Bank of England goes Quantitative

After cutting rates to 50bps, the Bank of England announced that it will directly purchase debt instruments for up to 150 billion pounds. This was expected given the signals from the MPC in the last two months and the continued freeze in credit markets.

This is actually a half step to full quantitative easing because short-term rates have still stayed high even with all of the exiting easing. The MPC is taking the place of banks which have reduced lending since their balance sheets have gotten trashed. The MPC already has a commercial paper program to swap CP with money raised in the UK Treasury bill market.

We now have the US, Japan, and great Britain on quantitative easing programs. This should continue as we move through the year as cuts in short-rates have driven rates down to zero. There are some rel risks with this credit quantitative easing where the central bank takes on credit risk. For example, the SNB reported a loss after taking on UBS assets for its bail-out.

The BOE easing is much needed and will have a positive effect but this will do nothing to support the currency in the short-run. The pound is trading near lows at 1.41.