Keeping interest rates at a low of 0.50%, central bankers at the Bank of England elected to leave monetary policy alone for the time being. Good for the Sterling, the lack of decisiveness by policymakers could lead to more inevitable moves toward yearend– and the beginning of next year.
On the surface, today’s MPC decision matched recent speculation that policymakers would keep rates - and the recently ended asset purchase program - steady in the near term. But, this more optimistic notion was supported by a surge in third quarter gross domestic product figures and temporarily elevated manufacturing data. Now, with additional figures showing weakness in Europe’s second largest economy, it seems that policymakers are more in await-and-see mode.
Instead of lowering interest rates or adding to 375 billion pounds in asset purchases, central bankers will likely be shifting focus to easing credit directly – or placing emphasis on the 3-month old Funding for Lending program – in boosting economic growth. The program acts similarly to expansionary monetary policy, ensuring that lending is directed to small business and households.
But, policymakers won’t be able to ignore the lingering specter of underlying recessionary conditions plaguing the country for too long. This will likely end up leaving the MPC with no other option than to add to the asset purchase facility by another 25-50 billion pounds at their next meeting. More details will emerge when the bank releases its minutes on November 21st.
The pound sterling initially jumped higher on the news as fears over further pound currency debasement abated. GBPUSD surged from 1.5950 support, rising to as high as 1.6000 shortly after the decision. However, the short term bullish momentum is likely to remain subdued, especially with economic data expected to show further deterioration in the coming month. Look for 1.6300 to be the formidable test to any upside potential.