On February 9, 2012, at 12:00 pm GMT, the Bank of England (BOE) will announce its decision on interest rates and whether they will boost their quantitative easing program or not. The market widely expects the BOE to keep rates unchanged but analysts are also predicting that the central bank would increase their program to from 275 billion GBP to 325 billion GBP.
Even though there have been some positive data such as the recent positive services and manufacturing PMI surveys, the economic outlook remains gloomy overall. There are still sufficient grounds for the central bank to go for more easing.
1. The British economy contracted in Q4 2011.
During the last quarter of 2011, the U.K.'s economy shrank by 0.2%, worse than the 0.1% contraction initially expected. This stoked speculation that the country could fall into another recession. A double-dip is something that the BOE wants to avoid, and expanding their quantitative easing program is one way to combat a potential recession.
2. The previous QE program is about to expire.
If you've been keeping up with my Piponomics articles, you'd know that the bank increased their quantitative easing program just last October. But despite the bank's moves, it appears that the economy is still having a difficult time growing. Since the bank can't slash rates anymore, quantitative easing is their only option. Once the October program ends this month, the BOE is free to expand the program again.
3. Inflation is starting to slow down.
I gotta hand it to those BOE policymakers who insisted that inflation in the U.K. was bound to slow down sooner or later! As they predicted, the annual CPI figure for December 2011 reflected that price levels dropped as the reading slipped from 4.8% in November to its six-month low of 4.2%.
The BOE believes that this was a result of weak consumer demand, which forced retailers to slash prices to encourage more spending. This situation is expected to persist in the coming months and, with lower inflationary pressures on the horizon, the central bank has room for more asset purchases. They don't have to worry about inflation spinning out of control anymore!
4. January statement hinted at further QE.
If there's one thing that really hints at the possibility of more asset purchases from the BOE, it's the minutes of their most recent monetary policy meeting. Recall that, even though the central bank decided to sit on its hands during their January rate decision, several members of the monetary policy committee expressed their intention to vote for more asset purchases in the next meeting.
With all these reasons I pointed out, it appears that the odds favor another round of QE from the BOE. However, if the central bank decides to keep their asset purchase program unchanged for some reason, the pound could breathe a sigh of relief and resume its climb. Come to think of it, even if the BOE increases their asset purchases by 50 billion GBP but includes a lot of upbeat remarks in their statement, pound pairs might be able to stay afloat.
Another possible scenario is that the BOE expands its asset purchase program and also warns of further QE down the road. This scenario has the potential to send the pound crashing down again, just as the BOE's QE decision in October 2011 did. Make sure you stay on your toes if you decide to trade this event!
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