The BoE's £25bn gambit

The Bank of England has just announced it will keep interest rates on hold at 0.5 per cent and extend its programme of quantitative easing by £25bn over the next three months to bring the total of assets purchased up to £200bn.

This should be seen as a gradual ending of the flow of QE, with gilt purchases over the next three months now considerably slower than the issuance of new government paper. It was the minimum additional QE the Monetary Policy Committee could announce without pausing the process entirely.

I suspect we will find the vote was split.

In terms of the questions I posed yesterday regarding the MPC’s attitude to the economy and QE, some things are a bit clearer from today’s statement.

The MPC says QE is working by raising asset prices and improving access to capital markets, effectively allowing big companies to bypass banks. It is not claiming any effect from QE on bank lending, which it says will be weak. I interpret the following statements as indicating the majority on the MPC believe QE has not worked as clearly as they had expected, so more action was required. MPC The relevant quotes are:

 ”The Bank’s asset purchases have helped to boost asset prices and improve access to capital markets”.

“The need for banks to continue the process of balance sheet repair is likely to limit the availability of credit”.

The MPC said it believes there is quite a bit of spare capacity in the economy and this will continue to damp inflationary pressure coming from sterling’s fall. This following is quite a dovish element in the statement and could imply more QE later if the recovery is disappointing.

“A substantial margin of under-utilised resources persists. That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling.”

The MPC suggests it has taken the official figures showing a 0.4 per cent GDP contraction in the third quarter at face value. But the members clearly have as little idea about what is going on as the rest of us because they suggest the figures do not reflect the current position of the economy.

“GDP continued to fall in the third quarter. A number of indicators of spending and confidence, however, suggest a pickup in activity may soon be evident.”

The MPC is still saying nothing about whether it believes QE really works by raising public and market confidence in the Bank’s ability to secure a recovery, thereby generating a self-fulfilling prophesy. But, by definition, the MPC cannot say anything about this, even if it believes the channel to be important.
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