Member Article

Bank of England provides welcome shot in the arm for FTSE

Yesterday’s upward trajectory in equity markets was extended this morning, as banking stocks and miners posted healthy gains on continuing hopes of a coordinated, Europe-wide plan to recapitalise banks. Following suggestions from Oli Rehn (the European Economic Affaird Commissioner) yesterday, hopes were augmented as Angela Merkel added to the voices calling for such action.

Risk sentiment was given a further boost as the Bank of England announced a further round of quantitative easing, known as QE2, at its midday monetary policy committee statement. Whilst the bank kept interest rates on hold at the record low of 0.5%, £75 billion worth of asset purchases were announced, ahead of the £50 billion that some analysts had expected. Whilst the news was positive for equities and bonds (10 year Gilt yields fell 0.1%), the decision highlighted the precarious state of the UK economy. Sterling fell 0.5% against the dollar and by 1% versus the euro,.

Attention soon turned to Europe, where the European Central Bank would announce its latest monetary policy decision through President Jean Claude Trichet’s last press conference before stepping down from the position. Markets learnt that interest rates were to be held at 1.5%, following two hikes earlier in the year, with rhetoric citing that greater inflationary pressure as sufficient to offset the growing economic risks. In the conference following the headline announcements, Mr Trichet admitted that there were “intensified downside risks” to the economic outlook. This paved the way for the reintroduction of covered-bond purchases and two long-term refinancing operations in an attempt to provide some support to the troubled banking sector.

The confidence boost by both central banks saw share prices rocket, especially those of banks and miners, with the FTSE 100 ending the day 3.7% higher, with a 189 point rise to 5291.

This was posted in Bdaily's Members' News section by John Dance .