Bank of England Leaves Policy Unchanged; Further QE Imminent
The Bank of England’s governing council elected to keep its benchmark interest rate at 0.50% for the 30th month and their asset purchase plan at 200B pounds. While the decision was widely expected there is a rising clamour for the immediate expansion of the central bank’s quantitative easing actions by 50B pounds. The chatter reached something of a crescendo this morning with the Institute of Directors called for a 50B pound extension today to keep the double dip recession threat at bay.
Despite the mounting pressure on the Bank of England to take action to help support the economy as growth stagnates we do not foresee more QE until October or November. We certainly understand the rationale calling for immediate action to invigorate the economy but we see inflation concerns forcing the central bank to hold off pulling the trigger at this juncture. We believe that Governor King will wait for a broader consensus on the governing council before moving to expand asset purchases. The MPC at present remains still quite split with Dale and Weale continuing to harbor hawkish sentiments, despite switching their votes to neutral at the previous meeting, they will still be wary of inflationary pressures resulting for increased asset purchases. In addition, MPC members Miles and Fisher haven’t sounded keen to make policy changes on the back of several months of weak data either. We expected there was heated discussion among the MPC on QE measures with the possibility of one (or two) joining Posen's calling for immediate action, all will be revealed in the minutes released on September 21.
The pound spiked higher in the aftermath of the as expected result as players who had been betting on the central bank pulling the trigger on expanding its quantitative easing measures exited short positions and Gbp/Usd embarked on a short relief rally. With further QE measures still on the horizon and the UK economy beset with difficulties at home and abroad risks to the pound are to the downside.
Looking at this daily chart we can see just how much downside there still is in Gbp/Usd and how exposed the downside is if this most recent decline moves through range lows by 1.5750. Particularly against the greenback the pound is likely to underperform as the buck is now well positioned to make outsize gains across the board after the SNB effectively neutered the franc as an attractive safe haven play – similar to the BoJ action on the yen – leaving only the buck available as an unfettered safe haven asset. For a full technical outlook.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.