Today saw the Bank of England release minutes from the most recent Monetary Policy Committee (MPC) meeting, revealing a unanimous vote to leave the current programme of quantitative easing unchanged at €275bn.
This was largely expected; the minutes just confirmed that the MPC is happy to adopt a wait-and-see approach to the effects of October’s increase in quantitative easing (QE) on UK growth and inflation.
I wouldn’t have been surprised to see Adam Posen press for additional QE but on this occasion he was in line with his fellow MPC colleagues.
Nonetheless, the MPC noted that the risks of a major eurozone financial collapse is greater than ever, which clearly favours the introduction of further QE down the line.
While inflation dropped fairly sharply in October, Caxton FX expects that the MPC will want to see inflation continue to decline in the coming months before adding further stimulus.
October’s asset-purchases would have run their course by February 2012 but if we see UK inflation continue to drop - as the Bank of England expects it to - and UK growth continues to struggle, which is more than likely, then February seems a strong bet for the next round of QE.
If the Bank ramps up QE next year, thankfully sterling shouldn’t suffer too much when it does come as QE expectations have already made their mark on the pound.
The GBP/EUR rate is looking healthier today, not based on the MPC’s minutes however, but largely due to some awful industrial orders data out of the eurozone.
We feel it’s only a matter of time before the eurozone debt crisis and the imminent eurozone recession sends sterling up above €1.20.
Richard Driver
Senior Analyst – Caxton FX
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