QE2 sees stocks surge as pound drops sharply

MARKETS were rocked yesterday after the Bank of England announced its even higher than expected extension of its quantitative easing.

Stocks soared in afternoon trading, the FTSE closing a whopping 3.7 per cent higher on the day, at 5291.26.

Yields on government debt initially plummeted on the news of the Bank’s extra £75bn of asset purchases. Yields on 10-year notes fell off a cliff, dropping from over 2.35 per cent to under 2.23 per cent in minutes of trading.

Yet gilts slipped and yields recovered in later trading, as a rosier economic outlook saw investors move to riskier asset classes.

Sterling dropped like a stone after the Bank’s announcement, falling from over $1.55 to $1.53, touching its lowest rate against the dollar for over a year. Yet it recovered to end over $1.54.

The Bank of England confirmed that it would start with the first gilt purchases of its new round of quantitative easing next week, buying £1.7bn worth on Monday, Tuesday and Wednesday.

Monday will focus on three to 10 year gilts, Tuesday on those 25 years and longer and Wednesday on 10-25 year gilts. The Bank said it would not buy any of the eight per cent 2021 gilt, the 3.75 per cent 2021 gilt or 4.25 per cent 2039 gilt.