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Cyprus Internet Directory [ Bank of England halts QE, leaves door open for more ]

Bank of England halts QE, leaves door open for more

Bank of England halts QE, leaves door open for more
February 04, 2010 - Reuters

The Bank of England put a hold on its unprecedented 200 billion pound asset-buying programme for the first time in 11 months on Thursday, but left the door open for more so-called quantitative easing if the economy relapsed.

The pause in QE and the decision to hold interest rates at a record low of 0.5 percent had been widely expected but gilts fell and sterling rose after the announcement as some traders had positioned for an expansion of the asset-buying scheme.

"The Committee will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them," the central bank said in a statement.

Analysts said the overall tone of the BoE statement appeared dovish and it would be a long while yet before the central bank moved toward tightening monetary policy after the extraordinary measures taken over the last year.

"We think that message is that policy is on hold for now, and that the committee will not raise rates until it is more confident over that the recovery has legs," said Philip Shaw, chief economist at Investec. "This may mean that a rate increase arrives later than our mid-year forecast."

In Frankfurt, the European Central Bank also made no change in policy and is expected to hold off until March before looking at further unwinding its crisis support measures. [ID:nLDE6130OJ]


The BoE started buying assets, mostly gilts, last March with newly-created money in an effort to boost the economy but the 200 billion pounds ($317.5 billion) it had so far sanctioned was exhausted last week.

On Thursday, the BoE predicted the economic recovery would be gradual and the high degree of spare capacity in the economy would mean that inflation would fall below target for a period.

It appeared relaxed about a spike in the CPI rate in December, noting that it would probably go higher still but that this was mostly because of base effects.

"The BoE seems cautious about the sustainability of the recovery, essentially because of the lack of credit supply and the outlook of restrictive fiscal policy weighing on consumption," said Slavena Nazarova, economist at Calyon.

"We still think that the BoE should keep its key policy rate at this low level and its monetary policy loose throughout 2010."

A British election is due by June and whichever party wins will, at some point, have to dramatically tighten fiscal policy to rein in a ballooning budget deficit.


The jury remains out on whether QE worked. Critics note the economy grew by just 0.1 percent in the last quarter of 2009 after an 18-month downturn that wiped out 6 percent of output and left Britain as the last major country out of recession.

But others say the outcome would have been much worse if the central bank had not acted.

The only similar previous example of such a move had been in Japan in the part of the last decade. Many note the Japanese economy has never really roared back to life.

But last year, the BoE, like many central banks around the world, found it had no choice but to sail into previously uncharted waters to prevent the economy sinking into the rocks.

So in March it cut interest rates to just 0.5 percent and embarked on a 75 billion pound asset-buying programme. Another 50 billion pounds was added in May and in August, and then 25 billion pounds in November, taking the total to 200 billion.

The BoE said that while QE was on hold, it would continue to buy high quality private sector assets on behalf of the government financed through the issue of treasury bills.

"Today's statement hinted that, if the MPC does think that further stimulus is required, any further action will take the form of more gilt purchases," said Colin Ellis, economist at Daiwa.

"The MPC's Plan B appears to be 'more of Plan A'. If QE suddenly starts to have a big impact, that is fine. But if it does not, history may judge that the Committee was found wanting both on the way into recession, and on the way out as well."

(Source: Financial Mirror,

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