The British pound took a tumble this morning after the Bank of England (BOE) defied market expectationsand expanded its asset purchase plan (aka quantitative easing, or QE) by an additional GBP 50 bln to a maximum of GBP 175 bln.
With generally improving economic data in recent months, the expectation was that the BOE would either stop at the 125 bio pounds of QE already done or at least pause before deciding whether to finish out the GBP 150 bln allotment.
That they went ahead with a GBP 50 bln increase unnerved traders, who took it as a sign that the BOE foresees more entrenched deflationary pressures and a weaker outlook than previously thought.
Quantitative easing is frequently viewed as short-hand for printing money and is typically seen as a negative for the currency of any country pursuing it.
That was certainly the case today as the pound has fallen by about 1.2% against the USD and about 1.0% against the euro since the BOE announcement at 0700EDT. An additional GBP 50 bio of government borrowing (about $85 bln) may not seem like much to us in the U.S., but it's a significant amount relative to the size of the U.K. economy. The additional BOE balance sheet expansion will increase already heightened concerns about U.K. debt levels and fiscal stability, which should add to pressure on the pound. About the only GBP-positive element is that the BOE said it would expand its purchases of long term bonds, drawing in international demand for gilts, and with it demand for pounds to pay for them.