Sterling Steady as BoE Left Rates Unchanged, Expand QE by GBP 50b

Sterling remains steady after BoE did what markets expected, keeping rates unchanged at 0.5% and raised the size of the asset purchase program by GBP 50b to GBP 325b as "more likely than not that inflation would undershoot the 2% target in the medium term". In the accompanying statement, the bank noted that UK's recovery has slowed during 2011with slight contraction in Q4. The bank acknowledged recent improvement in business surveys but pointed to slowdown in Eurozone's market. The banks expected that with continued monetary stimulus, UK output growth will strengthen later this year. Regarding inflation, the bank expect CPI to "fall sharply" in near term as January 2011 drops out of the twelve-month comparison. Also contribution to moderation in inflation are energy price while "unemployment and spare capacity continues to restrain domestically generated inflation."

Released earlier today, UK industrial production rose more than expected by 0.5% mom in December while manufacturing production rose 1.0% mom. Visible trade deficit narrowed much more than expected to GBP -7.1b in December, hitting a 22-month low. Exported jumped 0.9% to GBP 25.6b while imports dropped -4.6% to GBP 32.7b.

Focus will turn to ECB meeting next.