Bank of England keeps QE at 375bn

The Bank of England today kept quantitative easing levels on hold at £375bn, giving the pound sterling a timely boost.

The move today by the MPC was no doubt helped by the much stronger than expected UK services data earlier this week, which accounts for two-thirds of the UK economy and rose at its fastest pace in five months. The weakness in the pound sterling on the back of elevated stimulus expectations and the recent UK credit rating downgrade likely also played a role in giving the MPC breathing space in their decision to keep QE levels on hold.

The market had raised its expectations of a move in the short term for the MPC to increase stimulus efforts after a notable split in the MPC from last months decision to keep QE levels on hold. Last time around Mervyn King, alongside Fisher and Dale, all voted for an increase in QE by £25bn. Clearly they have failed to win more support within the committee and it will certainly be interesting to see if the pickup in UK services last month has dictated a change in Kings call last month for more QE also.

The Pound Sterling Jumps
The pound sterling saw an immediate and timely boost as a direct result of the decision to hold QE at current levels. The pound rose from $1.4990 to $1.5069 within mere seconds as the market digested the news. The pound has been under heavy pressure of late having fallen from $1.58 in the space of just one month.

The key now will be in whether this decision to hold has any longevity or is merely delaying the inevitable. The likelihood is the Bank of England has merely delayed this decision to watch for developments on both UK output and inflation (in that order of priority) and will move sooner rather later to increase asset purchases to proect the economic recovery.

Whilst the boost to the pound sterling is welcome to holiday makers – who has seen their spending power abroad be significantly reduced of late – the likelihood is that today’s sterling strength is short term at best, with the move to hold interest rates and QE levels at current levels unlikely to dramatically change the banks motivation to protect the economic recovery through the printing presses.