- The BOE increased QE by £100, the lower bound of expectations.
- Running through the program by year-end suggests slower support from Governor Bailey.
- Chief Economist Andy Haldane’s dissent also suggests bailout fatigue.
Is that all folks? The pound has recovered its pre-Bank of England losses but seems reluctant to bounce. It may now be headed down for these three reasons:
1) Only the minimum
The BOE met expectations by announcing it is expanding its bond-buying scheme by £100 billion. Its total support for the government’s efforts to mitigate coronavirus now stands at £300 billion, yet may be insufficient and the UK’s slow emergence from fighting the disease.
For the reaction in sterling, the “Old Lady” fell short of estimates of some participants which foresaw an expansion of £150 to £200 billion.
In the coronavirus era, more money printing is better for the underlying currency – at least in the case of the pound or the euro – as it funds fiscal relief and stimulus.
2) Tapering down already?
The BOE said it expects to run through its new funds by year-end and that implies a slower pace of purchases. Such a move means the government would also move more gradually – or suffer somewhat higher borrowing costs.
Andrew Bailey, Governor of the Bank of England, seems reluctant to “do whatever it takes” – and that does not bode well for the economy nor for sterling.
3) Surprising dissent
Andy Haldane, the bank’s chief economist and usually a dove, surprised by voting against all the other eight peers in the Monetary Policy Committee (MPC) by rejecting further support. If he continues throwing his weight against the further stimulus, others may follow.
Conclusion
The BOE provided help to the government and the economy, but probably fell short of expectations – and of what is needed as the country struggles to return to normal from COVID-19 and amid Brexit uncertainty. GBP/USD has room to fall.
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