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Home > Monetary Policy > Quantitative Easing Explained > Quantitative easing: recent views of MPC members
 

Quantitative easing: recent views of MPC members

Recent views of MPC members on some of the most commonly-raised questions on QE are summarised here.

 

 

 

Has QE boosted demand? 

 

I don’t want to pretend that QE is the answer to all our economy’s problems.  And I certainly wouldn’t want to suggest that we know with any precision how big the impact from our asset purchases will be....A recent article in the Bank’s Quarterly Bulletin summarised research by Bank economists which suggests that the first round of asset purchases had a significant positive impact on the level of output and inflation in the UK.  But there is considerable uncertainty as to exactly how big that effect was.  And there are many reasons why the impact of the latest round of purchases may be either bigger or smaller.  So, although I am confident that QE will continue to provide substantial support to the economy, we need to remain alert to our uncertainty concerning the precise mechanisms through which it works and its ultimate impact.

Spencer Dale, 13/12/11 - speech

It is quite possible that the impact of a given quantum of purchases will be different at different times and be sensitive to the prevailing economic conditions.  But that is also the case with changes in Bank Rate, where the effects can be equally uncertain.

Charlie Bean, 21/02/12 - speech  

Our analysis of the first phase of quantitative easing suggests bond yields were around one percentage point lower than they would otherwise have been.  And UK equity prices rose 50% during the programme, though only a small part of that is likely to be down to quantitative easing.  That made it cheaper for companies to access finance through the capital markets and issuance was indeed strong during 2009.  But the ultimate aim was to sustain demand.  Though we cannot be sure what would have happened in the absence of our asset purchases, our internal work suggests that the first phase of quantitative easing boosted the level of activity by around1½-2%.

Charlie Bean, 21/02/12 - speech 

Tracking the impact of the new round of purchases is also harder than before. Market participants have increasingly come to anticipate our actions, so that asset prices tend to move ahead of our decisions.  That makes it difficult to isolate the impact on asset prices of policy changes from the myriad of other things driving them.... In any case, so far we have seen little to suggest that the effect on nominal demand will be markedly at odds with that of our first round of purchases.  But it is still rather early to draw firm conclusions one way or the other.

Charlie Bean, 21/02/12 - speech

A variety of studies carried out at several institutions have concluded that asset purchases increase demand and GDP.  Economists at the Bank of England have used a variety of empirical methods to estimate the effect of the first tranche of £200bn of asset purchases in 2009-10.  The results suggested that those asset purchases boosted GDP by about 1.5% to 2%.

David Miles, 01/03/12 - speech  

The ultimate objective of the asset purchases is to boost nominal demand in order to prevent there being such slack in the economy that inflation stays below target. In the absence of the Bank’s asset purchases I am sure that investment and consumer spending would have been significantly weaker than they have been.  Many more people would have been much worse off. Unemployment would have been even higher than it currently is. Many of those who would have found themselves without a job are the children or grandchildren of someone nearing retirement.

David Miles, 01/03/12 - speech   

 “You can see quite a lot of effects from QE as it works through the system:  bringing down market interest rates, making it easier for large scale corporates to go to capital markets to borrow.  Really the effects have been quite powerful.  But they have not been direct.  Monetary policy seldom works very directly, so it is quite difficult for people to see how it’s working.”
 
Paul Fisher, interview on the Murgnahan show (Sky), 04/03/12


The evidence suggests that QE has worked. That is corroborated by studies of the Fed’s large-scale asset purchases. But there is considerable uncertainty about the precise impact. And it is plausible that the effectiveness of the policy depends upon the state of the economy. 

Charles Bean, 03/05/12 - speech 
 
The first round of QE was initiated, in early 2009, when the domestic banking system was, to all intents and purposes, broken. The Monetary Policy Committee did not think that our stimulus to aggregate demand could rely on easing bank lending conditions. On the contrary, we aimed effectively to side-step the banking system by putting money directly into the hands of long-term investment institutions by buying gilts from them. Because they would not want to give up the duration benefits of holding gilts, we would have to pay up, driving down gilt yields. That helped to support the value of other asset classes. And because money was yielding next to nothing in real terms, we thought that they would try to get rid of the money by buying other assets, including sterling corporate bonds.  That happened.  More companies have issued sterling bonds over the past three years than previously.  Such firms used the proceeds of their bond issues to repay bank loans. This was benign deleveraging.  It meant that buoyant broad money growth was not, in my view, an acid test of the success of QE in its initial phase.
 
