BOE Extends QE; Sterling Gains, Gilts Fall

 
   By Peter Nurse 
   Of DOW JONES NEWSWIRES 
 

LONDON (Dow Jones)--Sterling strengthened, U.K. government securities prices fell and London share prices were largely unaffected as the Bank of England kicked the can down the road on Thursday by extending quantitative easing and keeping U.K. interest rates steady.

The increase in its bond purchase program was GBP25 billion, about half the figure some economists had been projecting, but there remains scope for it to be increased when this latest round of buying expires in three months time. As it stands, the BOE will have bought GBP200 billion of gilts, almost exactly covering the U.K. government's estimated fiscal deficit for the current year.

The BOE's attention is switching to rising inflationary pressures, with a scheduled rise in value added tax at the end of the year, the lagged effects of sterling devaluation, and rising utility prices likely to push consumer prices above its 2% target in the New Year. The BOE expects this upward shift in inflation to be temporary.

Any significant rise in inflation expectations, earnings and signs that the output gap is smaller than originally expected because existing capacity is redundant rather than just underutilized is, however, likely to ring alarm bells.

Still, the decision of the BOE to increase the amount of assets it plans to purchase under its quantitative easing program by only GBP25 billion prompted a positive reaction in the pound.

Sterling strengthened against the dollar, to trade at a session high of $1.6636, while the euro fell by a similar degree to hit a low of GBP0.8932. The move reflects relief that a larger extension did not materialize.

"That a smaller than expected addition to quantitative easing has been made perhaps shows some members of the MPC are becoming a little more concerned about the longer-term implications of the very loose policy stance," said Peter Hensman, Global Strategist at Newton Investment Management.

Gilts, on the other hand, fell as many in the market had expected a larger extension.

At 1250 GMT, the December gilt futures contract stood at 117.15, down 0.54 on the day, from 117.37 prior to the announcement, while the 10-year benchmark gilt stood 0.39 lower at 104.875, yielding 3.871%, from 3.753% prior to the data.

As far as equities were concerned, the benchmark FTSE 100 index was largely static, down 0.4% at 5087.92, and only around 10 points higher than the levels before the announcement.

As the decision neared, the market began to expect such a figure, said David Morrison at GFT, so the reaction was fairly muted. However, it's important to note that "we're slightly out on our own" as other economies, such as those of Norway and Australia, begin tightening their monetary policies.

-By Peter Nurse, Dow Jones Newswires; +44-20-7842-9288; peter.nurse@dowjones.com

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(END) Dow Jones Newswires

November 05, 2009 07:58 ET (12:58 GMT)


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