Pound firms after Bank restrained in raising QE

LONDON (Reuters) - Sterling jumped to a two-week high against the dollar on Thursday after the Bank of England expanded its quantitative easing programme by 25 billion pounds, confounding some analysts' expectations of a bigger increase.

The announcement helped the pound recover losses made in early trade, when traders had been divided on the size of any increase in the asset-buying plan, if the bank extended it at all. The Bank left interest rates unchanged at a record low of 0.5 percent, as expected.

A Reuters poll had shown that two-thirds of analysts had predicted the Bank would expand its asset-buying scheme, with the consensus being an increase of 25 billion pounds. Some in the market had forecast a 50 billion pound increase.

Analysts said the pound rallied as market participants were relieved the Bank did not take more drastic action on quantitative easing, and on the view that it may hold off from implementing aggressive stimulus through the end of the year.

"Some in the market expected 50 billion pounds, and so 25 billion was seen as less aggressive," said Chris Turner, currency strategist at ING in London.

"The market has more transparency on UK rate policy, just 25 billion more in QE, nothing more drastic about that."

Sterling jumped more than a full U.S. cent to $1.6637 after the announcement, hitting its highest in two weeks. By 2:41 p.m., it had pulled back to $1.6550, slightly up on the day.

The euro fell more than half a penny to the day's low of 89.31 pence.

The single European currency trimmed losses to trade around 89.75 pence after European Central Bank President Jean-Claude Trichet said extra liquidity measures taken by the central bank would be phased out in a timely manner.

The comments came after the ECB held rates at 1.0 percent, underlining a deepening divergence in monetary policy as some central banks begin to consider phasing out stimulus measures while the Bank continues to prop up the UK economy.

BOE OUTLOOK

The Bank's decision raises the volume of its asset-buying programme, which began in March, to 200 billion pounds.

The central bank said it had increased its target because any economic recovery was likely to be slow, adding that it would take three months to work through the additional 25 billion pounds.

Some analysts said Thursday's top-up may be the last.

"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.

Speculation of a big increase in QE had mounted after a surprise fall in UK economic growth in the third quarter, although the market's view of the policy outlook was muddied after stronger-than-expected readings of UK manufacturing and services sectors activity.

Adding to the view that the economy was improving, data earlier on Thursday showed British industrial output rose in September at its fastest pace since July 2002.

While many central banks are seen keeping rates low well into 2010 -- the Federal Reserve on Wednesday said U.S. rates would stay low for an "extended period" -- analysts expect the Bank will lag other central banks in eventually raising rates.

This view has battered sterling all year, pushing it down nearly 13 percent against the dollar.

With the Bank meeting over, analysts said the market's next focus was on the bank's quarterly inflation report next week, which they said would shed more light on the medium-term outlook for inflation, the key driver of the Bank's monetary policy.

(Editing by Nigel Stephenson)