of 10-25 years on Wednesdays.

4. The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be Stg 1.7bn for each maturity sector.

5. The Bank will confirm details of the following week's operations each Thursday at 16.00. The Bank does not currently intend to purchase gilts where the Bank holds more than 70% of the "free float", i.e. the total amount in issue minus government holdings. The Bank will, however, continue to keep the identity of gilts eligible for purchase in the APF under review.

6. The MPC expects the announced programme of asset purchases to take four months to complete. The scale of the programme will be kept under review. The Bank does not intend to hold gilt-purchase operations during the weeks beginning 19 or 26 December 2011.

7. Other than as amended by this Market Notice, previous Market Notices relating to the Bank's gilt purchases under the APF will apply. The Bank will publish an updated consolidated market notice in due course.

 

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