Monday June 1, 03:42 PM
SCENARIOS-BoE to keep pace of monetary easing steady in June
By Christina Fincher
LONDON, June 1 (Reuters) - The Bank of England is unlikely to change either interest rates or the pace at which it is pumping money into the UK economy at its policy meeting this week.
However, there is a small chance that BoE policymakers will raise their target for quantitative easing for a second month running. They may also request a higher upper limit for bond purchases from the government, giving them more firepower to use at a future date if needed.
Britain's central bank has kept its key lending rate at a record low 0.5 percent since March when it indicated conventional policy had reached its limit and unorthodox measures were needed to kick-start the economy.
Since then it has used unfunded asset purchases as its main policy tool, buying gilts at a rate of around 25 billion pounds a month to lower long-term borrowing costs and get credit flowing more freely again.
Last month, the BoE raised the target for its asset purchase programme from 75 billion pounds to 125 billion -- 25 billion pounds short of the 150 billion pound total that the government has authorised.
NO CHANGE TO RATES/QE TARGET
Most analysts expect the Monetary Policy Committee to keep its benchmark rate at 0.5 percent when it announces its decision at 1100 GMT on Thursday, and to stick to its current 125 billion pound target for quantitative easing.
Probability (LSE: PBTY.L - news) : Very high
Market impact: Minimal as scenario fully priced in.
BOE RAISES QE TARGET TO 150 BLN
The central bank could decide to raise its target for quantitative easing by a further 25 billion pounds to 150 billion pounds, the upper limit authorised by the government.
The BoE's quarterly GDP and inflation projections, published in early May, indicated that further monetary stimulus was likely to be needed to put Britain's economy on a sustainable recovery track. However, BoE policymakers voted to raise the QE target only last month, so it might seem strange to vote for another increase so soon.
Probability: Unlikely
Market impact: Gilt prices would be supported but the overall impact may be muted since the extension would be relatively small and uncertainty about the longer-term outlook for QE would remain.
BOE ASKS GOVERNMENT TO RAISE QE LIMIT
BoE policymakers could call on Governor Mervyn King to ask the Chancellor of the Exchequer (finance minister) to authorise a higher limit for quantitative easing. Minutes to last month's MPC (A050540.KQ - news) meeting noted that 'the Committee would ask the Governor to write to the Chancellor seeking an increase in that limit should economic conditions require it'.
Nevertheless, there is no rush for such a move since the BoE is unlikely to reach the existing limit until the end of August.
Probability: Moderate risk
Market impact: An early extension of the upper limit to QE would reinforce expectations that the BoE intends to continue its gilt purchases beyond August. Gilt yields would fall, equity prices would be supported but worries about money supply expansion could temporarily hurt sterling's recent recovery.
BOE COMMUNICATES OUTLOOK SHIFT
Since the BoE's last meeting, optimism has grown that Britain's economy has passed the deepest point of the recession. Equity markets have rallied, money market strains have eased and forward-looking indicators suggest the pace of contraction is slowing.
If the BoE wants to communicate a change in its thinking, it could word its statement to indicate that recovery may come sooner than it previously thought.
This would signal to markets that it is unlikely to extend its quantitative easing programme and may move to tighten monetary policy sooner than is currently anticipated.
Probability: Very unlikely
Market impact: Sterling would jump, extending its impressive rally over the past month. Equities would also be supported. Gilt prices could tumble, potentially sending benchmark yields through chart resistance to this year's high.
Keywords: BRITAIN BOE/
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