Uh oh…
Now that CPI is rising, trusty Bank of England governor Mervyn King seems to be suffering from a touch of mind-changing.
Note the following flashes on the BoE’s just introduced quantitative easing measures (our emphasis):
-KING-WE MIGHT NEED TO DO LESS ON QE THAN 75 BLN STG IF IT WORKS
-KING-TARGET IS TO COMPLETE SOMETHING IN THE ORDER OF 75 BLN STG IN QE OVER NEXT 3 MONTHS
-BOE’S KING-WE ARE MILDLY ENCOURAGED BY WHAT WE HAVE SEEN ON COMMERCIAL PAPER BUYING SCHEME
-BOE’S DALE SAYS SEES SOME SIGNS OF RECOVERY EVIDENT BY TURN OF THE YEAR
-WITH BANK RATE CLOSE TO ZERO, RATES ARE NO LONGER GOOD INSTRUMENT TO EASE POLICY
-KING-THE AMOUNT OF MONEY IS SIMPLY NOT GROWING FAST ENOUGH TO REACH SUSTAINABLE GROWTH RATE
-BOE’S KING-DOES NOT SEE BIG PROBLEMS FOR PENSION FUNDS FROM DEFLATION
-DALE: STIMULUS IS LARGE, BUT RISK IS THAT IT COULD BE SLOW TO TAKE EFFECT
-BOE’S BLANCHFLOWER SAYS EXPECTS UK UNEMPLOYMENT RATE TO ENTER DOUBLE FIGURES BY YEAR-END 10:07
Marc Ostwald at Monument Securities finds all of the above rather peculiar, specifically the comment referring to “if it works”, as it was never likely that they would know “if it was working” by the end of the three month period anyway. As he explains:
This does little to enhance the Bank’s credibility, particularly after the much higher than expected inflation data does not fit comfortably the idea that prices will fall nearly as far as many had been assuming. After the rather unsettling QE buyback auction yesterday, it leaves Gilts looking ever more volatile.
The “unsettling QE buyback” Ostwald is referring to is Monday’s auction, which, while it was subscribed only slightly below last week’s 3.35x, saw all the bonds sold at levels below market prices. This, according to Ostwald, makes the gamble of selling to the BoE at somewhat ‘inflated’ levels a rather more precarious one.
Wednesday’s 5-10 year buyback is next, and it will be interesting to note if all of the above does dampen the subscription levels somewhat.