BoE asset purchases sit on knife-edge

The Bank of England's (BoE) Monetary Policy Committee (MPC) held fire on further quantitative easing (QE) today amid speculation that it would sanction an additional £25 billion ($38 billion) of asset purchases.

In its previous meeting, a motion to increase the central bank's asset purchase programme – currently at £375 billion ($565 billion) – by an additional £25 billion was rejected by six votes to three.

Comments by Paul Tucker, a BoE deputy governor, in the interim period had helped contribute to an expectation of further easing, but it failed to materialise. The MPC also held the benchmark interest rate at 0.5%, as expected.

Joost Beaumont, an ABN Amro economist, said it "is likely to have been a very close call", and a motion for additional purchases may have gained Tucker's support but still been defeated by a single vote.

Many analysts had predicted that the BoE would shift closer to easing policy, but that a commitment to further QE was marginally more likely to be delayed beyond today's meeting.

In the two days leading up to the MPC decision, the pound fell by 1.1% against the dollar as the possibility of easing was priced in by the markets, but it regained almost half of the slump in the minutes immediately following the announcement.

"The news that the money presses will be allowed to gather dust for another month will halt Sterling's slide for now," according to Glenn Uniacke, head of options at foreign exchange broker Moneycorp, but "the pound's prospects still hang in the balance".

Beaumont said the MPC could favour targeted measures to boost growth over more asset purchases, and that extending the funding-for-lending scheme (FLS) to small- and medium-sized companies would be a way of achieving this.

BoE policy framework review

A Morgan Stanley research note, released on March 5, agreed this was a possibility, and said it could be included in the UK finance minister's budget announcement on March 20. Any FLS expansion would have to be co-ordinated with the Treasury, it said, "since taxpayers' money would be at risk".

The note, authored by Melanie Baker and Jonathan Ashworth, said the finance minister, George Osborne, could also make "minor changes to the wording of the MPC's inflation targeting remit" in the budget.

Osborne could seek to enshrine the notion of flexible inflation targeting in the remit, the note said, to "codify current MPC practice and give it increased legitimacy".

However, they said the most likely outcome is for Osborne to announce a formal review of the BoE monetary policy framework, and switch the measure of inflation that it targets from CPI to CPIH, which accounts for owner-occupied housing costs.