The Bank of England voted to pump an additional £100bn into the UK economy on Thursday but, with financial markets more stable than in March, it felt able to slash the pace at which it would inject the money.
The decision to increase quantitative easing reflected continued concern about the likely strength of the economic recovery, despite the central bank now thinking the plunge in output in April would turn out to be milder than it previously feared.
The BoE’s simultaneous move to slow the pace of asset purchases means that it will no longer hoover up all the additional debt created by the UK government and will require private sector investors to finance the deficit again.
The bank’s Monetary Policy Committee unanimously voted to keep interest rates at the historic low of 0.1 per cent. It also voted of 8 to 1 in favour of increasing QE. Andy Haldane, the BoE’s chief economist, was the sole dissenter, preferring no increase in the amount of assets purchased.
The minutes indicated there had been no discussion of lowering interest rates into negative territory, with the issue still under review at the bank.
Financial markets and economists struggled to interpret the central bank’s thinking after the decision was published at noon. The extension of asset purchases suggested a further easing of policy, while the two-thirds cut in the weekly pace of government bond purchases, from £13.5bn recently to an average of £4.5bn for the rest of the year, indicated tighter financial conditions.
Sterling initially rose against the dollar and other currencies before falling sharply. In late afternoon trading, it was down 0.92 per cent against the US dollar at $1.2438, indicating currency markets believed the BoE had imparted a dovish message with the additional QE. But UK government bonds took a more hawkish view of the package, with yields rising 3 basis points.
Andrew Bailey, BoE governor, later sought to clarify the central bank’s position in a conference call. He explained that although the economy in the UK and globally was healthier than the bank had expected, it needed to do more QE because the medium-term outlook was troubling, especially for the labour market.
“There’s no doubt we’re looking at the steepest trajectory of a rise in unemployment because of the sheer nature of what’s happened in this case and the rapid closedown of the economy,” Mr Bailey said, adding that behind the headlines, the news in the latest official labour market figures suggested a weak outlook.
In its statement, the MPC said: “The economy, and especially the labour market, will therefore take some time to recover towards its previous path.”
Mr Haldane disagreed and voted against more QE because he thought the economy was performing better than expected. Explaining his dissenting view, he said in the minutes that the recovery was “materially faster” than the central bank had expected and monetary policy was already “extremely accommodative”.
With the majority of the committee judging that more QE was needed, Mr Bailey then had to explain why it simultaneously wanted to slash the pace of purchases.
The governor sought to play down the importance of the move. “We’re slowing [asset purchases] . . . from warp speed to something that by any historical standards still looks fast,” he said.
Krishna Guha, vice-chairman of Evercore ISI, said the BoE’s decision to slow the pace of QE while increasing the amount probably reflected the fact that QE was performing two jobs at the same time: seeking to quell disorder in financial markets and to provide monetary stimulus, with one driving the pace and the other the amount.
But, he added, cutting the pace of purchases because markets are more orderly while increasing the amount on economic concerns “risks confusing markets as to the Bank’s intentions.”
Reflecting the BoE’s ambiguous messaging, economists took many different positions on the likely future direction for monetary policy.
In a research note, economists at Citi described the bank’s actions as “underwhelming” and predicted it would do more as weak economic data came through in the autumn. Capital Economics predicted the BoE would increase the amount of QE by around another £250bn over the next year.
But Daniel Vernazza, chief international economist at UniCredit, reflected the views of many others that the BoE was signalling it had done enough. “A further increase in the MPC’s stock of asset purchases would likely require a material deterioration in the economic outlook from both its and our current forecasts,” he said.
The main consequence for the Treasury is that it will now have a much less active BoE purchasing the debt it has been selling to finance its deficit. In recent months, the central bank has bought almost as many government bonds as have been issued.
Samuel Tombs, UK economist at consultancy Pantheon Macroeconomics, said: “The stock of gilts in private sector hands is set to rise — especially if the chancellor signs off fiscal stimulus later this year — putting some upward pressure on [gilt] yields”.