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Bank of England Monetary Policy – Further Easing in November


Posted: Friday, November 13th, 2020

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One of the much-awaited events in the currency market this month was the Bank of England monetary policy decision. The market expected more easing, and the bank delivered. However, it eased more than expected, taking many by surprise.

Last week’s Bank of England’s decision came in the context of the current bank rate already being close to zero. More precisely, as a response to the COVID-19 pandemic, the central bank lowered the bank rate to 0.1. Moreover, it engaged in new rounds of quantitative easing – just like other major central banks did.

Much speculation existed in the market regarding lowering the bank rate below zero. While the Bank of England monetary policy tools may include negative rates, it appeared that the central bank chose to postpone such a decision. In any case, it does not rule out negative rates, like the Fed in the States does.

Perhaps next year when it will have more clarity about Brexit?

Bank of England Monetary Policy

Quantitative Easing – Key to Bank of England Monetary Policy

The Bank of England uses Quantitative Easing (QE) to lower the interest rates on the bonds. Also called yields, lower interest rates are the result of higher bond prices. Therefore, by buying the bonds, the bank puts pressure on their price and lowers the yields. As a consequence, businesses and households have an easier time borrowing money at cheaper rates.

What took the market by surprise was the size of the new purchases announced in November. Instead of the GBP100 billion expected, the bank announced GBP150 billion.

It is not the first time this year when the Bank of England expands the QE program. It did it twice so far – in March and June. The new GBP150 billion increase in November aims at bringing inflation to the 2% target in the next couple of years. If this size of the QE is enough to achieve the purpose, it remains to be seen.

How Did the GBP React?

Sterling saw the move as proactive. As such, instead of dropping due to the dovish surprise, it actually rallied. The EURGBP broke below 0.90 a couple of days after the Bank of England monetary policy announcement, and cable recovered 1.30 and beyond.

However, as the market priced in more QE, the Bank of England’s decision did not have much of an impact. On top of that, the monetary policy decision came in the context of an unknown outcome of the U.S. elections at the time.

All in all, the Bank of England monetary policy easing comes to confirm the trend among peer central banks toward the end of the year. The Reserve Bank in Australia eased some more at the start of November. Moreover, the ECB already pre-committed to a new round of easing in December. Furthermore, the Fed plays the same game – expected to ease in December too.

Therefore, the name of the game is flooding financial markets with cheap money until the pandemic is behind. It sounds like the normal (and logical) decision to support both businesses and households.

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