The British Monetary Policy Committee decided to extend the Asset Purchase Facility by 50 billion pounds to 375 billion. The interest rate remained unchanged at 0.50% as expected.
Update: the ECB cut the deposit rate to 0% and the benchmark rate to 0.75% – EUR/USD plunges and GBP/USD changes course and drops as well – now at
GBP/USD reacts with a small rise and temporarily tops 1.5580, before chopping its way back down.
The additional 50 billion pounds in bond buys will take place over 4 months. The BOE justifies this by saying that “UK output has barely grown for a year and a half”.
At the same time, China cut its benchmark deposit rate by 0.25% to 3% – peculiar timing!
One BOE member voted for a 25 billion increase last time, so also such a smaller increase was a possibility. The recent deterioration in economic indicators promoted some analysts to anticipate an expansion of 75 billion pounds.
So, it was a “sell the rumor, buy the fact” reaction. It’s also important to note that QE has the greatest impact in the US, much more than in the UK or in Europe (that has indirect QE via the LTROs).
Expectations stood on an expansion of 50 billion. This is what the governor of the Bank of England, Mervyn King, voted for in the previous meeting in June. At that time, he didn’t have a majority, but the publication of the meeting minutes set the ground for an expansion now.
The recent weak PMIs, that disappointed in all three sectors (manufacturing, construction and services) made the choice quite obvious.
GBP/USD traded around 1.5560 prior to the announcement. Apart from the weak PMIs, the pair was hit in recent days by the Liebor scandal. The resignation and testimony by Bob Diamond, former CEO of Barclays rocked the pound.
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