While this decision was obvious to some, chances are that the BOE didn’t have an easy time making it because the central bank has been under a lot of pressure to bump up its asset purchases. But it seems the pros of pausing its stimulus program outweighed the cons this time around!
For one, many out there, including some BOE members themselves, have begun to question the asset purchase program’s effectiveness in boosting economic activity. After all, past attempts at pumping money into the economy have done little to help the U.K., as its recovery has been fragile at best.
Besides, having just launched the Funding for Lending (FFL) scheme in August, the BOE probably wants to see how its new approach will affect the economy. For those of you who don’t know, the FFL scheme allows U.K. banks to swap collateral, such as existing loans, in exchange for Treasury bills with low interest rates. Simply put, for every pound that a bank lends out to consumers and businesses, it gains access to a pound of cheap funds.
So far, there’s not much word on the street yet on how well the new FFL scheme is doing, but MPC members have said that they believe that it looks promising. In any case, it seems that they’re more interested in giving this new program a bit more time to show its full impact on the economy, rather than taking the tried-and-tested (but not-so-effective) route of increasing bond purchases again.
As I had predicted in my BOE rate statement preview, the decision to keep the asset purchase facility untouched turned out bullish for GBP/USD. It led the pair to stage a nice 50-pip rally to undo its losses from earlier in the day – not bad for a day trade, eh?
The central bank’s decision not to expand its asset purchase facility has increased interest in next week’s inflation report (where the BOE will announce its latest inflation and growth forecasts) and the MPC meeting minutes.
These reports will give us a sneak peek into the minds of the BOE members. Have they become so jaded with QE that they’ve totally abandoned the idea of expanding the asset purchase program, or are they merely giving the FFL time to do its magic?
If there’s anything U.K. policymakers know that the markets don’t, it will be revealed at the inflation report on November 14 or when the MPC meeting minutes are published on November 21!