More on goodbye to QE

In my debut blog yesterday, which looked forward to today’s publication of latest Bank of England Quarterly Inflation Report I suggested that no further clues would be forthcoming as to the date of the first Bank Rate increase other than building into the Bank’s forecasts market expectations for spring 2015. I claim no special credit for being correct on that count but it is worth noting again just how keen Mr Carney is to postpone that ‘dies irae dies illa’!


What was of more interest to me was looking for more evidence that the MPC might be turning its back on QE and I reckon there were some pretty heavy hints that the Committee has already done so. The following extract is taken from the Box on page 41. The emphases are mine.


‘’Bank staff analysis suggests that the peak cumulative impact of the MPC’s asset purchases on the level of real GDP was around 2½%. As purchases are assumed to take around two years to feed through fully to activity, that peak impact probably occurred during 2013. In the MPC’s projections the stock of purchased assets is assumed to remain at £375 billion throughout the forecast period. Over the forecast period, therefore, the support to the level of activity from asset purchases is assumed to wane.


In the February Report, the MPC stated that it intends to maintain the stock, including reinvesting the cash flows associated with all maturing gilts held in the APF, at least until Bank Rate has been raised from its current rate of 0.5%. Beyond that point, as MPC members have previously set out in

individual speeches and testimony there are a number of considerations that will affect its decisions as to how to tighten policy.


  • Bank Rate will be the active marginal instrument for monetary policy.

• In order to be able to use Bank Rate as an active tool in response to adverse shocks to activity, the MPC is likely to defer sales of assets at least until Bank Rate has reached alevel from which it could be cut materially, were more stimulus to be required.

  • Some reduction in the stock of assets could be achieved without active sales, as the gilts in the portfolio mature.

• Any asset sales will be conducted in an orderly programme over a period of time so as not to disrupt the gilt market and cause a sharp tightening in monetary conditions. The Bank will liaise with the Debt Management Office when deciding any programme of sales.


All else equal, any reduction in the stock of purchased assets is likely to be associated with a lower path of Bank Rate than would otherwise have been the case.’’


The real show in town remains, of course, the  massive QE programme in the US. The FOMC hawks will be preparing their own arguments but it is likely that comments such as those above (together with the Bank staff papers on money and money creation I mentioned yesterday) will be cited as ‘evidence for the prosecution’.  The same can be said for hawks on the ECB governing council who may well go along with interest rate cuts and even some form of focused Funding for Lending Scheme for SMEs but will surely fight hard to prevent any major EMU government bond purchasing programme.


So it really does look like goodbye to QE! Except in Asia but that is another story!

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