British Pound Dives as BOE Unexpectedly Expands Quantitative Easing Program by �50 Bi

The Bank of England (BOE) left their Bank Rate unchanged at 0.50 percent today, as expected, but the market-moving part of the announcement came from the Monetary Policy Committee’s (MPC) decision to expand their quantitative easing (QE) program. Indeed, the British pound fell sharply across the majors and ended the day down over 1 percent against the greenback after Chancellor of the Exchequer Alistair Darling approved a £25 billion increase to the limit on purchases that the BOE may make via the Asset Purchase Facility, bringing the ceiling up to £175 billion and leading the central bank to declare that they would expand purchases by another £50 billion.

As we mentioned yesterday, recent financial data had suggested that greater intervention was possible after lending to non-financial corporations fell a record £14.7 billion during Q2 compared to Q1 and as the annual rate of M4 money supply growth (excluding intermediate Offshore Financial Centers) fell 0.7 percentage points to 3.1 percent in Q2, all of which suggested that the central bank’s £125 billion worth of asset purchases haven’t had the desired effects of boosting money supply and increasing lending. Another thing we noted yesterday was that this very evidence may indicate that the level of asset purchases that the UK Treasury and BOE have been willing to commit to will never have the desired effect, making the expansion to the program a very risky bet.