The British pound sparked a massive movement after the Bank of England (BoE) expanded its quantitative easing program to support economic growth in the fallout of the coronavirus pandemic. With inflation relatively tame, policymakers believe they have some leeway to be more aggressive on monetary policy. Will this be enough to help dig the United Kingdom out of a recession?
On Thursday, the BoE’s Monetary Policy Committee (MPC) overwhelmingly approved a plan to increase its purchases of British government and corporate bonds by an extra $125 billion. This would lift its total stock of asset purchases to just under $925 billion. Officials noted that buying the assets would be completed by the start of next year, adding that they might expand this round of QE in the second quarter.
Policymakers left the BoE’s benchmark interest rate unchanged at a record low of 0.1%, which did not surprise market observers.
BoE heads say that while the economic outlook and labor market remain uncertain, they believe the contraction in UK GDP next year will be less severe than what they initially forecast. That said, the central does think it could take more time to fully recover from the aftermath of the COVID-19 public health crisis. If so, the BoE says it could take additional action if necessary.
The unprecedented situation means that the outlook for the UK and global economies is unusually uncertain. It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors.
The MPC will continue to monitor the situation closely and, consistent with its remit, stands ready to take further action as necessary to support the economy and ensure a sustained return of inflation to the 2% target. The Committee will keep the asset purchase programme under review.
The yield on the 10-year benchmark rose four basis points to 0.227% after the announcement.
On Wednesday, the Office for National Statistics (ONS) reported that the inflation was unchanged, while the core inflation rate climbed at an annualized rate of 1.2%. The producer price index (PPI) core output was flat, while the PPI core input edged up 0.3%. Retail prices dipped 0.1% last month.
The GBP/USD currency pair tumbled 1.15% to 1.2411, from an opening of 1.2553, at 17:36 GMT on Thursday. The EUR/GBP advanced 0.75% to 0.9021, from an opening of 0.8955.