BOE Preview: Focus on the Asset Purchase Program

The Bank of England will continue to keep its policy rate at 0.5%. However, the focus of the meeting is whether the central bank will extend the asset purchase program which was increased by 25B pound to 175B pound in August. The surprising contraction in 3Q09 GDP increased the likelihood of such an extension.

In August, the MPC expanded the asset buying program to 175B pound with the aim of achieving an inflation target of 2%. In the Inflation Report in August, policymakers stated that restocking should rebound in the second half of the year while the main concerns are sluggish housing and financial markets. However, these forecasts have failed to materialize so far. Housing prices have been rising but businesses continue destocking. Destocking was actually the key reason causing the -0.4% qoq contraction in 3Q08.

We believe the probability for the BOE to extend the program in November is 50/50. However, the central bank may need to consider the following issue before implementing the extension. Inflation has been stickier than the BOE had anticipated. While getting farther away from BOE's target, headline CPI still grew +1.1% on annual basis in September. Core CPI continued to rose +1.7% in September following a +1.8% growth in the prior month. Moreover, British pound has dropped +6% against USD since the last meeting. This should have offered helps to the economy.