2nd UPDATE: Pound Jumps After GBP25 Bln Asset Purchase Boost

(Adds further context, analysis.)

 
   By Katie Martin 
   Of DOW JONES NEWSWIRES 
 

LONDON (Dow Jones)--The pound has jumped after the Bank of England met many analysts' expectations by increasing its liquidity-boosting asset purchase scheme by GBP25 billion.

The move takes the total target for the BOE's facility to GBP200 billion. Core interest rates remain at 0.5%, as expected.

The news immediately pushed the pound 0.6% higher against the dollar, to trade at $1.6619. It later extended its gains. The euro dropped by a similar degree to hit a low of GBP0.8938, before falling a little further.

Economists had generally expected that the asset purchase scheme would be extended, although they were divided over the scale of the BOE's likely action.

Just over half of 19 analysts surveyed by Dow Jones Newswires had predicted that the facility would be lifted by GBP50 billion, while seven correctly expected an increase of GBP25 billion. Two had predicted no change.

Relief that a bigger extension hadn't materialized appeared to be behind the boost to the currency.

In a statement, the BOE said past sterling weakness will temper inflation over the short term. This may help restrain the currency's spike from here.

"The pound's gains are unlikely to be sustained, with the BOE noting pound weakness will support inflation," said analysts at Brown Brothers Harriman in a note to clients.

It is so far unclear how the decision on asset purchases will affect sterling in the longer term. Traders may eventually judge that the modest extension isn't enough to provide a meaningful boost to the economy, dragging the pound down.

Alternatively, they may consider the fact that the scheme's extension is smaller than many had predicted suggests the BOE feels the scheme is working at helping the U.K. out of recession.

Overnight, the U.S. Federal Reserve took a different path, opting not to increase its asset purchases. Indeed, for technical reasons, it will scale its target back slightly.

Attention now turns to the European Central Bank, which announces its own monetary policy decision at 1245 GMT, with a press conference following at 1330 GMT.

Any divergence between the monetary policy stances of the key central banks is likely to prove an important determinant of foreign exchange movements in the coming months.

At 1232 GMT, just over half an hour after the BOE announcement, the euro was still under pressure against sterling, at GBP0.8934. The pound was extending its gains against the dollar at $1.6630.

-By Katie Martin, Dow Jones Newswires; +44 (0) 207 842 9346; katie.martin@dowjones.com

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(END) Dow Jones Newswires

November 05, 2009 07:48 ET (12:48 GMT)


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