[DanRath]

The Bank of England MPC yesterday voted to keep the Bank Rate unchanged at 0.5% and the size of its asset purchase program capped at GBP125bn. There had been some expectation among economists that there would be an extension of the program primarily to prevent the asset purchase program from running out before the August meeting, during which the MPC will gauge the strength of UK economy and the outlook for growth and inflation. Although no explicit mention was made in today's announcement regarding the pace of asset purchases, economists believe that a reduction in the size of weekly purchases will be necessary for the program to run till the August 6 MPC meeting. GBP and bond yields jumped sharply yesterday in response to the MPC announcement.

Next month the MPC publishes its Inflation Report, which gives it the opportunity to thoroughly assess how well QE is working. There is nothing in the MPC's short statement that stops it from increasing the size of purchases then. In the short term, this suggests being careful about GBP, which is for the most part still largely in the hands of global risk tolerance. However, over the medium term, the risks are skewed toward policy being tightened earlier and more quickly than the market currently expects, for three reasons - 1) inflation has been regularly surprising to the upside, which is worrying for an inflation targeting central bank such as the BoE, 2) activity data have been picking up, and 3) monetary policy can be tightened and still being very supportive of demand. This supports the view for GBP appreciation in the medium term.