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Bank to cap QE at 175 billion pounds

Source: Reuters - Tue 25th Aug 2009

The Bank of England will cap its government bond purchase programme at 175 billion pounds and the plan will ultimately prove successful in revitalising a battered economy, a Reuters poll of economists found.

The snap poll was taken after minutes from the central bank's latest meeting showed Governor Mervyn King and two others on the nine member Monetary Policy Committee wanted to raise its programme to 200 billion pounds, rattling markets.

About a third of the respondents who answered the question 14 of 41 said that King would eventually get his wish, and possibly more. That mirrored the 6-3 split on the MPC itself.

The highest forecast saw the MPC eventually spending 250 billion pounds on its quantitative easing programme.

The minutes on Wednesday surprised financial markets, which had expected a unanimous vote in favour of a 50 billion pound extension to the 175 billion now planned.

"At this stage, the odds are tilted towards another 50 billion pounds of QE in November" said Ross Walker, UK economist at RBS.

The programme will eventually prove successful, economists say. The poll found 34 of 41 saying the QE programme would eventually be very effective or effective. Only five said it would be ineffective and just two said very ineffective.

A poll taken at the beginning of July produced similar results, with 47 of 55 saying the plan would at least prove effective. 

Yet while economists agree on the eventual success of the plan they were not united on how well the Bank of England had communicated with the market.

Seventeen of 40 said the central bank's communications strategy had been effective and one very effective, but 20 said it had been ineffective and two very ineffective.

In a poll taken earlier this month, 19 of 44 said the bank's communications strategy had been effective.

"The surprises are partly substantive the Committee has maintained a more cautious view of the economy for longer than we think is required" said analysts at Credit Suisse. "They are also partly presentational. In our view, its communication has been remarkably poor recently."

While confusion has reigned over the bank's QE strategy the path for rates remains clear. The MPC has slashed 450 basis points from rates since October in an effort to rejuvenate the economy and median forecasts show them on hold at 0.5 percent until July at least.

This is in line with a poll taken earlier this month.

"Although rate hikes are likely to be part of the BoE's exit strategy, today's MPC minutes suggest rates could remain at the current low level for quite a while" said Frederik Ducrozet at Calyon.

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