Paul Tucker, 12/06/12 - speech 
 
There is a widespread misunderstanding that the impact of an expansion of the broad money supply is limited to the first round effects of gilt purchases.  But the private sector which sells gilts to us then uses the money thereby created to purchase other assets, including private sector paper. And it is the private sector which decides which assets to purchase in the second, third and all subsequent rounds as the additional money percolates through the economy.
 
Mervyn King, 14/06/12  - speech
 
“If we thought rate cuts would add more stimulus, we would do it, but asset purchases through quantitative easing is a more powerful way of aiding the economy”
 
Paul Fisher, interview with the Belfast Telegraph, 16/08/12
 
Some commentators have pointed to the weakness of growth over the past couple of years as evidence that the impact [of QE] has been relatively limited.  But this seems a silly argument.  The scale of the headwinds affecting our economy over this period – in terms of the squeeze in households’ real incomes stemming from the rise in commodity and other import prices, the fiscal consolidation, the tightening in credit conditions, and the fallout from the euro zone crisis – has been huge. These headwinds have to be taken into account when assessing the effectiveness of the policy actions taken to offset them.  There is a legitimate debate as to exactly how effective our policy actions to date have been. But I have little doubt that without them our economy would be in a far worse state today.
 
Spencer Dale, 08/09/12 - speech 
 
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Will QE be ineffective because gilt yields are already so low? 

 

I think this concern is misplaced. Although yields on short-dated gilts have little scope to fall further, that is less true for longer-term yields.

Spencer Dale, 13/12/11 - speech  

It is precisely in times of heightened risk and increased spreads that QE has the potential to do most good.

Spencer Dale, 13/12/11 - speech

A decrease in gilt yields is only one part of the transmission mechanism, and it is certainly not the ultimate goal of the asset purchases.  Movements in the yields on other, risky, assets are probably more important as the means by which asset purchases boost demand than are movements in gilt yields per se.

David Miles, 01/03/12 - speech 

...asset purchases by the central bank might have their main impact upon the prices (or yields) on risky assets via the impact on the spread over government bond yields rather than through shifting government bond yields. That is one reason why I think there is rather too much attention paid to the question of the impact of the Bank’s asset purchases on gilt yields.

David Miles, 01/03/12 - speech   

During the course of 2009, when the Bank bought close to £200 billion of gilts, the spread between yields on corporate bonds and gilts fell by between 2000 basis points (for high yield bonds) and 200 basis points (for investment-grade, non-financial corporate bonds). Those shifts in spreads were far greater than the shift in gilt yields.

David Miles, 01/03/12 - speech   

The issuance of sterling bonds by the non-bank private sector was unusually large in 2009. I believe that it was through its impact on corporate bond yields and issuance that much of the impact of the Bank’s asset purchases made then came through.

David Miles, 01/03/12 - speech 

Research carried out at the Bank suggests that the first round of asset purchases might have decreased gilt yields by around 100 basis points.

David Miles, 01/03/12 - speech  

I think focusing on gilt yields risks both exaggerating and simultaneously understating the impact of the central bank’s asset purchases. It understates the impact because I think more of the effect of asset purchases works through changing the demand for other risky assets and that shows up in rather big shifts in their yield spreads over gilts; it exaggerates the impact of asset purchases because other factors have certainly been at work in driving the yield on UK government bonds lower.

David Miles, 01/03/12 - speech  

Focusing on the impact of the Bank of England’s asset purchases on the yields of conventional gilts is understandable because those are the assets the Bank is buying. But it is a mistake to see the impact on gilt yields as a sufficient measure of the economic impact of policy. It is also a mistake to think that because asset purchases reduce gilt yields they must reduce the value of pension savings relative to the cost of securing a retirement income.

David Miles, 01/03/12 - speech 

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Could QE lead to high inflation?

