The Bank of England on Thursday surprisingly increased a bond-purchasing program while the European Central Bank cut interest rates, as neither central bank was ready to endorse the view that the economy is on the road to recovery.
In keeping rates at 0.5% but lifting its bond purchase total to 125 billion pounds ($189 billion) from 75 billion pounds, the Bank of England said the world economy remains in deep recession. Britain's government has authorized the purchase of a total of 150 billion pounds worth of bonds.
"Output has continued to contract and international trade has fallen precipitously," it said.
World trade is down an annualized 44% in the three months ending February, according to the Netherlands Bureau of Economic Policy Analysis, whose data was cited by Bank of England Monetary Policy Committee Member Andrew Sentance in a recent speech.
The European Central Bank meanwhile cut interest rates by a quarter point to 1%, a new low for the Frankfurt-based central bank that sets interest rate policy in the euro zone.
The ECB is responding to an economy that may slump 4% this year, according to European Union estimates for the 16-nation region. The German economy, the euro-zone's largest, may shrink 5.4%.
Attention now turns to a press conference at 8:30 a.m. Eastern where European Central Bank President Jean-Claude Trichet may detail possible "non-standard" measures to bolster the European economy.
The ECB is likely to extend the maturity of its refinancing operations to 12 months or more from six months. But it's not expected to follow the Bank of England or the U.S. Federal Reserve in buying government bonds.
Under quantitative easing, the Fed and the Bank of England have created new money electronically that's used to purchase assets in an effort to boost the money supply, increase spending, bring down interest rates and avert a deflationary spiral.
Unlike in the United Kingdom and the United States, the euro-zone economy is more dependent on bank-based lending rather than credit markets. The ECB has focused on providing liquidity to the banking sector by offering unlimited loans.
"The bottom line is the euro, the European Central Bank [and] the banking system in Europe is a completely different beast compared to the Anglo-Saxon model," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
Bank of England surprise
U.K. stocks held onto their outsized gains after the Bank of England decision, with the FTSE 100 up 2.5% as fears surrounding the global banking system ease.
But the British pound turned lower, falling 0.3% to $1.5069.
Yields on 10-year U.K. government bonds, which earlier had reached nearly a three-month high of 3.75%, pared gains to 6 basis points and were at 3.66%. Yields move in the opposite direction to prices.
The Bank of England's actions show the central bank is determined to drive yields lower with its quantitative-easing program.
"Government gilt supply of 220 billion pounds this fiscal year will need to be offset by more BoE purchases," said Kenneth Broux, an economist at Lloyds TSB Corporate Markets.
"The problem is what does the BoE do when stock markets continue to rally, and investors switch out of government bonds and yields carry on rising? I think it will be hard for them to stop the tide if the green shoots turn out to be real."
The Bank of England did note signs of optimism.
"There is considerable economic stimulus stemming from the easing in monetary and fiscal policy, at home and abroad, the substantial depreciation in sterling, past falls in commodity prices, and actions by authorities internationally to improve the availability of credit," the central bank said.
But it also said the "timing and strength" of a recovery is uncertain.
Since its last decision, the data coming out of the U.K. has been bleak, with GDP data showing the U.K. economy shrinking at an annualized 4.1% rate during the first quarter and the unemployment rate climbing 0.6 percentage points to 6.7%.
"The degree of spare capacity in the economy has increased and the loosening in the labor market has contributed to a sharp easing in pay pressures," the central bank said.
