BoE increases QE2 by 50bn as expected

The Bank of England today kept rates on hold and announced an increase to the scale of asset purchases under a second phase of quantitative easing by £50bn, as expected.

The market had long been expecting an increase of £50bn and the Bank of England delivered on that expectation. However, as much of the increase had already been priced in, the stock market reaction was minimal, with investor risk appetite lacking vigour in the immediate minutes following the announcement.

The higher risk to the support of equities was always likely to be with a disappointment and an increase of less than the expected £50bn. To that end, at least the Bank of England met expectations and continues to show a dedicated appetite to supporting the faltering UK economy.

The pound sterling pushed slightly higher against the US dollar in the immediate reaction, with some sterling traders buying into the pound after earlier rumours that the BoE could announce as much as £75bn in asset purchases.

What today’s announcement does show is that the Bank of England remains fully committed to supporting the UK economy through a tough start to 2012. The Bank of England has long been seen as more reactive than proactive but certainly since last October’s decision to surprisingly kick start asset purchases once again, that assumption is starting to be put to one side by investors.

In January there had been rising expectations that we could see as much as £75bn announced in more QE today. Clearly however, stronger UK PMI data has helped to reduce the aggression to which the BoE may have felt compelled to act, and the fact that we have seen an £50bn increase announced today breeds confidence that the UK’s Central Bank are confident that the UK can escape from negative growth fairly quickly.

The increase also gives a strong indication as to what we can expect in next week’s release of the Bank of England quarterly inflation report, which is unlikely to generate too many surprises.”

Previous Update: Bank of England expected to announce a further £50bn in QE

08/02/2012 (11am) Joshua Raymond, Chief Market Strategist, City Index 

All eyes are on Thursday’s Bank of England rate decision, where the UK’s Central Bank is expected to keep interest rates on hold for yet another month in an effort to kick start failing UK growth, which contracted 0.2% in the last quarter. The markets are also expecting to see an increase in the amount of asset purchases under a second phase of quantitative easing by £50bn.

The real question now will be whether the BoE can deliver on what much of the markets had been expecting ever since the BoE first started, to some surprise, to increase asset purchases in October last year. It is expected that with the release of the quarterly inflation report next week to digest, and more evidence of the anaemic UK recovery, the Bank of England was always likely to step up purchases in Thursday’s decision. However, there remains some degree of debate over the scale to which any increase may be, should it be announced.

Originally, investors had hoped that we could see as much as £75bn announced, on top of the £275bn already announced through the first and second phases of asset purchases. However, that consensus figure has receded somewhat over the past month after PMI data helped to contain fears of a prolonged bout in recessionary mode for the UK economy.

Indications from Mervyn King, the Bank of England Governor, have bred confidence amongst investors that the BoE is ready to act with further stimulus, more so by its own admission that the first phase of quantitative easing worked. With inflation expected to have peaked and now on the fall, this has given Mr King more room for manoeuvre on stimulus and so as such, this has fed expectations in the market that Thursday will see an increase.

The real question now will be, if there is an increase, what will it be? £25bn, £50bn or £75bn. Should no stimulus be announced, it could be a real shock to the system and we could may see investors face a price correction. A £25bn addition could disappoint a number of investors and would escalate fears that the Bank has started to tone down the aggression of its support for more QE. A £50bn rise would fall in line with expectations whilst a £75 increase may surprise and trigger higher appetite for risk. A caveat to a £75bn increase however would be ‘what is the BoE seeing that the markets aren’t, and that may put longer term doubts in investor minds about UK growth.

The result could trigger some added volatility in the FTSE 100, UK stocks and the pound sterling, so traders need to be on their guard. For now, all eyes on the final number.