A mixed day for the pound which initially fell against the euro on publication of the minutes of the Bank of England’s Monetary Policy Committee (MPC) meeting from the beginning of the month which showed a unanimous 9-0 vote to increase its asset purchase programme, commonly known as quantitative easing (QE) by £75 billion to £275 billion.
The minutes show that some policy makers wanted an even bigger stimulus (up to £100 billion) over concerns the UK’s underlying rate of growth had moderated and would “be close to zero in Q4″. “It was agreed that the asset purchases would be of nominal gilts, conducted over a four-month period, and spread evenly across residual maturities over three years,” according to the minutes.
International developments weighed heavily on the minds of the MPC’s members. “Several euro-area economies faced severe challenges in restoring the sustainability of their fiscal positions and their competitiveness,” the statement said.
It detailed “increasingly visible symptoms over the month of rising stress in financial markets as concerns about the vulnerabilities associated with the indebtedness of several euro-area governments and banks had intensified”.
A day after official figures showed CPI, the government’s preferred measure of inflation, had hit 5.2% in September, the highest rate since September 2008, the MPC minutes restated the Committee’s central view that domestically generated inflation had remained contained.
“Inflation was likely to fall back sharply in 2012 as the influence of the factors temporarily raising it diminished and downward pressure from spare capacity persisted,” the statement said.
Analysts at Barclays Capital said it was far from clear how effective the new round of QE would be. “Our calculations suggest that £75 billion is likely to be insufficient to fill the demand gap that has emerged over recent months, but the lack of experience with this policy makes any attempt at calibration highly speculative,” said Simon Hayes.
“One development that might nudge QE off track is if the government deficit worsens over the next few months, as seems likely given the growth backdrop,” he said.
“If the government has to issue more gilts this will partially nullify the Bank’s operations to remove gilts from the market, and mean more QE will be needed to achieve the same result.”
The euro benefited from the continuing pressure on the pound but then gave up the gains made in the morning after confusion over whether Germany and France have agreed on an expansion to the European Financial Stability Fund (EFSF). This weekend, the 17 leaders of the nations which make up the euro zone will meet in Brussels to discuss plans to deal with the worsening debt crisis.
A report on Tuesday night suggested that France and Germany have reached an agreement to boost the EFSF as part of a “comprehensive plan” to bring an end to the region’s debt problems by agreeing to a fivefold increase in the EFSF’s lending capability from €440 billion to €2 trillion and the recapitalisation of between 60 and 70 of the euro zone’s “systemic” banks.
However, EU sources let it be known via the news agencies that no deal has yet been struck which led to a euro sell off.
In US data, US housing starts in September climbed by 15% to a 658,000 annual rate, ahead of estimates. Consumer price data was a bit more mixed. The core consumer prices index (CPI), which excludes energy and food prices rose by 0.1% in September to give a year-on-year rise of 2.0%. However, the general CPI index rose 0.4% in August, taking the annual inflation rate up to 3.9% from Augusts’ 3.8%, the highest rate for a year. Analysts suggested the data was negative because it signals that the US economy is generating inflation in spite of the economic slowdown. Inflation is basically coming from energy costs and to a lesser extent, food costs.
This data makes life more difficult for the Federal Reserve to come up with measures to stimulate the US economy into growth without adding to inflationary pressures.
