The Bank of England paused its 200-billion pound ($317 billion) bond purchase program, deciding not to expand it for the first time since starting its asset-purchases in March last year. It also kept its benchmark rate at 0.5%. The Monetary Policy Committee, in its statement, said that the considerable stimulus from the easing in monetary policy, the lower level of sterling, and the recovery in UK export markets should together support domestic activity. Therefore, further quantitative easing was not necessary at this time and the purchases already made as well as the low bank rate should provide substantial monetary stimulus to the economy for some time to come. The MPC did leave open the possibility of further purchases if the outlook warranted them. The scenario feared in that case would be if the economy fell into a double-dip recession. The MPC also has to be concerned about recent inflation readings which have been on the rise, with December’s CPI reaching 2.9% and expectations for January’s price pressures to rise even further.

From the Release: “The considerable stimulus from the easing in monetary policy, the lower level of sterling and the recovery in UK export markets should together support domestic activity.  But credit conditions are likely to remain restrictive, while the need to strengthen public and private sector finances will also weigh on spending.  On balance, the Committee believes that the prospect is for a gradual recovery in the level of activity.  The recession has probably impaired the supply capacity of the economy, but the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come.  That is likely to mean that inflation will fall below the target for a period.”

The Bank’s decision may be the last shift in policy before the general election, which may take place on May 6th. There is considerable uncertainty about the UK fiscal position, as the next government will have to take appropriate steps to cut the record UK budget deficit.

The Pound slid overnight prior to the announcement, with the GBP/USD falling from 1.59 to 1.58 in the European session, extending gains by the greenback from yesterday’s trading. Most economists had prediced the bank pausing its asset-purchases, but the Pound still got a boost in the wake of the bank’s decision as it managed a counter rally to the 1.5885 level.  However that counter rally fizzled, and the pair was back trading below 1.5850 at the NY open.