Bank of England increases Asset Purchases
City Index July 5, 2012 6:00 PM
<p>The FTSE 100 traded above the 5700 resistance level, boosted by moves by the Bank of England (BoE), European Central Bank (ECB) and China to […]</p>
The FTSE 100 traded above the 5700 resistance level, boosted by moves by the Bank of England (BoE), European Central Bank (ECB) and China to re-ignite faltering growth with interest rate cuts and additional stimulus.
The Bank of England announced an increase of £50bn in asset purchases, a move that had been widely expected, in an effort to kick start UK growth, which slipped back into recession last quarter.
The move had been expected in the market for some weeks now, having seen various hints by both Mervyn King and other committee members within the Central Bank. It would not be a surprise if all committee members voted unanimously for at least £50bn but what will be interesting to see is if there were votes for £75bn, when the minutes are released, which could help to indicate whether the BoE will now pause or look to increase the scale of purchases as they see fit on a monthly basis.
The confirmation of the announcement helped investors to breathe easy, particularly those that had bought into the market this week on expectations of action from the BoE.
The real surprise came in the shape of action by China to help speed growth by cutting their interest rates on deposits by 25 basis points to 3%. The move is yet another sign of determination by China to curtail slowing growth in the region and this is where much of the FTSE’s knee jerk move higher originated from, as the timing of the announcement took many by surprise.
The move by China to cut rates gave an immediate lift to heavyweight mining stocks on the FTSE 100, which powered higher as a result and gave the UK index support. The FTSE 350 mining sector rallied over 2.6% within 30 minutes of the announcement.
The ECB was next up to make a play on rates and cut the main refinancing interest rates by 25 basis points to 0.75%, whilst the Central Bank also cut the rate on deposit facility by the same amount to zero.
The ECB move had been widely expected and so does not come as any surprise to traders, which limited any reactive bounce in equities in the immediate reaction to the decision.
The risks towards today’s Central Bank action was in a failure to deliver on hinted promises. Many investors have been buying into the market on expectations of action by both the Bank of England and European Central Bank. As such, the markets were at high risk of disappointment were these decisions to not be realised. Fortunately both the BoE and ECB delivered with the minimum of expectations.
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