BoE in wait-and-see-mode after August surprise
10th September 2009
As expected, the Bank of England held borrowing costs steady at 0.50% in September for a sixth consecutive month and left its quantitative easing programme unchanged at £175bln as it continues to steer Britain’s recession-hit economy towards recovery.
In August the Central Bank kept the Base Rate unchanged at 0.50% and extended its QE programme by a larger-than-expected £50 billion to £175 billion. With the current programme expected to take another two months to complete, the BoE now have scope to stay in wait-and-see-mode through September and October, buying time for the MPC to monitor the effects of the QE on the wider economy in the run up to the November Inflation Report.
Since August, ONS data has confirmed that the second quarter contraction in GDP was the sharpest since records began, despite a moderate upward revision. The near-term outlook beyond Q2 is nonetheless proving more optimistic, with recent survey data implying a return to growth in the third quarter. However, the sustainability of the recovery beyond Q3 remains a key concern, particularly once the boost from the easing in the inventory cycle and monetary and fiscal stimulus measures begin to fade.
The success of the quantitative easing policy will ultimately be judged against the BoE’s objective of lowering the yields on gilts and corporate bonds, boosting corporate lending and ultimately helping to create conditions for a sustained recovery in confidence and economic activity.