Bank of England quantitative easing decision today

Publication date: 7 June 2012
Author: Moneycorp

Researchers have discovered that satellite navigation systems are a hazard to road safety. Scientists at Lancaster University and Royal Holloway found that sat-navs reduced drivers’ competence in that “they tended to drive faster, with more steering variations, as well as being less likely to notice pedestrians.” It would be interesting to run the same experiment to find out whether the pre-sat-nav method was any safer; gear lever in one hand, steering wheel and A-Z in the other.

But at least with either method there is a map to provide guidance. Spain’s government has no such advantage as it gropes its way towards what it hopes will be a no-strings-attached injection of EU funds directly into its troubled banks. As usual in EU affairs there is an element of brinkmanship. Spain is gambling that Brussels will meet its wishes in order to prevent the Spanish banking system falling off an uncharted cliff; Brussels is betting that Spain will take the government bailout if nothing else is on the table.

To move things along, Spain will auction €2bn of two- to ten-year bonds today. It will involve paying elevated rates of interest but, if the experience of Greece, Portugal and Ireland is anything to go by, they will be appreciably lower than anything achievable in a post-bailout environment. There should be no problem shifting the stock; Spanish banks are fully aware of the stakes and they can surely scratch together €2bn between them to buy the lot. The Spanish government will be hoping that a successful demonstration proves to the EU the benefit of keeping it out of the bailout basket.

The European Central Bank will not be taking part. At yesterday’s press conference President Mario Draghi made clear for the nth time that the responsibility for sorting out euro crises falls to politicians, not the ECB. He did allow, however, that at the Governing Council meeting there had been “a few” votes for a rate cut. Nevertheless, investors picked up on Sig. Draghi’s assessment that today’s situation was less serious than the post-Lehman crunch and they were inclined to favour the euro.

Bank of England announces its latest policy decision

Another central bank will be in the frame at midday when the Bank of England announces its latest policy decision. There can be little doubt that the Bank Rate will remain at 0.5% for a 40th month but there is considerable angst about a renewal of quantitative easing. The asset purchase programme has already soaked up €325bn of government bonds – about a third of the entire national debt. At last month’s meeting, although there was only one vote for more asset purchases, “the decision… was finely balanced”. That phrase is loaded with inference.

There are three things to watch today: the UK services sector purchasing managers’ index; the Spanish bond auction; and the Bank of England’s policy announcement. All three could affect the broad value of sterling and the answer to the QE question could affect it a lot.