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If debt got us into this problem, debt can also get us out. Governments have issued billions of dollars’ worth of bonds since the crisis began and central banks have helpfully lapped them up. To date, no one has been a more active quantitative easer than the Bank of England. But on Thursday it surprised everyone by deciding to halt its hair-of-the-dog treatment, calling time, for now, on its £125bn programme rather than extending it to £150bn. Investors took fright that other central banks might follow suit and stop their own programmes. UK gilts fell, as did the prices of 30-year US Treasury bonds.
Yet it makes sense for the Bank of England to take a break. Many think the world economy is on the mend. The International Monetary Fund has raised its growth forecasts for next year. Investment bank bonuses are back; so too are 125 per cent mortgages in the UK and the US. Monetary stimulus is still being poured on to the incipient recovery via near-zero interest rates.
Many wonder whether QE even really worked. In the UK, 10-year gilt yields remain much the same as before QE began in March, even though the Bank has since bought bonds almost as fast as they have been printed. Also, the Bank’s break may only be a pause that refreshes. Although global growth appears to be returning, nobody seems entirely convinced. Bond vigilantes, no longer so worried about inflation, have gone to bed.
Commodity prices are in retreat. Unemployment is rising. Banks are still not lending much. While that remains the case, the reflationary effects of easy monetary policy will be weak.
The Bank has been the world’s most extreme proponent of QE, having bought the equivalent of almost half of all UK government debt issued this year. The Bank of Japan, by comparison, has bought less than 20 per cent, the US Federal Reserve about 10 per cent and the European Central Bank none.
The pause in QE on Threadneedle Street is prudent. But it does not necessarily herald a tightening of policy elsewhere.
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