 

Yes: QE is inflationary.  And yes, inflation would almost certainly have been lower had we not undertaken the first round of asset purchases in 2009. But no, that does not mean that the MPC is any less determined to bring inflation back to target. Indeed, quite the opposite.

Spencer Dale, 13/12/11 - speech  

I’m not saying that if I had had perfect foresight, I wouldn’t have changed my policy stance at all over this period.  But the hurdle for wanting to have had materially tighter policy in the face of the most severe downturn in the post-war period seems pretty high to me. 

Spencer Dale, 13/12/11 - speech  

QE is often described as "printing money", conjuring up images of Weimar hyperinflation. That is indeed the fate of countries that resort to the permanant monetary finance of a persistent budget deficit. QE is different. It involves temporarily exchanging one liability of the state - government bonds (gilts) - for another - claims on the central bank.

Charles Bean, 03/05/12 - speech 

 
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Is the extra money created by QE simply hoarded by the banks?

 

The asset purchase programme was explicitly designed to go around the banking system, not through it.  In 2009, we initially avoided buying shorter-dated gilts since these were the gilts that banks tended to hold.  But in fact, at the time we started QE, UK banks in total owned only around £25bn of gilts. We purchased £200 billion of gilts!

Spencer Dale, 13/12/11 - speech    

There are many reasons why QE may not have the impact we hope or expect. But I do not think that the money getting stuck in the banks is one of them.

Spencer Dale, 13/12/11 - speech    

It is no co-incidence that in 2009 – close to the depths of the recession – UK companies issued more corporate bonds and more equities than in any year, either before or since. 

Spencer Dale, 13/12/11 - speech    

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Does QE provide support for SMEs? 

 

I have considerable sympathy for the argument that the MPC’s asset purchase programme provides relatively limited direct support to SMEs.  It will provide indirect support by stimulating spending and activity in our economy.  But most SMEs are heavily dependent on bank credit and so not able to benefit directly from the increased demand for corporate debt and equity triggered by our asset purchases.  But therein lies the problem.  The majority of SMEs do not issue marketable securities that the MPC could purchase.....Instead, we need to find ways to incentivise the banks to lend more to SMEs.  That is exactly the aim of the credit easing policies that the Chancellor announced in his Autumn Statement last month.  I very much hope that those schemes are able to improve the flow of credit to smaller companies.

Spencer Dale, 13/12/11 - speech   
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Has QE affected retirement incomes?   

 

Turning to the distributional consequences of the asset purchases, attention has focussed on the downward impact on annuity rates, which have fallen about a percentage point over the past three years since we started our purchases.  That means someone with a £100,000 pension pot, who could have expected that to yield an annual pension of a little under £7,000 three years ago, would now get just under £6,0001. That is a rather substantial income loss.  But it is only part of the story. Those pension funds will typically have been invested in a mix of bonds and equities, with perhaps a bit of cash too.  The rise in asset prices as a result of quantitative easing consequently also raises the value of the pension pot, providing an offset to the fall in annuity rates.  The impact of quantitative easing on those approaching retirement is thus more complex than it seems at first blush.

Charlie Bean, 21/02/12 - speech 

People have raised legitimate concerns about the impact of the Bank’s asset purchases on those approaching retirement. That is understandable. Annuity rates have fallen by around 100 bps since asset purchases started in March 2009, and by around 150 bps from their recent peaks in 2008. A couple with a pension pot of £100,000 could have received an annual pension of around £6200 around three years ago, but would now get around £52002. Focusing just on the price of annuities it would seem that those close to retirement have seen the value of their pension saving fall by around 17%. ....But it cannot be right to assess the impact of monetary policy upon the retirement resources of people by just focusing on what has happened to gilt yields and noting the impact on annuity rates. The impact of asset purchases (or more generally of monetary policy) must depend not just on what it does to gilt yields and annuity prices but also what it does to the value of the retirement savings of those about to buy annuities.  If they hold government bonds then the capital gain on those bonds from lower gilt yields offsets the impact of the induced change in annuity rates. If they hold other assets – equities, residential property, land, corporate bonds – then the impact of monetary policy on those asset values needs to be factored in. An increase of about 19% in the value of a pension pot would provide the same yearly income as expected in March 2009 at current annuity rates. If monetary policy generates rises in other asset prices (besides gilts) it can offset some, or all – or more than all – of the effects of rising annuity prices. And the impact of monetary policy on the real economy – on GDP and on unemployment – will affect welfare too. Even someone about to leave the labour force will not be unaffected by changes in unemployment which affect the incomes of children, grandchildren, nephews and nieces.

