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After the more dovish BoE minutes this morning, sterling has continued to soften, breaking below the 1.57 level against the dollar - marking a new low for the year vs. the single currency. The main surprise was that two members of the Monetary Policy Committee voted for a GBP 75bln increase in bond purchases under the Bank’s QE program. The extent of the sterling reaction reflects the fact that markets were wrong-footed, thinking that if anything the Bank was perhaps a bit more cautious on the need for further stimulus.
The need for a greater dose of quantitative easing from those that voted for it (Miles and Posen), stemmed from the view of greater spare capacity in the economy than generally envisaged, together with the risk of a “prolonged period of depressed demand”. As we’ve seen before, especially with the US, there have been false dawns along the road since the 2008-09 downturn and the Bank of England appears to be preferring caution, not least given the continued risks surrounding events in the eurozone. This is the correct approach in our view because recoveries from balance sheet-recessions, which involve deleveraging by either the corporate, household or government sectors (or a combination thereof) tend to take longer than nearly everyone expects.
