LONDON The Bank of England expanded its asset-purchase programme by 25 billion pounds on Thursday, halving the pace at which it buys bonds and suggesting the scheme to revive Britain's recession-hit economy may be coming to an end.
Sterling shot up around a cent against the dollar and government bonds tumbled as many investors had expected a bigger expansion of the eight-month-old programme to buy assets, mostly UK government bonds, with newly-created money -- otherwise known as quantitative easing (QE).
"We suspect that this will be the final extension to the QE programme unless the economy suffers a major relapse in 2010," said Howard Archer, economist at IHS Global Insight.
The Bank, which also left interest rates unchanged at a record low of 0.5 percent as expected, said the bond purchases would take three months to complete as it has halved the pace at which the buying would be conducted.
Up to now the Bank undertook three gilt purchases a week but will now do two in one week and one in the next.
The QE programme started in March when the Bank first cut interest rates to 0.5 percent with a promise to buy 75 billion pounds of assets over three months. The scheme was then expanded by 50 billion pounds each in May and August.
Economists said any interest rate rises were still a long way off. The U.S. Federal Reserve this week also signalled rates would be kept ultra-low for some time to come and the European Central Bank on Thursday left borrowing costs at a record low of 1 percent.
But the Bank remains the one major central bank that is in easing mode. Rates in countries like Norway, Israel and Australia are already on their way up.
Analysts polled by Reuters last week had been split three ways on what the Bank would do this month. Some had said there would be no change to the QE total and others were split between a 25 or 50 billion pounds expansion.
The confusion was perhaps unsurprising given the recent mixed signals on the economy, something noted by the Bank itself in its statement accompanying the decision.
The British economy shrank by 0.4 percent in the third quarter, marking the longest period of recession since World War Two, according to official data, and contrasting with earlier recoveries in the U.S. and euro zone.
But at the same time many surveys are suggesting the economy has returned to growth. House prices are rebounding, consumer confidence is rising and data out just hours before the BoE decision showed manufacturing output rose at its fastest rate in seven years in September.
While the Bank noted an economic pick-up was in sight, it still believed the prospect was for a slow recovery which would bear down on inflation for some time to come.
"What they're saying in today's statement is that a high level of spare capacity in the economy means that a shift towards a tightening bias is a long way off, even if the economy emerges from recession in the fourth quarter," said Lena Komileva of Tullet Prebon.
(additional reporting by Fiona Shaikh, David Milliken, Christina Fincher, Keith Weir, Kylie Maclennan and Catherine Bosley)
(Editing by Ron Askew)