BoE Interest Rate vote 9-0; Asset Purchase Program Vote 9-0
THE TAKEAWAY: BoE unanimously backs QE -> inflation already on the rise, expected to gain more -> GBP falls on Minutes release
The Bank of England Minutes released today gave unanimous support to short-term quantitative easing measures aimed at stabilizing the economy. As expected, the body showed strong backing for leaving interest rates at their current low level (0.5%) in order to stimulate growth. Perhaps a more surprising move was the Bank’s unequivocal backing of its recent decision to expand its asset purchase program by 75 billion Pounds, a move which at the time caught many off guard and contributed to an initial Cable selling frenzy on fears of impending inflation.
According to the Minutes, policy makers debated expanding the asset purchase program by 50-100 billion Pounds, stating that the program could be “adjusted” to accommodate any curve balls. The APF boost seemed to be the hot topic of the day as the officials cited broad-based concerns about the European debt crisis and shaky financial markets: “Heightened…vulnerabilities associated with the indebtedness of several Euro-area governments and banks (has) les to further deterioration in demand,” the Minutes said.
The APF increase came only slightly before UK CPI data for September showed higher-than-expected inflation numbers across the board, with CPI rising 0.6% on the month versus the expected 0.4%. Annually, inflation rose 5.2% since this time last year, compared to the predicted 4.9% and the previous 4.5%. Besides being problematic when seen in the context of the BoE asset purchase decision (which is expected to hike inflation even further), the CPI numbers and the Minutes released today underscore broad-based concerns about the soundness of the British economy – if the central bank shows unanimity in risking ever-rising inflation in order to fix short-term issues, the issues must be grave indeed.
Following the Minutes release, the pound dropped against the Dollar as inflation concerns prompted selloffs. Sterling has now regained its losses on Euro strength and on the reality that today’s minutes showed nothing truly unexpected.
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