City shocked as Bank pulls back from printing money

Robert Lea
9 Jul 2009

The Bank of England today shocked City investors as it turned off the printing presses on its so-called quantitative easing programme.

Sterling rocketed more than 1 cent against the dollar within seconds of the announcement.

The City is now split over whether or not we have seen the end of “QE”.

The Bank's monetary policy committee also kept interest rates on hold for the fourth month running since it cut its base rate by half a point to an all-time low of 0.5% in March.

In a statement after the monthly MPC meeting today, the Bank said it is continuing with its programme of pumping £125 billion into the financial sector.

But the Bank, led by Governor Mervyn King, said it is not going back to the Treasury to ask for permission to increase the programme of quantitative easing as it has only spent £112 billion of the agreed facility so far. Its wait-and-see stance would be reviewed in early August, said the MPC, when it has more up-to-date inflation projections.

The statement was taken by some as potentially an end to the QE programme to reflate the economy and George Buckley, UK economist at Deutsche Bank said: “Unless we see some really bad forecasts in the Inflation Report, the MPC might not continue with QE at all. It seems likely now that, given that the data has been a bit better, that might actually prevent them from doing any more at all.”

Bronwyn Curtis, head of research at HSBC, said the Bank had already been “very pre-emptive” in its QE programme and predicted a pause.

“They've put twice as much money into their QE programme this year as the US Federal Reserve, so we really think they probably want to see what the impact is on the economic data.” Others think a break is wrong. “With the growth outlook still looking poor, with real household disposable income under pressure from rising unemployment, falling wage rates, and higher petrol prices, at a time when credit is still being heavily restricted, there is room for more policy action,” said James Knightley, head economist at ING. In the real world credit is still not available, according to Ray Boulger of top mortgage broker John Charcol.

“There are clear indications of the distress in the mortgage market,” he said. “The cost of fixed-rate mortgages rose steadily throughout June and has not fallen back since. There was a whole raft of five-year fixed rates available well below 5% at the beginning of this period but most are now well above 5%. This is not a sign of a healthy market.” David Kern, chief economist at the British Chambers of Commerce,said : “Quantitative easing is not yet fully effective. It is important to significantly increase the programme's size.”

Sterling rose 1.64 cents to $1.6235. The surprise decision sent 10-year government bonds, or gilts, tumbling, pushing yields up 14 ticks to 3.75%.