BOE drives Sterling after surprise bond purchase announcement

The Pound experience a wild ride during a trading session where riskier assets were back in vogue.  The FTSE rallied nearly 3.75% as investor piled back into UK debt and equity instruments.  The pound move lower in early trade, but quickly bounced as investors realized that inflation in the UK was not a thing of the past.

The Bank of England, decided not to wait for the quarterly inflation report but announce GBP75 billion additional bond purchases over the next four months.  Although many recognized it was possible, only less than half the economists surveyed expected the asset purchases to be announced.  Additionally, recent data, which included stronger than expected manufacturing and service PMIs seemed to discourage the undecided. The central bank announced that it will buy GBP25 billion of gilts across a range of maturities in three weekly auctions.

In the past, the  BOE bought GBP200 billion gilts between March 2009 and Feb 2010, as part of their first round of quantitative easing.   Six months ago, many observers had expected the BOE to have to hike rates in the face of the persistence of inflation above target, which is 2% for the central bank.  The 4.5% headline of CPI in August matches the peak since the late 2008.  Right now UK inflation has peaked and many expect inflation to hit a high closer to 5%.

The fact that the BOE announced the new bond purchases, even though most of the governors opposed it, suggests a significant deterioration in economic and financial conditions.  The BOE said it will keep the size of the program under review, which could mean that if the economy deteriorates, the program could grow large.  The program will be extended if either domestic or international conditions deteriorate.   The UK’s base rate remains at 0.5%, and unless the UK economy contracts, it will likely remain fixed near this level for the foreseeable further.

The Pound hit support near a weekly horizontal trend line near 1.5290.  A break of this level could test target support near 1.48.  Resistance on the GBP/USD is seen near 1.5700.