Sterling weakened across the board following the dovish Bank of England minutes, touching an eight-month low against the dollar and a 2-1/2 year low against the yen.
MPC meeting minutes showed that the central bank was planning to pump more money into the UK economy and may need to buy more bonds to keep borrowing costs low as the recovery falters. This would result in weakening the value of the British pound. At the meeting, Adam Posen remained the only one to vote for an additional 50 billion pound in asset purchases, while the MPC voted 9-0 to keep interest rates unchanged at the record low 0.5 percent.
Sterling fell to an eight-month low against the dollar as GBPUSD dipped to 1.5609 from 1.5685 before the minutes were released. EURGBP rose to the day’s high of 87.47 from around 86.88 beforehand. Meanwhile GBPJPY tumbled to 119.20, its weakest since January 2009.
Separate figures from the Office for National Statistics showed Britain’s public sector net borrowing was higher than expected in August.
The following are some analysts comments on the Bank of England minutes:
ANALYSTS’ COMMENTS :
SAMUEL TOMBS, CAPITAL ECONOMICS
“The minutes of September’s MPC meeting strongly suggest that QE2 is set to be launched in the very near future. Admittedly, no other members joined Adam Posen in voting for an instant resumption of the asset purchases.
However, most members of the Committee accept that the case for immediate policy stimulus has significantly strengthened over the last month – the debate is now how to do provide that extra stimulus.
The MPC discussed lowering interest rates below 0.5%, providing explicit guidance on the future path of Bank Rate and changing the maturity of the portfolio of existing asset purchases (akin to “Operation Twist” proposals in the US). However, the Committee concluded that “none of these options appeared to be preferable to a policy of further asset purchases”.
So our guess is that a further £50bn of gilt purchases will be announced in November.
Meanwhile, August’s public finance figures suggest that the trend in borrowing has deteriorated again – the PSNB ex. figure of £15.9bn was nearly £2bn higher than a year ago. The figures therefore cast further doubt on the ability of the Government to achieve its current fiscal forecasts.”
JAMES KNIGHTLEY, ECONOMIST AT ING FINANCIAL MARKETS
“This is clearly a major swing in a dovish direction and follows the BoE’s Quarterly Bulletin on Monday which suggested that the 200 billion pounds of asset purchases the BoE made was equivalent to around 150-300 basis points of interest rate cuts.
“This is a significant stimulus so should the BoE cut its growth and inflation forecasts, as pretty much everyone else has (the IMF included), then a November 10 increase in asset purchases will look likely. Consequently sterling will stay under downward pressure, particularly with the Federal Reserve likely to lag behind in offering and further QE.”
PHILIP SHAW, INVESTEC
“Although the vote on QE remained the same as in August, there was a further shift in tone of the committee’s deliberations and the prevailing view is now that further quantitative easing is likely to be warranted at some stage.
“In our view the question is it’s really a matter of when and whilst the Bank of England will prepare a new set of forecasts for its inflation report in November, it’s possible the case for further stimulus is clear cut next month and therefore we could see more QE at the October meeting.”