Thursday, October 6, 2011

200 Billion Dollars

The Bank of England injects £75bn through quantitative easing (BBC)

The Bank has already pumped £200bn into the economy by buying assets such as government bonds, in an attempt to boost lending by commercial banks.

But this is the first time it has added to its QE programme since 2009. There have been recent calls for it to step in again to aid the fragile recovery.

The Bank also held interest rates at the record low of 0.5%.

On Wednesday, data showed the UK economy grew by 0.1% between April and June, which was less than previously thought.

"In the United Kingdom, the path of output has been affected by a number of temporary factors, but the available indicators suggest that the underlying rate of growth has also moderated," the Bank said in a statement.

"The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term.

"In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the committee judged that it was necessary to inject further monetary stimulus into the economy."

Sterling fell by almost two cents after the announcement to $1.5280, its lowest since late July 2010.


The CBI and the British Chambers of Commerce (BCC) business groups welcomed the Bank's move to expand the QE programme to £275bn, but said that on its own, its impact would be limited.

"This measure will help support confidence, but we need to recognise that its impact on near term growth prospects is likely to be relatively modest," said Ian McCafferty, the CBI's chief economic adviser.

"Only once the turmoil in the eurozone is resolved will confidence be fully restored."

David Kern, chief economist at the BCC, said: "Higher QE on its own is not enough and we urge the MPC [Monetary Policy Committee] to look at other radical methods.

"There is a strong case for the MPC to help boost bank lending to businesses by immediately raising its purchases of private sector assets."

The manufacturers' organisation, the EEF, said that the Bank's decision to act now, before the third-quarter estimates of GDP and its latest inflation forecast were released, "would indicate that members believed immediate action was warranted in order to head off a deteriorating growth outlook".

However, the National Association of Pension Funds (NAPF) is calling for an urgent meeting with the pensions regulator to discuss ways of protecting UK pension funds from the negative effects of QE.

QE tends to push down long-term bond yields, therefore reducing the return on the investments made by pension schemes.

"Quantitative easing makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase," said Joanne Segars, chief executive of the NAPF.

"All this will put additional pressure on employers at a time when they are facing a bleak economic situation."

Complementary actions

The governor of the Bank of England, Mervyn King, wrote to the chancellor earlier on Thursday, setting out the MPC's case for expanding the asset purchasing programme.

In his letter of response, in which he authorised the move, Chancellor George Osborne said: "I agree that an increase in the ceiling would provide the MPC with scope to vary the stance of monetary policy to meet the inflation target."

In his speech to the Conservative Party conference earlier in the week, Mr Osborne said that the Treasury would look into "credit easing" - a way to underwrite loans to small businesses who are struggling to get credit now.

He confirmed this in his letter to Mr King: "Given evidence of continued impairment in the flow of credit to some parts of the real economy, notably small and medium-sized businesses, the Treasury is exploring further policy actions. Such interventions should complement the MPC's asset purchases."

Asian stocks higher on ECB, Bank of England moves

By KELVIN CHAN, AP Business Writer – 3 hours ago

HONG KONG (AP) — Asian stocks climbed Friday after Europe's move to backstop troubled banks and Britain's plan to pump more stimulus into its fading economy gave a boost to confidence.

After a week of wild gyrations stemming from Europe's debt crisis, investors in Asia reacted positively to news that the Bank of England will turn on its stimulus taps and that the European Central Bank will offer new short-terms to banks that are facing difficulties securing funding.

Hong Kong's Hang Seng index leaped 3.5 percent to 17,778.34 after surging 5.7 percent the day before while South Korea's Kospi index jumped 2.9 percent to 1,760.31.

Japan's Nikkei index rose 1.4 percent to 8,640.34 after the country's central bank said the economy is "picking up" and predicted an eventual return to a moderate recovery.

Benchmarks in Taiwan, Singapore, Australia and New Zealand also advanced. Markets in mainland China were closed for a weeklong holiday.

"We're seeing a lot of buying today basically because markets have bounced off their lows so a lot of people are covering their shorts ahead of the weekend" before stock prices increase further, said Andrew Sullivan, a sales trader at Piper Jaffray Asia Securities Ltd. in Hong Kong.

Short sellers borrow a stock to sell and "cover their shorts" when they buy it back at a lower price, pocketing the difference when it is returned to the lender.

