BOE Analysis: Slowing the printing press sends sterling higher, why more may be in store

• The BOE announced it would leave its total bond-buying scheme unchanged but slow its purchases.
• One member voted to cut the stock, opening the door to others.  
• Sterling has reacted positively and has additional reasons to rise.

To taper or not to taper, that is the question for central banks worldwide – and the Bank of England has chosen the middle ground. Governor Andrew Bailey and his colleagues announced that the total stock of purchase would remain unchanged at £895 billion, but that the monthly pace would slow down.

The “unchanged” headline sent sterling down amid prospects of more pound printing, but it then shot higher. Why?

First, creating less of the currency now means there is a growing chance the bank will not fully reach its target. The BOE already upgraded its economic forecasts – 7.5% expansion in 2021 in the UK. If it pushes expectations higher once again, revisiting the total stock of buying would undoubtedly be on the cards.

Secondly, Andy Haldane, the BOE’s outgoing Chief Economist, voted already now to cut short the program. While he is on his way out, he has influence and others may follow.

The mix of less buying now, a dissenter and upgraded forecasts were enough for dozens of pips of gains. What is next? Apart from waiting for additional economic indicators, the pound has more room to rise in the near term if Bailey conveys an optimistic message in his upcoming press appearances.

In the nearer future, investors are also eyeing two other issues. The standoff between French fishermen and the British navy around Jersey – related to Brexit – will likely subside and support sterling.

More importantly, investors remain cautious ahead of election results in Scotland. Some fear that if pro-independence parties gain a majority, it could raise tensions with London. However, once the vote ends, a dose of uncertainty disappears. Moreover, if the Scottish National Party (SNP) has a disappointing night, the pound could extend its gains.

Circling back to the BOE, the upbeat message on the economy – which has already resulted in a policy change – should keep the pound bid.