The Bank of England's Monetary Policy Committee surprised and disappointed markets yesterday as it signalled a possible end to its programme of "quantitative easing", known colloquially as "printing money".
As was universally anticipated, the Bank left interest rates at their historic low of 0.5 per cent, but it drew back from committing itself to spending the final £25bn of the £150bn allocated to it by the Chancellor in March, as many thought likely.
In a statement, the Bank merely said that it intended to complete its current programme, dividing opinion in the City as to whether this meant that it would announce a renewed QE programme in August alongside its Inflation Report, or whether this is the beginning of the end of this extraordinary phase in monetary policy.
The prospective loss of such a large purchaser of government bonds pushed gilt prices sharply lower and the yield on the benchmark 10-year gilt up by around 15 basis points to 3.76 per cent after the announcement at noon, a significant movement. The pound strengthened by about 1 per cent against the dollar, again in response to the unanticipated move by the Bank.
In a statement, the MPC said: "The committee also voted to continue with its programme of asset purchases totalling £125bn financed by the issuance of central bank reserves. The committee expects that the announced programme will take another month to complete. The committee will review the scale of the programme again at its August meeting, alongside its latest inflation projections."
Far from clarifying matters, City economists were left confused, the opposite of the effect the MPC usually likes to achieve. Some noted the fact that the remaining £13bn of gilt purchases would be spread over the next month rather than the next few weeks meant that the weekly rate of purchases would be much slower than in the recent past. Such "smoothing" to the next MPC meeting and Inflation Report in August was taken by some to mean that the policy was being gently wound down, but by others to mean that the Bank wanted another burst of quantitative easing in August.
The minutes of the MPC meeting will be published on 22 July.
Robert Barrie, the managing director of European Economics at Credit Suisse, commented: "The MPC continues to make the straightforward more complicated than it need be. The decision not to go ahead at this point with the remaining £25bn suggests that maybe it has changed its mind in some way. The decision not to write asking for more suggests the same. The suggestion in the statement that these decisions have not been taken but deferred until next month goes the other way."
However, some are confident of more easing. Jonathan Loynes of Capital Economics said: "There are still few signs of any increase in money holdings of, or bank lending to, firms or households. We expect at least another £25bn of QE to be announced next month." Despite some evidence that the economy may not, after all, have stopped shrinking in the first quarter, most of the forward-looking surveys of business and consumer confidence, such as yesterday's UK Conference Board data, point to a fragile recovery.
The two-year depreciation of the pound is also offering some small assistance to the economy. The Office for National Statistics said that the UK's trade deficit narrowed to a three-year low in May, to £2.2bn, from £3bn in April. It was largely down to a reduction in imports rather than a boost to exports.
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