David Miles, 01/03/12 - speech 

...close to 60% of the assets held by company pension schemes have seen very large increases in value in the period since asset purchases began. That rise in values continued over the shorter period since asset purchases were resumed in October of last year.

David Miles, 01/03/12 - speech 

 ...it is implausible to see the increase in equity and corporate bond prices in the UK over the past few months as unrelated to the policy actions of the Bank of England and other central banks. And those increases in asset values will have boosted the assets of pension funds, and of other savers, relative to a situation without asset purchases.

David Miles, 01/03/12 - speech 

...it is  inevitable that there are some people that have been made worse off by the direct impact of the Bank’s asset purchases on gilt yields, and that have not benefitted much from the effects on the prices of other assets. Those people are amongst the losers from very low gilt yields. It will not be any comfort for people in this position to be told that any monetary policy action will have some distributional impacts. But if monetary policy actions could be vetoed so long as someone was made worse off then there could be no monetary policy.

David Miles, 01/03/12 - speech 

1 For a single male, aged 65.
2 Based on a £100,000 annuity for a male aged 65 and a female aged 60, on a joint life, two thirds, guaranteed 5 years and level payments basis. 

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How is current monetary policy affecting savers?

 

More generally, the current extended period of rock-bottom interest rates has impacted heavily on those holding most of their savings in deposit or short-term savings accounts, who have seen negative real returns.  Savers have every right to feel aggrieved at losing out; after all, they did nothing to cause the financial crisis.  But neither did most of those in work, who have also seen a substantial squeeze in their real incomes.  And unemployment, particularly among the young, has risen as output has fallen. This is all a reflection of the hit to output from the financial crisis.  Output is still some 4% below its previous peak and more than 10% below where it would have been if the economy had simply continued growing at its pre-crisis historical trend. There have been few winners over the past few years.

Charlie Bean, 21/02/12 - speech

Treating serious medical conditions often has unwanted side effects. But, unpleasant as those side effects sometimes are, treatment is invariably better than the alternative. So it is with the economic medicine of low interest rates and quantitative easing. The immediate consequences may be unpalatable, but the sooner we can get the economy on the mend, the sooner we can return policy to more normal settings and the better it will be for all of us – savers, businesses and employees alike.

Charlie Bean, 21/02/12 - speech

I have the utmost sympathy for the hardship faced by many pensioners and other households dependent on the flow of income from their savings.  They played no role in fuelling the financial crisis, but have been badly hit by the reduction in interest rates that followed. I understand that the burden of interest rate cuts falls most heavily on savers.  And I can understand why, to many, it seems unfair that those with high levels of debt and borrowing should now benefit from lower rates.

Spencer Dale, 13/12/11 - speech  

Savers and pensioners in our society have much to be angry about. But I’m not sure that anger is best directed at monetary policy. 
 
Spencer Dale, 13/12/11 - speech 
 
A long period of abnormal monetary policy strains social support for a central bank’s actions. Changes in policy always have distributional consequences, shifting income from savers to borrowers or vice versa. That is an unavoidable byproduct, rather than the aim, of policy. Society usually accepts such consequences because they are transitory, and what one loses on the swings today, one may gain on the roundabouts tomorrow. But the sustained period of very low interest rates has, quite reasonably, prompted complaints from savers who feel they are bearing an unfair burden.
 
Part of the problem is that people can see the direct impact on them of policy, but are less conscious of the indirect effects. The present highly stimulatory policy stance means activity, employment and asset prices are all higher than they would otherwise be. So many savers are benefiting indirectly. But, most importantly, the highly stimulatory monetary stance should help put the economy back on to an even keel. That is the best medicine for us all.
 
Charles Bean, 03/05/12 - speech 
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