The Bank of England left interest rates on hold at the record low 0.1% and increased the size of its asset purchase programme by £100bn to £745bn. Although largely in line with expectations, the expansion of the QE programme was a little less than some of us had anticipated, and indeed was really the bare minimum to satisfy the market. The BoE said it stands ready to increase QE if required – it may need to this autumn. The Old Lady could have been a little bit braver here and expanded the envelope more.

The Bank said it can conduct asset purchases at a slower pace, and that the programme would be completed by the end of the year, which seems to be taken as a positive for sterling as it implies a degree of hawkishness vs expectations. The lack of any chatter about negative rates also lifted the pound off its lows. But by send time cable was still close to the LOD again – there is a degree of calm about the BoE that is slightly at odds with its major peers like the Fed and ECB. The MPC appears a little too relaxed about all this.

Gilt yields moved higher and sterling rose off the lows. 2yr gilt yields spiked, turning positive at one stage having traded around -0.075% ahead of the announcement. GBPUSD dropped to the lows of the day ahead of the announcement but bounced off lows around 1.2475 to touch 1.2550 before paring gains a little. Cable remains stuck within the recent range between 1.2450 (the 50 per cent retracement of the bottom-to-top rally from the May low to the Jun high.) and the 200-day moving average just above 1.2690 that sparked the run lower since Tuesday.

On inflation, the MPC noted that while the decline in oil prices has been very important in the drop in headline CPI figures, a ‘sharp drop in domestic activity is also adding to downward pressure on inflation’. As a result, inflation is expected to fall further below the 2% target in the coming quarters, largely reflecting the weakness in domestic demand.

On the economy, the MPC thinks the downturn in the second quarter will be less severe than it estimated in May. However, we know that the initial rebound is the easy bit; getting back on the previous trend takes a lot longer.

In particular the Bank seems to be very aware of labour market stress, noting that ‘there is a risk of higher and more persistent unemployment’… and that the ‘economy, and especially the labour market, will therefore take some time to recover towards its previous path’. The Bank will need to cope with a significant increase in unemployment as the year progresses and will require to take more aggressive action.