Bank of England surprises markets by keeping QE total steady

The Bank of England surprised markets on Thursday by keeping its quantitative easing program unchanged at 125 billion pounds, boosting speculation that it may soon finish its unprecedented asset-buying scheme.

But analysts said the central bank tends to make most big decisions in months when it publishes new quarterly economic forecasts, so it may still choose next month to add to the QE scheme, which aims to combat Britain's deep recession.

This could be a pause, or it could represent a halt for the Bank of England's gilt purchases, said Stephen Lewis, economist at Monument Securities.

Gilt futures fell more than a full point and sterling rose around half a cent against the dollar as investors bet that the BoE is now done with QE, even though analysts were hedging their bets.

With the economy on course to shrink at its fastest pace since World War 2 this year, markets had widely expected the BoE to increase its asset purchase target by 25 billion pounds, allowing it to continue to pump money into the economy until August when it releases the new forecasts.

But the bank's Monetary Policy Committee said it would maintain the current program at 125 billion pounds for now -- the total is due to be completed over the next month -- and review the operation at its August meeting.

We suspect that the BoE may use the cover of next month's Inflation Report to examine in more detail how well it is going and whether they should expand the program up to the 150 billion pounds level or perhaps, as we suspect, look to expand it beyond that amount, said James Knightley at ING.

Britain's economy is no longer in freefall, as it was at the turn of the year, but bank lending remains weak and a sustained recovery is far from assured, and so policymakers have said it is too early to declare victory over the recession.

Unemployment is still rising, manufacturing is still contracting and the recent pick-up in services activity may be little more firms re-stocking after running down inventory.

From a macroeconomic point of view, leaving a gap in asset purchases between late July and early August, when the Bank of England will have more data, will do little harm.

Median expectations from a Reuters poll last week suggested the bank would spend 150 billion pounds on the QE program. Only 16 of 41 economists said the bank would surpass the amount currently allowed.