Bank of England Turns Down the QE Quality Dial and the Pound Sterling Suffers

Published: Friday, 5 August 2016 10:00 BST - Written by Ben Hughes

STORY LINK Bank of England Turns Down the QE Quality Dial and the Pound Sterling Suffers

Extensive Stimulus from the BoE Weighs on Pound Sterling (GBP) Exchange Rates

Given that it has been around since the year 1694, yesterday’s decision by the Bank of England (BoE) to cut its benchmark interest rate to a new record low of 0.25% was always going to be a headline-grabber. However, the technical information contained in the BoE’s minutes which accompanied the announcement could prove to be of even more significance in the short-the-medium term.

The Bank’s decision to increase the GBP375bn which it has already ear-marked for its Quantitative Easing scheme was not a complete bolt out of the blue – a number of analysts had mooted the possibility of such a move in the lead-up to the announcement. However, the Bank’s decision to alter the make-up of the asset purchases which it effects as part of its QE programme could yet prove to be a game changer.

Rate Cut and QE Scheme Introduced to Bolster the UK's Post-Brexit Economy

Until this time, the QE scheme had seen the BoE has swap cash for government bonds held by British banks in an effort to get them to lend to private individuals and businesses. However, yesterday’s announcement saw the Bank alter the type of purchases it will now be making as part of its scheme, with Sterling-denominated investment-grade corporate bonds now also included. The Bank explained in its minutes that these,

‘Purchases of corporate bonds could provide somewhat more stimulus than the same amount of gilt purchases. In particular, given that corporate bonds are higher-yielding instruments than government bonds, investors selling corporate debt to the Bank could be more likely to invest the money received in other corporate assets than those selling gilts. In addition, by increasing demand in secondary markets, purchases by the Bank could reduce liquidity premia; and such purchases could stimulate issuance in sterling corporate bond markets.’

Slashed GDP Forecasts Send GBP Lower, Pound to Euro Currency Pair Expected to Fall

Meanwhile, yesterday’s session also brought the release of the latest UK Gross Domestic Product growth forecast, heaping further pressure on the Pound. The BoE announced that it now anticipates the UK economy to be a total of 2.5% smaller than it had forecast as recently as May of this year thanks to the uncertainty and drop in inward investment triggered by June’s Brexit decision by the UK electorate. The outlook for Sterling now looks decidedly negative, with December 2008’s all-time low of 1.0200 GBP EUR providing the short-to-medium term target for the Pound euro exchange rate.

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