BoE pauses QE, what next?

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Bank of England holds interest rates, pauses QE

What next for Iceland-on-the-Thames?

[*T*]

Re: BoE pauses QE, what next?

Interesting point in the comments;

ChrisJCook | February 4 4:40pm | Permalink
@Ando

Agree most of your analysis which pretty much mirrors mine.

Where I disagree with you is with the conventional wisdom re the use of sovereign credit. This conventional wisdom appears to me to be unjustifiable and based only upon ideology.

QE IMHO can and should be expanded greatly and used for investment in new productive capacity, becoming in effect a new form of National Equity analogous to UK Plc redeemable prefs.

We currently pay way too much for the credit we use, because in addition to the operating costs and default costs, we also pay profits to shareholders on the capital which underpins the credit they create.Now we see that we were relying upon the UK Plc balance sheet all along.

There is no reason at all - other than historic bank shareholder and managerial self interest - why Treasuries could not issue credit directly, managed by banks as service providers, and within monetary guidelines laid down by a Monetary Authority.

Hong Kong demonstrates empirically that a Central Bank is unnecessary - HK has never had one - and private banks as credit intermediaries may be the custom, but are no more necessary than is a central bank.

If you take the view that there should be a credit intermediary - and in the Internet age I don't, but that's another story - then there's no reason why that credit intermediary should not be Treasuries directly, with banks operating as credit managers/service providers, and requiring only the capital necessary to cover operating costs.

if private banks cannot, or will not, create the necessary credit for our economy, then public credit must be created instead 'at cost' - which is zero, but with a combination of charges for bank operating costs and default provisions.

Agreed that this does not solve the creditworthiness issue - that's where systemic fiscal reform is necessary.

[Mega]

Re: BoE pauses QE, what next?

READ THE SMALL PRINT
"QE" Paused....Direct M4 INJECTION has begun
Mike

[Chris]

Re: BoE pauses QE, what next?

This is what the full release actually says:

http://www.bankofengland.co.uk/publi...s/2010/008.htm

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion.
After a substantial fall in output, the United Kingdom economy recorded sluggish growth in the final quarter of 2009. Spending by households appears to have picked up a little, though that may partly reflect temporary factors. The rate of decline in businesses’ investment spending appears to have eased. And the world economy continued to recover, raising the demand for UK exports.
CPI inflation has risen sharply to well above the 2% target, reaching 2.9% in December. That rise was largely accounted for by higher petrol price inflation and the reduction in the main VAT rate a year earlier dropping out of the calculation. Inflation is likely to have risen further in January, reflecting the restoration of the VAT rate to 17.5%. Pay growth has remained subdued.
The considerable stimulus from the easing in monetary policy, the lower level of sterling and the recovery in UK export markets should together support domestic activity. But credit conditions are likely to remain restrictive, while the need to strengthen public and private sector finances will also weigh on spending. On balance, the Committee believes that the prospect is for a gradual recovery in the level of activity. The recession has probably impaired the supply capacity of the economy, but the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come. That is likely to mean that inflation will fall below the target for a period.
In the light of the Committee’s latest Inflation Report projections and in order to keep inflation on track to meet the 2% inflation target over the medium term, the Committee judged that it was appropriate to maintain Bank Rate at 0.5% and its stock of purchases of government and corporate debt financed by the issuance of central bank reserves at £200 billion. The Committee noted that this stock of past purchases, together with the low level of Bank Rate, would continue to impart a substantial monetary stimulus to the economy for some time to come. The Committee will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them.
The Committee’s latest inflation and output projections will appear in the Inflation Report to be published at 10.30am on Wednesday 10 February.
The minutes of the meeting will be published at 9.30am on Wednesday 17 February.

Note to Editors

The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009. A programme of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009. The most recent change in the size of that programme was an increase of £25 billion to a total of £200 billion on 5 November 2009. That programme of purchases has been completed.

Information on the Asset Purchase Facility can be found on the Bank of England website at http://www.bankofengland.co.uk/monet...tpurchases.htm.

The Bank will continue to purchase high-quality private sector assets on behalf of the Treasury and financed by the issue of Treasury bills, in line with the arrangements announced on 29 January 2009. The letter from the Chancellor of the Exchequer to the Governor on 29 January 2009 and the Governor’s reply to the Chancellor can be found at the following addresses. ...

Does that sound like the end of QE to you?

[*T*]

Re: BoE pauses QE, what next?

Doesn't the line

financed by the issue of Treasury bills

imply that there is no net new money in that operation, i.e. they are robbing Peter to pay Paul.

[Chris]

Re: BoE pauses QE, what next?

Doesn't the line

imply that there is no net new money in that operation, i.e. they are robbing Peter to pay Paul.

You are correct (although the outcome is the same).