Long-term UK government bond yields appear to have been suppressed by about 40 to 100 basis points by the Bank of England as a result of its unorthodox monetary policies, an International Monetary Fund study has calculated.
Interactive audio graphic explains how quantitative easing works and how this policy could stimulate the economy
But these policies have left the Bank holding a significant chunk of the total UK government bond market – and mean that the scale of this unorthodox intervention is larger than in any other western country, relative to the size of its economy, the IMF economists added.
The IMF analysis warned that it was still unclear whether the Bank’s unorthodox policy operations were helping to boost the economy – even though such measures were unexpectedly extended last week, with the announcement of another £50bn ($82bn) in gilts purchases.
The paper by André Meier, a senior IMF economist, noted: “It remains too early to tell whether [this] will be enough to ultimately generate the desired increase in aggregate demand”.
Policymakers and investors will closely watch the comments because the IMF paper is one of the first pieces of independent analysis, outside the private sector, of the “quantitative easing” policies recently unveiled by western central banks.
These policies were adopted on a large scale in the aftermath of the credit crisis, since it became clear that Western central banks were running out of traditional options to loosen monetary policy, because they had already slashed interest rates. As a result, they started purchasing a range of assets, hoping this would prevent deflation.
The IMF calculated that between September 2008 and the end of June 2009, the US Federal Reserve revealed the biggest asset-purchase scheme, pledging to acquire assets worth up to $2,100bn, or 14.7 per cent of gross domestic product. The UK pledged asset purchases worth 8.6 per cent of GDP.
However, in terms of actual, tangible purchases, the Bank of England was most active: in the nine months to July this year, the Bank bought assets worth 7 per cent of the UK’s GDP, compared with 6 per cent in the US, 3 per cent in Japan (and zero in the eurozone).
Since 97 per cent of the UK purchases were government bonds, the policy left the Bank holding about 15 per cent of the gilts market, and half the outstanding issuance (excluding the recent scheme-extension).
The paper says: “Its purchases also well exceeded the (considerable) net new issuance [of gilts] between March 5 and June 30”.
Analysts said this large bond intervention was a key factor behind why the UK has managed to keep 10-year gilt yields below 4 per cent in the past three months, even as the UK debt and issuance has spiralled.
Bob Giffords, a banking consultant said: “The Bank of England [has been] monetising the government debt, despite all its protestations to the contrary,”.
However, the impact on the real economy remains unclear. Underlying growth in broad money, cutting out distortions from the financial sector, is currently one of the chief metrics which the Bank is tracking.
But in the second quarter of this year, this measure of the money supply grew by just 3.7 per cent, barely faster than the 3.3 per cent in the first quarter, and much slower than the average growth of around 8 per cent before the financial crisis.
Nevertheless, the Bank argues that it is too early to judge whether the policy has been effective, since it may take until at least this December for the full effects to become clear.
Stuart Thomson, economist at Ignis Asset Management, said: “The Bank’s actions are justified and serve as additional insurance against deflation”.
Stewart Robertson, Senior UK and Europe Economist for Aviva Investors said: “Many have declared QE a failure . . . but QE will take time to have its full impact.”
