Impressive move following the Bank of England rebooting QE…
Some immediate reaction from Alan Ruskin of Deutsche Bank:
A few things stand-out immediately on BOE QE decision to do extra 75bn, which was more than the market expected, but spread over 4 months, so this should dilute some of the impact from doing more. The 4 months seems like it may be there to tie in with the timing of future inflation reports. The comments that inflation will rise above 5% in the short-term, and then undershoot 2% in the medium-term asks a lot of the market to believe, but is the foundation of the decision to use QE again. The other comments relating to financial stress (“Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery”) were at the top of their statement in explaining their actions. The BOE is the first central bank to jump back into full blown QE in the this latest phase of stress so no surprise to see the pound get tarred…
And as Ruskin points out — it really depends on what other central banks will do in the next four months, notably the Fed’s hesitation regarding QE3. What’s also interesting is that the Bank of England remains in gilt-buying mode. Those comments about bank funding risks would suggest it might at least be worth intervening to buy up bank bonds to support issuance — but clearly Mervyn King is more interested for now in asking the Treasury to take on credit risk.
Related link:
A belligerent Bank has put purity before pragmatism – FT