The Bank of England (BOE) will hold a policy meeting on Thursday November 5th. At the October policy meeting the BOE elected to maintain the current level of interest rates at a record low 0.5% and asset purchases at £175bln.  The BOE indicated that they would keep the scale of the asset purchase plan under review. Two recent UK economic reports generated concern about the outlook for the UK economy and may encourage the BOE to expand its asset purchase plan at the November policy meeting. UK Q3 GDP posted an unexpected 0.4% decline. The trade had expected a rise of 0.2% for Q3 GDP. The decline in GDP suggests that the BOE asset purchase plan has yet to boost the UK economy out of recession. UK manufacturing output fell by 1.8% in August. The decline in manufacturing output adds additional doubt about the UK economic recovery. The BOE must also take in consideration today's report of continued UK bank troubles. The UK government announced Tuesday that it will take a bigger stake in RBS and Lloyds Bank. It is not clear if he BOE will hold its asset purchase plan unchanged or elect to expand the purchase plan by £25bln or £50bln at Thursday's policy meeting. Today's Wall Street Journal reports that a majority of economists expect the BOE to hold policy steady and expand its asset purchase plan by £25bln. Based on the UK Q3 GDP report it may be difficult for the BOE to refrain from adding additional stimulus. Recent GBP price action has found that the GBP benefits from BOE decision to hold the level of asset purchases and weakens when the BOE elects to expand quantitative ease. Monday, the BOE's Blanchflower said that the BOE may expand its asset purchase program by another £50bln. The Sunday Times however carried a piece warning the BOE not to panic over the Q3 GDP report. GDP is seen as a lagging indicator. A Reuter's poll of 62 economists shows that 19 expect no change in BOE asset purchases, 22 look for an increase of £25bln and 21 look for 50bln. The impact of the BOE policy meeting may be limited as focus will likely quickly return to the direction of equities and risk sentiment. If the BOE elects to expand its asset purchases by more than £25bln we would expect to see a knee-jerk short-term selloff in GBP.

The European Central Bank (ECB) will also hold policy meeting on Thursday November 5th. No policy change is expected. At last month's policy meeting the ECB elected to hold monetary policy unchanged. In the press conference following ECB decision, ECB President Trichet indicated that interest rates were appropriate and he implied that the ECB is in no hurry to hike rates. The EU commission issued a report Tuesday which states that the EU economy is expected to recover in 2010 and 2011 with GDP growth expected at all 0.7% in 2010 and 1.5% in 2011. The EU commission expects EU 2009 GDP to contract by 4%.