The BOE is expected to move to the sidelines

The BOE surprised markets last month when it announced an additional £75bn of quantitative easing through its Asset Purchase Program, bringing the total amount to £275bn. However, the cash rate was unchanged at 0.5%. The Bank is clearly concerned about the situation in Europe and the weakening growth outlook domestically, as it highlighted tightening household income and fiscal consolidation as a hindrance to domestic spending.

Later today the BOE is expected to leave the official bank rate unchanged at 0.5% and leave its Asset Purchase Program untouched. Therefore, we don’t expect a huge reaction from GBP and we think that investors might wait until the minutes from today’s meeting, which are published on November 16th to gauge whether or not more QE is waiting in the wings at the BOE.

The BOE needs to balance inflation concerns with fears that the Eurozone crisis will cause the UK to slide back into recession. The National Institute for Economic and Fiscal Research said on November 3rd that the UK economy has a 50% chance of slipping back into a recession. Also, concerns in the banking sector remain.

The BOE said last month that it was pumping the economy with more money because strains in Europe’s banking sector threaten to tighten credit conditions in the UK, and if loans are harder to come by this increases the chances that growth will slow. Troubles in the banking sector remain, so the BOE is likely to be on its guard and ready to act if the EU can’t find a workable solution to this crisis.

Although stresses remain, we don’t think the Bank will expand QE this month, due to the significant amount of uncertainty surrounding the European crisis. Added to this, inflation is still above 5% in the UK, and more QE Is likely to lead to criticism of the Bank that it is stoking inflation.

Next year we can see the BOE possibly adding another £50bn to the Asset Purchase Program in the first quarter to boost growth and try to neutralise any tightening in lending conditions by the banking sector. But the bank rate is expected to stay unchanged at 0.5% until at least 2013.

Source: Forex.com

10.11.2011