"The Bank of England is extending its Quantitative Easing programme by £50bn from £125bn to £175bn.  This required the Chancellor to increase the level of permitted bond purchases from £150bn (of which the Bank has done £125bn) to £175bn.

"This action has surprised many analysts, some of whom had begun to expect that the MPC might suspend this policy given some recent improvement in the tone of economic data.

"The extra £50bn is expected to be invested over the course of the next three months.  This is a slower pace (around £16bn a month) than the pace at which the previous £125bn was invested (around £25bn a month on average), but the pace is probably less important than the quantum of new money which is being injected into the economy.  The full £175bn being over 12% of GDP.

"Analysts of the monetary data have recently voiced concern that the desired effect on money supply growth has not yet shown convincing signs of emerging and this may have weighed on the Bank's thinking.  The Bank itself has stated that the pace of underlying broad money growth has picked up since the end of last year but remains weak.  The Bank clearly feels that the continued process of deleveraging throughout the economy is likely to bear down on economic growth and on inflation. 

"This is a sensible move, since a pause or a complete cessation of QE, would have suggested that the Bank felt that the economy was beginning to regain self-sustaining momentum and it is clearly too early to make that assessment. 

"The Bank has broadened the maturity range of gilts that it will purchase under the scheme, to cover the whole maturity range.  Previously they were only buying gilts in the 5-25 year range.  The extension to over 25 year gilts has caused a sharp rise in the prices of these stocks (some 2.5-3%) since the announcement.  The perception was that this region had previously been avoided because of the risk of driving long yields down and potentially causing some worsening in pension fund deficits. 

"Having already purchased close to 40% (by value) of the 5-25 year area, however, it is possible that the Bank was concerned about liquidity issues and thus felt it had to extend the range of purchases.  Concerns about liquidity issues are also likely to be behind the announcement that the Bank, in conjunction with the Debt Management Office, will make a significant amount of the gilts purchased available for on-lending to the market.

"The action sends a strong message that the Bank remains concerned about the risks to the economy. At the same time, by showing its preparedness to ease policy further I feel this move seems likely to support asset prices and keep the market's optimism about recovery prospects intact."

NOTE

Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM) are both authorised and regulated by the Financial Services Authority and their registered address is 1 Grosvenor Place London SW1X 7JJ. They are both subsidiaries of Jupiter Investment Management Group Limited and the group is collectively known as "Jupiter". The above commentary represents the views of the Fund Manager at the time of preparation and may be subject to change and this is particularly likely during periods of rapidly changing market circumstances. Their views are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.