BOE Extends The Asset Purchase Program To 175B Pound

The Bank of England decided to keep interest rate unchanged at 0.5% but to extend the asset purchase program by 50B pounds to 175B pound. This was done as recession has been deeper than expected and after assessing the new set of economic forecasts, the existing stimulus plans and generation-low interest rate are not sufficient to overcome deflation.

In the accompanying statement, the central bank stated 'the recession appears to have been deeper than previously thought. GDP fell further in the second quarter of 2009. But the pace of contraction has moderated and business surveys suggest that the trough in output is close at hand. Underlying broad money growth has picked up since the end of last year but remains weak. And though there are signs that credit conditions may have started to ease, lending to business has fallen and spreads on bank loans remain elevated'.

We believe the BOE worried about employment and bank lending. Unemployment rate rose to 4.8% in the 3 months through May, the highest since 1995. There's possibility to further increase as companies continue cut headcount. Moreover, money supply M4 increased +3.7% in 2Q09 but it's almost half of +6.4% gain in the same period last year.

In the previous meeting, the BOE said that 'the Committee will review the scale of the program again at its August meeting, alongside its latest inflation projections'. With the 50B pound extension announced today, we believe downgrade in inflation forecast will be seen in the new set of forecasts.