The Great Debate UK
from The Great Debate:
-- John Kemp is a Reuters columnist. The views expressed are his own --
The Bank of England's decision to continue with its asset purchase programme, or quantitative easing (QE), at the rate of 50 billion pounds per quarter in Oct-Dec, unchanged from Jul-Sep, shows bank officials are more worried about ending support for the recovery too soon than about risking inflation by leaving it too late.
The problem with QE is that you have to keep buying the same amount of assets each month to maintain the same monetary stance. With interest rates, the Bank can cut them and they stay cut. If asset prices drop with QE, it represents a tightening of monetary policy.
The Bank initially bought 75 billion pounds in the first 3 months (Apr-Jun) and then tapered this to 50 billion in the second three months (Jul-Sep) as the crisis engulfing the banking system and the rest of the economy eased. A cautious approach might have tapered the QE programme again to 25 billion in the final three months of the year before ending it entirely at the start of 2010. But the Bank opted to stick at 50 billion.
Critics point out that the programme has not achieved its announced objective of increasing bank credit and the amount of money in circulation. The rate of growth in M4, the broadest money supply measure, has risen only marginally. But that ignores the counterfactual of what would have happened to M4 in the absence of the programme -- it might have fallen sharply.
Chancellor Alastair Darling has ignored the first rule of holes: if you’re in one, stop digging. He could have produced a few motherhood-and-apple pie reforms of the banking system, to give the impression of activity. Instead, he has dug in, proposing an upgrade of Britain’s failed “tripartite” system of regulation.
The Monetary Policy Committee of the Bank of England has kept its key lending rate at a record low of 0.5 percent, last reduced in March 2009 when it indicated that conventional policy had reached its limit and unorthodox measures such as quantitative easing were to be used.
The Bank of England tells us that their 75 billion pound quantitative easing programme will start the banks lending again (despite the banks saying that they are already lending, this is not strictly true). The programme works by the Bank buying securities from the banks and then this money can be loaned to consumers. The question is, does and will this work? Is 75 billion pounds enough?
- David Kuo is director at The Motley Fool. The opinions expressed are his own. -
The Bank of England Monetary Policy Committee decided to leave interest rates unchanged at 0.5 percent in May. This came as no great surprise given that the Central Bank has already slashed interest rates to a level where further cuts would have made no discernible difference to the cost of money.
Not exactly shock and awe as the MPC keeps base rates on hold at 0.5 percent while the most recent financial surveys have been unanimous in expecting a no change decision for some time now. It was always going to be an MPC meeting to discuss whether or not to persevere with quantitative easing. The difficulty for the MPC is that it is too early to judge the effectiveness of the quantitative easing. Clearly the Bank of England would prefer to wait at least until it publishes new quarterly growth and inflation forecasts to explain how it wishes to proceed.
LONDON, April 23 (Reuters) – The UK Government needs to raise four billion pounds a week, every week, in the financial year to next April, to bridge the gap between its tax income and its spending.
– Neil Collins is a Reuters columnist. The opinions expressed are his own –
Quantitative easing is like drinking. Nothing much seems to happen at first, so you take a little more. As the warm alcoholic glow spreads over you, it feels pretty good, and surely another glass will make you feel even better. Stop soon enough, before you start feeling woozy, and there are no ill effects. Go on until you can’t stand, and the effects can be disastrous.
LONDON, April 9 (Reuters) – The Bank of England’s terse press statement announcing it will maintain overnight rates at 0.5 percent and continue the existing 75 billion pound quantitative easing (QE) programme gives no clue about whether the Bank intends to extend the programme when the first tranche of asset purchases are completed in June.
But officials will have to make a decision soon: unless they signal a commitment to extend QE, gilt yields will rise even further in anticipation that the major buyer in the market will withdraw.
The QE programme is dogged by ambiguity about its objectives (which a cynical observer might conclude is deliberate).
Officially, the aim is to prevent inflation falling below target by accelerating money supply growth, not manipulate the yield curve for government and corporate debt.
In this, the Bank’s avowed strategy is more conventional than the Fed’s ambitious efforts to determine the cost of credit for borrowers throughout the economy. It is a straightforward quantitative easing patterned on the Bank of Japan, rather than a credit easing patterned on the Fed.
If true, the measure of success is how much the money supply has been boosted at the end of the three month period; the Bank should be indifferent about whether ending QE causes yields and borrowing costs to rise.
So long as money supply has risen consistent with the inflation target, and the Bank can discern some green shoots of stabilisation if not recovery, officials can declare victory, end the programme, and keep the other 75 billion pounds of asset purchases authorised by the chancellor in reserve. Yields can be left to find their natural level.
But many suspect the Bank’s real objective is yield control — in which case it will have to announce another round of buy backs of gilts and corporate bonds in good time, well before the current programme is completed, to shape market expectations.
The results of the existing round have been unimpressive.
After falling initially, gilt yields are almost back up to the level they were at before the Bank’s foray into unconventional monetary policy.
The snag is that if the Bank stops buying, other investors will struggle to absorb all the new government paper on offer without a major increase in yield — pushing up borrowing costs for everyone, precisely what the Bank has sought to avoid.
The Bank’s dilemma is whether to push on (heightening fears about inflation) or call a halt (risking a spike in yields all the same).
Either way, the Bank needs to give the market, as well as the Treasury and the Debt Management Office, plenty of warning about its intentions.
(Editing by Richard Hubbard)
As expected, the Bank of England left the Bank Rate unchanged at 0.5 percent at the April meeting, the first unchanged decision since September 2008.
The accompanying statement was short and sweet. The Bank has accumulated 26 billion pounds of asset purchases and will take a further two months to complete the planned 75 billion pounds of purchases – see you next month!