The British currency fell against the US dollar and euro yesterday as the governor of Bank of England (BoE) Sir Mervyn King considered injecting more money into the economy.
The fall in pound shocked investors, who expected policy makers to hold fire on further asset purchases.
Mervyn King and Paul Fisher, executive director for markets at the BoE, had supported policy maker David Miles in calling for an additional £25bn worth of asset purchases, according to the minutes of the monetary policy committee’s February meeting.
Members of the monetary policy committee (MPC), including the BoE governor, had in recent times appeared to lose faith in the ability of the bank’s gilt purchases to revive the UK economy.
Paul Robson, currency strategist at RBS, told the Financial Times: “People weren’t expecting the Bank to go down the QE route again. It smacks a little bit of desperation.”
Geoff Kendrick at Nomura told the Financial Times: “The market is getting on board with the possibility of structurally higher inflation. You’re opening up the possibility that foreigners exit gilts and the currency – this could be just the start of the sell-off.”
The yield on the 10-year benchmark government bond fell as low as 2.08 per cent immediately after the minutes of February meeting were released, but then recovered to trade at 2.19 per cent by late afternoon, roughly flat on the day.
Kevin Adams, director of fixed income at Henderson Global Investors, told the Financial Times: “Gilts were first on fire and then they sold off. It was a bizarre move.
As per the minutes, some committee members were confident that by supporting asset prices and lowering longer-term interest rates, more quantitative easing could help the UK economy boost exports.
The committee also considered purchases of assets other than gilts and further interest rate cuts, although all members voted to keep the BoE’s main rate on hold at 0.5 per cent. “The committee had noted drawbacks with each of these options in the past; those drawbacks remained,” the minutes said.
Monetary policy has been on hold since July 2012. The BoE has already bought £375bn-worth of gilts.
The pound has already come under pressure due to Britain’s referendum on EU and change of governor in July.