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Bank of England set to reopen QE taps
00:00, 05 July 2012
The continued deterioration in economic data in the UK and Europe is likely to see both the Bank of England and the European Central Bank ease monetary policy further at their respective monthly meetings tomorrow. At the end of last year in response to fears about the health of the UK economy the Bank of England restarted its asset purchase scheme by £75bn in an attempt to help support the overall economy. Since then the economy has continued to falter, with a contraction of 0.4% in Q4 and a contraction of 0.3% in Q1, which has prompted calls for further measures to help stimulate demand and get banks to lend money into the economy in an attempt to support growth. Last month's Mansion House dinner gave the first indication that the government in conjunction with the Bank of England was looking at other ways to support the economy with the activation of the Extended Collateral Term Repo (ECTR) facility as well as the funding for lending scheme. The recent minutes of the June Bank of England meeting show how split the committee was with respect to further asset purchases with a 5-4 split against the adoption of further measures. The weakness of recent data is likely to see those voting patterns shift if the tone of the language of the June minutes is any guide. "Most members judged that some further stimulus was either warranted immediately or would probably become warranted in order to meet the inflation target". The recent sharp drop in CPI inflation will certainly have emboldened the doves on the committee into leaning in the direction of further easing, but it is also important to remember that a lot of this CPI fall is due to a 25% fall in oil prices in sterling terms, since the March highs of £80 a barrel. Since the lows of £57 in June, crude prices have rebounded 10% and this remains a key concern going forward, not only with respect to sticky inflation, as asset prices rebound on further liquidity injections, but also with regard to the effect further stimulus could have on the economy, given that the last £75bn appears to have changed little with respect to the economy's growth prospects. M4 money supply on an annualised basis remains negative, despite the fact that since 2008 the Bank of England has purchased £325bn worth of gilts, and in the process driven gilt yields to record lows. In any event it appears that the Bank will embark on further QE tomorrow, with the main speculation surrounding about how much it will be, with estimates ranging from £25bn to £75bn, with the consensus centring on £50bn. It would be a major surprise if the Bank were to do nothing given the heavy hints being dropped by Bank governor Mervyn King over the past few weeks. The main question mark remains as to how effective it will be given the concerns about problems in Europe. Certainly if the intention is to help drive the value of sterling lower then it could well all be for nought if the European Central Bank also eases monetary policy and in the process negates the sterling effect that policymakers could be looking to promote. As far as the pound is concerned against the euro it is likely to remain in its range with resistance at 0.8080, the 55 day MA as well as trend line resistance from the highs this year at 0.8505 at 0.8090. As long as any pullbacks stay below here then further euro losses are the preferred scenario, otherwise we're looking at resistance at the 0.8150 area. The area below the 0.8000 level seems to be offering quite a bit of support at the moment; however the key level remains the 0.7950 area. Once below 0.7950 we could well see a move towards 0.7845 and the November 2008 lows.