Bank of England’s money-printing program stumbles on second day of operations
As part of the quantitative easing program announced by Mark Carney last week, yesterday the Bank’s trading desk attempted to buy £1.17 billion worth of long-dated (those that last 15 years or more) UK government bonds from a group of investors including pension funds, insurance firms and commercial banks. Unfortunately for the BoE, there was a rather significant problem: the market refused to sell the allotted sum of gilts, effectively blocking the easing process entirely.
BoE blame summer markets for the shortfall, markets not so sure
Since then, the Bank of England has stated the root cause of the issue was merely the time of year, with market liquidity thin and volumes light as traders take their annual leave. No doubt this was likely to have been a contributing factor, but it’s hard to believe this would have resulted in a £50 million shortfall in bonds being offered to the Bank. If read pessimistically, yesterday’s events could be seen as an indicator that markets don’t hold much stock in the most recent wave of BoE policy and believe that if they hold onto their bonds for longer, the Bank will be forced to up their buying price in order to fulfil their £70 billion target. Gilt yields plunged following the failed reverse-auction, which prompted some minor and short-lived Sterling weakness as markets now focus on what could be a repeat performance at the next operation.
In order to avoid this embarrassing event happening again, the Bank could change tack and target shorter maturity bonds (those which last up to five years), which could flatter fixed term mortgage rates and further benefit the real economy. This would prove negative for Sterling in the short- to medium-term as the Bank would be conducting further of easing of policy by moving the goalposts that little bit closer.
The Bank will address the failed operation in a statement due at 9am BST.
Reserve Bank of New Zealand expected to pull the trigger this evening
Markets believe the New Zealand central bank will cut rates today, but there remains some dispute over the size of the cut. The median forecast is for the Bank to cut rates by just 25bps to 2.0%, but many see a deeper cut of 50bps on the cards, believing the Bank needs to take stronger action in order to lift inflation from its current depths of just 0.4%. As such, shying away from taking firm action (even easing by just 25bps) could result in a stronger NZD by the end of the day.