Pound and gilt yields slide as Bank of England pledges to buy £50bn more

Pound and gilt yields slide as Bank of England pledges to buy £50bn more

Money and currency markets were sent reeling after the Bank of England surprised the City by unexpectedly extending its programme of Quantitative Easing (QE) by £50bn.


By Edmund Conway, Economics Editor
Published: 5:54AM BST 07 Aug 2009

Far from bringing its programme of bond-buying to an end, the Bank's Monetary Policy Committee has extended it beyond the initial £150bn ceiling agreed with the Chancellor.

The Bank said it planned to increase the scale of its programme to £175bn over the next three months, buying up a further chunk of the UK sovereign debt market. As expected, it also left the Bank rate on hold at 0.5pc. The move sent the pound more than a cent and a half lower against the dollar to $1.6801, although sterling strengthened against the euro, whose guardian, the European Central Bank, also left its key rate on hold at 1pc.

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The announcement caused a further flurry in gilt market, where yields dropped at one point by more than 20 basis points, before settling at just above 3.7pc.

So much of the gilts market does the Bank now own that, in a landmark move, it also agreed that it would temporarily lend out gilts through the Debt Management Office to ensure that banks are able to close out positions as necessary.

The Bank has also suspended its purchases of four particular maturities of gilts after it emerged that it had bought as much as 70pc of their total issue. In a further sign of the rate at which it is exhausting the gilt market, the Bank will also start buying gilts of both shorter and longer maturities than the 5 to 25 year set it was originally buying.

Danny Gabay of Fathom Consulting said the news "reflects the fact that the Bank has to all intents and purposes 'cornered' the market for certain Gilts or bonds, to which market participants may still need to have access. Innocent enough - but it makes the charge that the whole [scheme] is an elaborate smokescreen for monetising the government's ballooning deficit even harder to refute.

"So, while we welcome the news of an extension to the asset programme, we would once again urge the MPC to consider a much wider range of assets to purchase than government bonds."

Yesterday's decision means that the Bank will soon own almost half of the entire gilts market, currently worth around £400bn, raising further questions about the Government's reliance on the QE programme to keep its financing under control.

Former Bank policymaker Sushil Wadhwani said he suspected the Bank's enthusiasm for QE could store up problems next year as attention focuses on the creditworthiness of various countries around the world.

"It seems to me that with the economic indicators bouncing they didn't need to take the risk [of extending QE], though I don't think it will do a lot of harm at this stage."

http://www.telegraph.co.uk/finance/financetopics/recession/5984999/Pound-and-gilt-yields-slide-as-Bank-of-England-pledges-to-buy-50bn-more.html