–BOE Surprises With Scale of QE2; No Change To Range Of Asset Purchases
–Treasury To Take Responsibility For Credit Easing; BOE Will be Agent
LONDON (MNI), Oct 6 – The Bank of England’s Monetary Policy
Committee surprised Thursday with the sheer scale of its second wave of
quantitative easing, but it is “plain vanilla” QE with no technical, or
tactical, variants on QE1.
Some strategists and economists had speculated the MPC might tilt
gilt purchases towards the longer end of the gilt curve or even tweak
bank reserve remuneration, but the BOE is using the same template it
employed for much of QE1 – buying large quantities of gilts at a wide
range of maturities.
The MPC has acted in accordance with the views of its newest member
Ben Broadbent – that when it comes to QE its size, rather than details,
Broadbent was asked by reporters at a Reuters event on September 26
about fine-tuning QE after a comment by his colleague Martin Weale that
it could be used to drive down yields at the long end.
“These are all second order decisions … the scale of the (QE)
policy, were it to happen, is the more important decision. I’m not
suggesting they’re irrelevant, but the size of the central bank’s
balance sheet is what matters,” Broadbent said.
In a Market News survey analysts had put a 42.5% median probability
on more QE being sanctioned at the October meeting, rising to a
cumulative 75% by November and then on up to 90% by February next year.
Most had expected the first tranche would be stg50 billion, though a
couple had predicted the MPC would seek to surprise markets by doing
In the end, the MPC did surprise with the scale – a strategy it
used in QE1, doing a chunk more than widely expected and providing a
booster shot to markets.
Those analysts who expected the MPC to delay QE until November
cited the fact the committee is more likely to act in Inflation Report
months, when its quarterly forecasts and subsequent press conference
allows Governor Mervyn King to spell out the reasons for action.
The BOE said it would take four months to complete the stg75
billion of asset purchases it unveiled Thursday. That means this tranche
of QE will carry on until February, an Inflation Report month, allowing
the MPC to get its key QE policy decisions and the IR back in synch.
All the debate over MPC policy will now turn to what happens at the
As the committee’s statement justifying its policy move made clear,
how the eurozone situation develops will be a key factor in what happens
“The pace of global expansion has slackened … Vulnerabilities
associated with the indebtedness of some euro-area sovereigns and banks
have resulted in severe strains in bank funding markets and financial
markets more generally. These tensions in the world economy threaten the
UK recovery,” it stated.
When, ahead of the meeting, analysts were asked how much QE the BOE
would eventually do, they highlighted the uncertainty over what next
comes next. If the eurozone sovereign debt strains intensify into a full
blown crisis, the expectation is the MPC would unload an arsenal of
policy measures to try and combat the problem.
The MPC has shown itself ready to sanction huge amounts of QE, the
total stg275 billion it has approved between QE1 and QE2, so far, is
equivalent to near 20% of GDP. It has, however, steered clear of
purchasing private sector assets on any significant scale and events
this week reaffirm that this is the line it has drawn in the sand.
BOE Governor Mervyn King has, since the start of the crisis,
refused to let the central bank take on credit risk and start buying
into the private sector.
King made clear to the former Labour administration he was opposed
to private sector asset purchases and, as former BOE economists note, it
looks like he is not giving ground to the new Conservative
administration on the issue either.
So the Treasury is going to spearhead “credit easing”, with the BOE
set to act as its agent. The BOE under King has been reluctant to even
use the funds it has had authorised for private sector purchases.
The BOE was given a stg50 billion ceiling in its Asset Purchase
Facility, with funding in part by T-bill issuance in pre-QE days, to buy
private sector assets but the central bank under King has only dabbled
in small amounts of “backstop” buying of corporate bonds and commercial
“The APF continues to include facilities for eligible private
sector assets funded by the issuance of central bank reserves,”
Chancellor George Osborne noted in his public letter to King,
authorising the extension of QE to stg275 billion.
Meanwhile, the Treasury is pressing ahead with plans to undertake
credit easing to ease funding pressures.
“Given evidence of continued impairment in the flow of credit to
some businesses, the Treasury is exploring further policy options,”
The division of labour at present is clear: the BOE will focus on
the large scale QE and the Treasury will work on the tweaks designed
to get the credit flowing to those sectors of the economy which are
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