The Bank of England signaled doubts Thursday about the sustainability of a recent improvement in the U.K. economy, surprising markets with a larger-than-expected increase in its so-called quantitative easing program — by £50 billion to a total of £175 billion. Meanwhile, the European Central Bank, as expected, left its benchmark rate unchanged at 1.0%. Below, economists react, first to the BOE and then to the ECB.
Bloomberg News/Landov
A big surprise relative to market expectations: The consensus expectation was for unchanged purchases. … A key uncertainty ahead of this decision was whether the Monetary Policy Committee would place greater emphasis on the (upbeat) UK survey data or the (much more pessimistic) official GDP data. In the past the MPC has argued that surveys are more reliable, in that they predict future revisions to the official data. But it now seems that the MPC is relying much more on the official data. – Goldman Sachs
[D]uring the crisis, the criticism [of policy] was too little too late. Now, with the extension of the quantitative easing program to the point at which it effectively monetizes this year’s record budget deficit, it’s back to too much too late. … So, what is the committee up to? The statement emphasizes the latest – disappointing – growth number and continued concerns about the current and prospective strength of money and credit. There’s nothing wrong with that, though, at other times, it has seemed as if the committee put more weight on other indicators. … The latest decision adds to the committee’s record of surprising markets. — Robert Barrie, Credit Suisse
The Monetary Policy Committee’s decision to extend its Quantitative Easing program by £50 billion to £175 billion indicates that the committee continues to have serious concerns about long-term growth prospects and persistent muted bank lending to businesses. This is reinforced by the fact that the Bank of England had to seek permission from the Chancellor to extend the Quantitative Easing program beyond £150 billion. Despite the recent improved data, the economy continues to face serious headwinds and sustainable recovery is still very far from certain. – Howard Archer, IHS Global Insight
[The BOE statement] acknowledged that surveys are picking up and the world economy is stabilizing. However, this is in the context of a lower starting point – i.e. the recession is deeper than previously thought. It explicitly highlighted that the future policy outlook will be a trade-off between two opposing forces. Firstly, there is a lot of stimulus already in the system and that will continue to work through. But the economy is still facing the overhang of balance sheets that are in need of repair. — Alan Clarke, BNP Paribas
Until recently, we had thought that the decision to expand asset purchases could be a close one, but firmer newsflow over the past week in the shape of surveys, house prices and overseas data had dented expectations for further quantitative easing. Moreover most comment had surrounded the possibilities of no change or a rise of £25 billion. £50 billion was almost off the scale. … The MPC seems more driven than normal by its inflation forecasts and less influenced by the recent dataflow than we had believed. … [W]we would be wary of assuming that £175 billion will be the limit for QE. We suspect that it will be, but a materialization of downside risks would prompt a further expansion of the scheme and we will scrutinize the forthcoming Inflation Report to gauge the MPC’s current thoughts. — Philip Shaw, Investec
European Central Bank
The ECB August statement was very similar to that of July with a mildly more positive tone on the growth front, reflecting the recent improvement in sentiment indicators. However, the ECB was not prepared to claim that these signs should be interpreted as sustainable. Indeed, Trichet emphasised that the Bank remains “very prudent and cautious.” … We remain of the view that ECB rates will remain on hold for longer than markets anticipate. — Jacques Cailloux, RBS
The ECB statement and Mr.Trichet’s accompanying comments reinforce our belief that the bank is likely to keep interest rates at 1.00% deep into 2010, despite the recent improvement in Eurozone economic data and survey evidence. Certainly any policy tightening currently looks a considerable way off, although we would not totally rule out the possibility that the ECB could trim interest rates further if there is any faltering in the current signs that the rate of Eurozone economic contraction is slowing substantially and the risk of extended deflation increases. … The ECB also acknowledged that the supply of credit remains a problem, although it considered that low demand is the main factor behind the subdued flow of bank loans to the non-financial private sector. — Howard Archer, IHS Global Insight
Staying very close to the message of the last press conference, the ECB seems to have become a bit less bearish on the economic outlook. Dropping the explicit reference to the recovery only starting in mid 2010 suggests that the September staff projections could reveal a less gloomy GDP estimate than the current -0.3%. We are at +0.5%. In the Q&A, Trichet tried to play down the potential change to the staff projections though. Instead, he emphasized the high degree of uncertainty, the potential setbacks along a bumpy road to recovery and the lagged effects of the past contraction in activity on the labour market. – Elga Bartsch, Morgan Stanley
