Bank rolls over QE while Draghi hints at rate cut

Ben Southwood
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THE BANK of England yesterday announced it would reinvest maturing assets in the gilt market, to keep its asset portfolio in line with its £375bn target.

The rate-setters kept interest rates at their all-time low of 0.5 per cent for the 47th month, and maintained the size of the quantitative easing (QE) gilt-purchase programme at £375bn.

With £6.6bn of gilts maturing, this required a reinvestment of funds, a fact the Bank announced in a press release – unusual except when policy is changed.

Andrew Goodwin, economist at ITEM and Oxford Economics, said the decision could not be described as QE on the sly – according to Goodwin it would have been secret monetary tightening if the Bank had not kept the programme at £375bn.

But the release did reveal that the Bank had accepted inflation would stay above target for two years – clearly showing that rate-setters are not focused solely on inflation.

In an unusual statement for a month in which policy was left unchanged, the Bank said “the UK economy is set for a slow but sustained recovery in both demand and effective supply.”

And in Frankfurt, European Central Bank president Mario Draghi said he will monitor the economic impact of a strengthening euro, feeding expectations the climbing currency could open the door to an interest rate cut in the Eurozone.

After the ECB left its main interest rate at 0.75 per cent yesterday, Draghi said the exchange rate was near to its long-term average but went further than many analysts had expected.

“The appreciation is, in a sense, a sign of return of confidence in the euro,” Draghi told a news conference.

“The exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained and will alter our risk assessment as far as price stability is concerned.”

His comments sent the euro falling sharply against the dollar and yen.

Carsten Brezeski at ING said of the president’s comments: “Draghi successfully tried to talk down the euro exchange rate and opened the door for possible policy action.”