"There was positive news out of the U.K., out of Europe on the banking side certainly and that spurred a run on the U.S. banks being positive as well," Sullivan said.

European and U.S. bank stocks gained after the ECB and Bank of England announcements on Thursday. The moves gave hope to global financial markets and were a sharp turnaround from the beginning of the week, when stocks tumbled on fears that European policymakers were acting slowly and indecisively to contain the debt crisis.

The ECB offered new unlimited emergency short-term loans to the continent's battered banks, which have faced difficulties borrowing from each other because of worries about each other's financial stability.

The ECB will also buy up to euro40 billion ($53 billion) in covered bonds, an important source of funding for banks. But it held interest rates steady, disappointing some economists who had hoped for a cut.

On the same day, the Bank of England said it would pump another 75 billion pounds ($116 billion) into the country's stagnant economy, reviving an asset purchase program that injected 200 billion pounds from March 2009 to January 2010. The Bank's decision came earlier and was bigger than many economists had predicted.

A U.S. report later Friday on September employment will provide guidance on the state of the economic recovery. Investors are looking closely for any clues ahead of its release.

Piper Jaffray's Sullivan said that in a speech on Thursday U.S. President Barack Obama "criticized Europe for dithering over Greece and its banks."

"To some people that might indicate that jobs number is going to be worse than the market is expecting."

In currencies, the euro was marginally higher at $1.3430 from $1.3429 late Thursday. The dollar inched up to 76.62 yen from 76.61.

Oil prices rose, with benchmark crude for November delivery up 34 cents, or 0.4 percent, to $82.95. The contract jumped $2.91, or 3.7 percent, to finish at $82.59 per barrel in New York on Thursday. Brent crude rose 27 cents, or 0.3 percent, to $106.00 in London.

Copyright © 2011 The Associated Press. All rights reserved.

Markets respond sharply to Bank decision

By David Oakley, Capital Markets Correspondent

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Financial markets moved sharply in response to the Bank of England’s decision to launch a second round of quantitative easing.

Sterling and gilt yields fell and inflation expectations rose in what represented an initial success for the policy of buying another £75bn in gilts to stimulate growth.

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However, investors warned that the Bank may need to launch another round of QE to revive a lifeless economy that is on the verge of a double-dip recession.

Jim Leaviss, head of retail fixed interest at M&G Investments, said: “I think the Bank will go on doing QE until the economy starts growing strongly – and they may need to.”

Sterling fell to its lowest point against the dollar since July 2010 after the announcement of plans to buy gilts over the next four months, as many in the markets had expected the Bank to limit its purchases to £50bn and delay the announcement until November.

The pound immediately dropped 1.3 per cent to a 14-month low against the dollar. By the end of the London trading day, it had recovered some of its losses and was down 0.5 per cent to $1.5388.

Ten-year gilt yields fell to 2.23 per cent at one point, close to 100-year lows, according to Bank of England data. Two-year gilt yields fell to 48 basis points and 30-year yields dropped to 3.35 per cent – lows since 1989, or as far back as available data goes for these maturities.

Gilt yields ended the day higher for some maturities because of rising confidence in global markets, which tend not to favour UK government bonds that are seen as a haven and a so-called risk-off trade.

However, gilts sharply outperformed German Bunds in a sign of the influence of the Bank’s decision.

Inflation expectations also rose sharply as another stimulus from gilts purchases should boost growth and prices on the high street. Inflation expectations increased to 2.46 per cent annually over the next five years compared with 2.37 per cent the day before.

The question for investors is whether the fall in gilt yields will reduce borrowing costs for companies and encourage banks to lend more to small businesses. Doubts also remain over the effectiveness of the policy a second time round.

Gilts and sterling did not react as sharply as they might have because many in the market had expected QE, which means the policy stimulus may not drive yields or the currency much lower.

John Wraith, fixed-income strategist at BofA Merrill Lynch, said: “This is welcome in terms of the outlook for the economy, which needed the stimulus but the fact the Bank is doing it shows the trouble the economy is in. There is a real danger of a double-dip recession, which could see gilt yields and sterling fall lower. There comes a point where gilt yields become too low for comfort, implying a persistently subdued economy.”

And the DOW is just hanging at 11,000-- Sitting at 11 , 123 . 33

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