BOE Not Quite Ready for More QE

It seems that calls for more quantitative easing have been falling on deaf ears in the U.K. In its interest rate decision earlier this week, the Bank of England (BOE) held its ground and decided against further easing, much to the dismay of those who had been hoping for more stimulus.

It left its official bank rate at an all-time low of 0.50% and decided not to pad up its asset purchase facility, which currently stands at 375 billion GBP.

Some left disappointed

Recall that in last month’s meeting, BOE Governor Mervyn King joined two other MPC members in voting for an expansion of its bond-buying program. Some traders believed that other policymakers would follow in King’s footsteps, hop over the fence, and vote for an increase in stimulus in this month’s meeting.

Unfortunately, QE supporters were still unable to wrestle control from those who opposed an expansion of the stimulus program, which left many disappointed. According to a survey conducted by Bloomberg, 10 out of 39 economists had predicted an expansion of at least 25 billion GBP.

Possible reasons behind the decision

Word on the street is that some MPC members are starting to worry about the costs of easing. They’re afraid that injecting any more stimulus into the economy could lead to asset bubbles and higher inflation. Questions have also been raised about whether such a move would still have a material positive impact on the economy.

Furthermore, according to some policymakers, they’re more interested in giving the Funding for Lending scheme (which has been showing a lot of promise) time to work its magic rather than taking the familiar route of increasing asset purchases.

Increase in stimulus only a matter of time?

The BOE might have decided to hold off on bumping up its asset purchases this month, but many still see an increase in the near future. In fact, some speculate that it could come as early as next month.

With Mark Carney set to replace Mervyn King in July, the outlook for monetary policy in the U.K. certainly seems to favor more easing. Remember, Carney recently went on record to say that he believes policy isn’t “maxed out” yet, which implies he may take bolder measures when he assumes the role of BOE governor.

As for economic performance, recent reports also seem to hint at a need for some sort of boost. Contractions in retail sales and the manufacturing and construction sectors all point to a possible triple-dip recession this quarter.

GBP/USD reaction

The market’s initial reaction to the BOE decision was to buy up the pound, which resulted in a sharp GBP/USD rally. However, this move was slowly undone in the following hours until price made its way back to pre-BOE decision levels.

GBP/USD 15-minute Chart

In this old man’s opinion, this reaction suggests one very important thing: the outlook for U.K. monetary policy really hasn’t changed. The markets might have been disappointed in this month’s rate decision, but they still believe it’s only a matter of time before the BOE gives in to pressure to inject more stimulus into the economy.