MPC hold QE in the UK as Fed extends Operation Twist

Tom Tong21/Jun/2012Currency Updates

GBP

The Bank of England Minutes released yesterday revealed that MPC members had voted to keep QE on hold but with a much closer vote than previous sessions. The split of 5 – 4, with Mervyn King now in the pro QE camp, saw the pound slip as speculators factored in the increased likelihood of an extension of 50 billion pounds as early as next month. In the face of falling inflation and continued concerns over the developing crisis in the eurozone it seems further QE is likely sooner rather than later.

One positive for the UK economy is the falling unemployment levels as official figures released yesterday showed that in the three months to April unemployment had dropped for 8.4 to 8.2 %. The BoE also injected a fresh 5 billion of liquidity into the UK banking sector in the form of the Extended Collateral Term Repo facility. This essentially lends money to the banks at very low interest rates of around 0.5% plus premium. These loans can be secured cheaply against illiquid assets (student loan books for example) and should enable the British banking sector to maintain capital adequacy levels in the face of the potential ripples from the eurozone.

USD

The big news out of the US yesterday was the Fed’s decision to hold back on full blown QE in favour of extending the alternative stimulus package dubbed ‘Operation Twist’. In the face of a worse than expected outlook for the US economy, Ben Bernanke opted for an extension of Operation Twist which was set to end this month. The extension sees the Fed outlay 267 billion dollars on long dated securities (ranging between 6 and 30 year in expiry) and balance the scheme by selling the equivalent volume of short (3 year or less) treasury securities. This move saw the stock markets fall as traders had hoped for full blown QE and an expansion of overall bond purchases. The Greenback strengthened against sterling and the euro in the aftermath as positions factoring in full blown QE where unwound. Elsewhere President Obama urged the Europeans to ‘break the fever’ of the current debt crisis as ripples could cross the Atlantic and dragged the US economy backwards, no doubt hurting his prospect of re-election in November.

EUR

There was positive news for the euro yesterday as the beleaguered Greek politicians finally managed to form a government as Antonis Samaras (of the Greek conservative party) was appointed PM at the helm of a three party coalition. He is focused on keeping the Greeks in the single currency in exchange for a review of the draconian austerity measures implicit in the previous two bailout packages. The key battle ground will be over an extra two year window the coalition government want to fully implement the austerity measures, reducing the burden on the Greek electorate.

At the G20 meeting in Mexico, Angela Merkel has rubbished reports that eurozone leaders are intending to use rescue funds to purchase the debt of Spain and Italy. One solution to the funding worries of Spain and Italy would have been to use the existing framework around the EFSF to buy government bonds, suppressing increasing yields on the money markets. However, this position may soften as the week develops. In a positive development there was temporary relief for Spain and Itlay in the bond market yesterday as they had sucessful auctions of 10 year bonds with Spain’s yield dropping below the terminal 7% level and Italy’s yield dropping 15 basis points.

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Written by Tom Tong

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