U.K. Week in Review

The UK produced more than its fair share of economic headlines this week. Interest rates were kept on hold at the historical low of 0.5%, as expected. Not one commentator predicted a rise prior to the announcement and there was a similar paucity of predictions suggesting the Bank of England Monetary Policy Committee would cut rates further. The BoE did take the opportunity though to ambush markets with a surprise statement regarding its quantitative easing program. The £125bn originally agreed is almost fully utilised, with only £15bn of the budget remaining. The BoE have decided to pause the program when the £125bn initial budget is fully utilised.

Markets were broadly expecting an expansion of the policy. UK Gilt prices fell sharply in response, with yields spiking, as investors reduced exposure to the asset class on realisation a major buyer of bonds would imminently retire from the Gilt market, at least temporarily. The BoE advised it was keen to digest the economic and inflationary impact of the easing to date before possibly injecting further cash into the economic system. Following the announcement a number of analysts speculated the BoE had seen enough improvement in economic data to persuade them further action might provoke inflation and that the BoE, despite their cautious sound-bites, were confident the economy is already returning to growth.

Preliminary Q2 GDP data is due shortly, followed by a Q2 inflation report in August. Following those announcements, the BoE is likely to hold sufficient data to cement a decision, one way or the other, regarding the need for further stimulus.

Comments

[nobby73:]

The idea with QE was to encourage investors to swap Gilts for corporate risk, this increasing lending to riskier Sterling assets. The evidence suggest QE has simply resulted in a short term spike in Gilt yields as traders buy up Gilts to get their government handout, then once paid up, sell GBP and get the hell out of town.

They are not going to say this is a failure of the plan, but rather that the experiment may not be working as intended.

Jul 11 05:43 AM

[TradingHelp...:]

Great point. You are right. The sharp decline in government bond prices, following the annoucement, highlights the speculative bubble that was created as institutions tried to capture the upward momentum caused by massive BoE buying. The BoE had accumulated 17% of the liquid market. Another mis-thought, here-today-gone-tomorrow, poorly executed stimulus strategy.

Jul 11 05:50 AM