June 25, 2012
The Fed will extend its Maturity Extension Programme (operation twist) for another 6 months until year end. It intends to switch USD 267 bn of treasuries with maturities up to 3 years into maturities of more than 6 years (the volume of the 1st programme was USD 400 bn). The BoE has activated its “Extended Collateral Term Repo Facility”, auctioning at least GBP 5 bn per month with a maturity of six months. A “funding for lending” scheme has also been announced (size could amount to GBP 80 bn or 5% of GDP), which would allow banks to use lower-quality collateral such as loans to households or corporate in exchange for BoE funding.
In both cases policymakers are concerned about the recent weakness in their economies. The measures aim to reinvigorate anaemic credit growth, but their impact should be limited given risk aversion, the lack of credit demand and the declining economies of scale of unconventional policy measures. More is to come: The BoE strongly indicated at least another GBP 50 bn of QE and will most likely cut its key rate to 0.25%. The Fed kept its cards somewhat closer to its chest, but signalled its readiness to take further action as appropriate to promote a stronger recovery. The weaker preliminary June ISM and the slump in the Philly Fed index suggest that the Fed could be taken up on its promise pretty soon. We do not expect the ECB to remain on the sidelines either and expect a rate cut at the July meeting and most likely a further expansion of its balance sheet.
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