In its latest interest rate decision the Bank of England (BOE) voted to keep its asset purchases target steady at 275 billion GBP. Is their quantitative easing over or should they go for more? Here are four reasons why the BOE might go for more QE.
1. BOE already got the ball rolling!
Last October, the BOE surprised the markets by announcing that it's adding another 75 billion GBP to its asset purchases to a total of 275 billion GBP. Because the amount intended to boost the economy is a bit larger than analysts' expectations of only a 50 billion GBP additional stimulus, the BOE's announcement caused a pound selloff.
And to think that the latest euro zone debacle hasn't even gained momentum then! As far back as October, the BOE was already worried about the potential impact of the euro zone debt crisis on the U.K. economy. If the BOE was willing to increase its stimulus on its concerns on the local economy, what more if the euro zone's debt crisis finally spills over to the U.K.?
2. Increased risk of debt contagion in the U.K.
One of the more direct threats of the euro zone's debt problems is its impact on the U.K.'s major banks. Because of that, the Royal Bank of Scotland (RBS) and HSBC, two of Britain's big four high street banks, have already reduced their Italian debt holdings over the summer.
Unfortunately, some analysts think that the major banks are still too exposed to euro zone debt. Recent data show that the U.K.'s four largest banks are holding as much as 42 billion GBP in Italian debt.
And if that isn't enough to give some market players a seizure, then I should tell you about their exposure to French government debt! RBS alone is exposed to around 10 billion GBP in French debt, while HSBC is holding on to at least 4 billion GBP of the same risk.
3. Bleak U.K. economic outlook
Aside from threats to fiscal stability, the U.K. is also facing several dark clouds on the horizon when it comes to their economic standing. Earlier this week, the European Commission cut its GDP forecasts for the U.K., citing weak export demand and the impact of government spending cuts as two of the main factors that could dampen growth.
BOE officials themselves aren't feeling very upbeat about economic prospects in the U.K. as they pointed out that output could stay flat until mid-2012. BOE Markets Director Paul Fisher even went out on a limb to say that there's a risk that their economy could contract this fourth quarter. Yipes!
4. Weaker inflationary pressures
If you're wondering what's stopping the BOE from going all out with their quantitative easing, you should know that the central bank used to be very concerned about the strong inflationary pressures in their economy. You see, BOE policymakers would've probably implemented several stimulus measures to prop up the U.K. economy in the past were it not for the prospect of stagflation.
Now that their annual CPI is seen to have peaked at 5.2% in September and eased to 5.0% last month, the BOE has more room to conduct further easing. Besides, BOE head honcho Mervyn King expects inflation to fall sharply in the coming months and slide back to the BOE's target of 2% by the end of 2012.
These four factors seem to make a strong case for another round of asset purchases or maybe even a rate cut from the BOE. Any thoughts on when they could pull the trigger? Let us know by voting through the poll below!
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