The Bank of England returned to the QE market, for the first time since 2009, by raising the amount of its asset purchase program from 200B pounds to 275B pounds. 75B pounds is about $115B US dollars. While we have been conditioned to big numbers, and hence this doesn't feel like a huge amount, relative to the English economy, it is huge.
In U.S. terms (the U.S. economy is roughly 6.5 times the size of the U.K. economy) this would be the equivalent of just under $750B -- i.e., bigger than QE2 in relative terms. And it will be done in a relatively short amount of time, 4 months. The pound is, of course, taking it on the chin, as the global race to the bottom in currencies continues.
Bigger picture, with inflation far above the targeted rate in England, this shows a change in thought from central bankers away from worrying first about price stability, something that has been hinted at elsewhere. Today’s expansion shows policy makers are prioritizing the recovery over the threat from inflation, which was 4.5 percent in August, more than double the Bank of England’s target.
- The Bank of England pledged to buy the most bonds since the depths of the last financial crisis as officials raced to stop the euro-region debt turmoil from pushing the economy back into recession. The nine-member Monetary Policy Committee led by Governor Mervyn King raised the ceiling for so-called quantitative easing to 275 billion pounds ($421 billion) from 200 billion pounds. That’s the biggest expansion since the first round of stimulus in March 2009. Only 11 of 32 economists in a Bloomberg News survey predicted an increase in asset purchases.
- The central bank expects the new round of stimulus will take four months to complete and it will keep the program “under review.”
- The pound dropped and bonds jumped after the decision, which came a day after a report showed Europe’s second-biggest economy grew less than previously estimated in the quarter through June. The central bank said in a statement that slowing global growth and the turmoil in Europe “threaten the U.K. recovery.”
- “I think it’s a dramatic intervention and signals the urgency of the situation,” said Brian Hilliard, chief U.K. economist at Societe Generale SA in London, who predicted a 50 billion-pound expansion. “I expect the size of the program to be increased further.”
- The pound fell as much as 1.2 percent against the dollar after the decision to $1.5272.