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BOE: likely to expand QE to GBP 150bln from GBP 125bln

Thu, Jul 9 2009, 09:41 GMT
by RANsquawk Research Team

RANsquawk

• BOE likely to expand QE to GBP 150bln from GBP 125bln
• Some analysts think the BOE may request to up its ceiling beyond GBP 150bln
• All analysts expect BOE to leave interest rates unchanged at 0.50%

It’s a near certainty that record low interest rates at today’s meeting will be left unchanged, with the focus solely on any potential extension of the BOE’s QE programme.

The consensus is for the BOE to increase the size of its current QE programme by GBP 25 bln, which means asset purchases will continue through to August where the BOE will be armed with its new quarterly inflation report. There is also speculation that the BOE may request to increase the ceiling of asset purchases beyond GBP 150bln.

Increase QE or keep the status quo

As always there are risks, the BOE could do more or it could do nothing at all. The Shadow MPC, which meets under the auspices of the institute of economic affairs, said that ‘QE is the only effective monetary policy instrument presently available to the authorities’ with several committee members recommending that an additional GBP 100bln to GBP 150bln of Gilt purchases was required. However, The Times MPC, in today’s paper, voted 5-4 to not increase the current QE programme by GBP 25bln.

If the BOE asks permission from the Treasury to increase the upper limit of GBP 150bln, a new ceiling could be anything from GBP 175bln up to GBP 300bln. The BOE may also seek to expand the type of Gilts being purchased by widening the spectrum of maturities to 30y. However, the committee doesn’t want to be viewed as ignorant of inevitable inflationary pressures due to excess of newly printed money, while any mention of exit strategies remains premature at this stage. On the flip side, any talk of the program being halted will result in a similar market reaction to BOE’s announcement of withdrawal of 8% Gilt of 2021 and 5% Gilt of 2014, which caused yields to rise sharply.

BOE shoots itself in the foot

The Bank has purchased approximately 15% of the entire UK debt market, which is substantially higher than the Feds purchase of 3% of US Treasuries and BOJ’s 0.3%. Despite this aggressive effort, some players still expect more purchases due to a greater dependence on the housing market as well as the finance sector compared to other major economies. GBP has strengthened against the USD and the EUR since QE began, in contrast the worry in the US is that any expansion in Treasury buys by the Fed will further undermine the USD.

However, ironically, weakness in the UK’s fiscal position, caused in part by QE, is effecting the QE programme itself. Major players, such as PIMCO and Blackrock, are becoming anxious over the size of the UK’s budget deficit and staying on the sidelines. In turn yields in Gilts now higher than when the program began due in part to concerns that rising debt levels are simply unsustainable.

Published on  Thu, Jul 9 2009, 09:43 GMT

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