The Bank of England view of QE sounds just like Sir Humphrey Appleby

by Shaun Richards

The issue of QE ( Quantitative Easing) bond buying is back in the news. Or at least it should be as we are in a phase where we are seeing the first real challenge to all the post Covid-19 purchases. In the UK we have seen the ten-year bond yield rise from the 0.2% it started 2021 to 0.6% now. Also the fifty-year yield has nudged above 1% this week. Whilst this is hardly the return of the bond vigilantes ( which would put the ten-year above 2%) we see that in spite of the Bank of England buying some £4.4 billion of UK bonds or Gilts each week yields are rising. They have been unable to fully resist the worldwide concerns about inflation and the relatively improved prospects for the UK via the rate of vaccination.

Thus the thoughts of the Bank of England Deputy Governor for markets and banking should be on point. However it is hard not to have a wry smile at the way that a career civil servant with no experience in either area has got this gig. It would be perfect for the satire and comedy of Yes Prime Minister. Especially as even that is likely to be an improvement on his predecessor Minouche Shafik who was transferred out of post early. Here are his thoughts from yesterday at the University of Birmingham.

The QE experience

It is noticeable that even a committee hand picked for the role ( that is what independent means in this context) finds itself unable to give QE a full vote of confidence.

The Bank of England’s internal Independent Evaluation Office (IEO) published its own evaluation of QE
earlier this year, where it noted that “there remain open debates about how QE works in different states of
the world, its broader interlinkages and its potential limitations”

After more than a decade of experience that is really quite damning. Although according to our valiant Deputy Governor 12 years is not very long at all.

The fact that QE only came into use in the UK in March 2009 means that in practice its history, at least in the
UK, is a short one.

That makes him look even less appropriate to deal with markets which can move in week and indeed in a day as they did last March. Also I can only fear for what a man who told us that annual unsecured credit growth of 8.3% was “weak” will make of this.

Total net repayments were £16.6 billion in 2020, the weakest in one year on record. As a result, the annual growth rate fell further to -7.5% in December, a new series low since it began in 1994.

He must be really rather discombobulated.

How does it work?

This is left really rather vague about from a personal expression that it does and he is happy to promote what frankly are some extraordinary past claims from the Bank of England.

To make the macroeconomic effects of QE more concrete: previous Bank of England analysis suggests that
the initial £200 billion of QE during QE1 may have increased GDP by 1.5%–2% and inflation by
0.75pp–1.5pp.
Using similar estimates in a 2016 speech, Mark Carney, estimated that if the MPC had left
monetary policy – Bank Rate and QE – unchanged in the financial crisis, the level of GDP would have been
8% lower and 1.5 million more people would have been out of work.

I bet we all wish we could write reviews of our own performance although even Bank of England supporters may be wondering if it is so good why we keep needing it again?

QE1, 2 and 3 came in response to the financial crisis and the euro area crisis that followed; QE4 followed the Brexit
referendum; and QE5, which is still ongoing, formed part of the policy response to the Covid crisis last
March.

It also manages to be large and significant.

The headline numbers involved in those five interventions detailed in Figure 2 have been very large: in total
once the current programme comes to an end the Bank will have purchased £875bn of government bonds
and £20bn of corporate bonds – that is roughly 40% of annual (pre-Covid) UK GDP. Once that programme is
complete the Bank’s balance sheet, which already stands at around 40% of GDP, will be approaching
£1trillion, or 50% of GDP in size – an unprecedented figure in the Bank’s 327 year history

So what can we tell from it? Apparently not much.

It’s unsurprising, as the IEO noted, that with such a small number of observations there are still open
questions about the QE transmission mechanism and impact,

What was an “unprecedented figure” has suddenly shrunk to a “small number”. Still our career civil servant does continue the Yes Prime Minister theme as he echoes Sir Humphrey Appleby with applause for the bureaucracy involved.

The IEO’s review noted that “a common finding across successive rounds of QE is that the
Bank has excelled at delivering at pace and under pressure, drawing on very effective staff input from
multiple areas.”

Rather like the hospital with no patients in Yes Prime Minister which was described as the most efficient hospital in the country in spite of having no patients as they just get in the way. If you have never seen it then it is superb!

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As to the problems created by QE well we continue the Yes Minister theme as they get kicked into the long grass. Actually the very long grass.

While this topic is not the focus of my
remarks today, I would emphasise that the Bank continues to take the analysis and communication of
potential side-effects from its policy interventions extremely seriously.

But never mind as Dave is sure it works somehow and in some way.

But based on my reading of the academic evidence and my practical
experience as a UK policy maker, and consistent with the findings of the IEO report, my central view is that
QE achieves its goal of supporting demand and inflation.

Followers of this sort of thing will note he has left a potential escape route via the use of the phrase “central view”.

Monetary Financing

Apparently there has not been any.

But – crucially – they were taken independently and in pursuit of each institution’s own policy objectives.

We are also given a red herring to look at.

Indeed in June the MPC, acting on advice from the Bank’s executive, agreed, at the same time as adding to the target stock of asset purchases, to substantially slow the pace of purchases, from £13.5bn/week to an initial £6.9bn/week, before the DMO published its updated remit, which set out plans for increased issuance.

Firstly our career civil servant is tying to get us to believe that he did not know what his ex-colleagues at the Treasury were planning. Even if that were not true one might reasonably wonder what this person does at Bank of England policy meetings.

Clare Lombardelli was present as the Treasury representative.

Perhaps the biscuits are nicer….

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Climate Change

One might reasonably wonder what Sir Dave knows about markets as a career civil servant but even that seems more reasonable than this example of mission creep.

Responding to climate change is a strategic priority for the Bank

What has that got to do with an inflation target? Anyway we advance on.

Attention, however, has understandably focused on the £20bn corporate bond purchases that form part
(around 2%) of our QE programme, and whether more should be done to account for climate considerations
in these holdings.

In fact the Corporate Bond purchases have been something of a shambles ( for newer readers the market is not big enough so we ended up buying bonds from foreign companies and claiming that benefited the UK). Adding some greenwash may manage to make this even worse, which would be an achievement it you look at the starting point.

Measuring the climate impact of this market portfolio remains a developing science,

Comment

Perhaps Sir Dave got carried away with his rhetoric at the end as the uncertainty expressed in the speech suddenly became certainty.

My overall take on QE is still that it is a
tried and tested tool; for me it is the marginal monetary policy tool at present.

So tried and tested in fact we might need negative interest-rates as well.

As I noted earlier, the MPC has asked the PRA to engage with firms to ensure they could be ready to
implement a negative Bank Rate at any point after six months,

He has another go at plugging QE.

 is that QE is a policy tool that has worked:

Now let me spin this around to the what is the trend at the Bank of England and something which Sir Dave is steeped in. From 30th May 2019.

Before joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017. He was responsible for advising on UK macroeconomic policy and was the Government’s representative of the meetings of the Bank’s Monetary Policy Committee. Previous to that he held a number of civil service roles including leading the Treasury work advising on whether the UK should join the Euro.

Essentially the UK Treasury let the Bank of England be independent to some extent but then took control via placing its staff in it. Remarkably they have been even more successful than Goldman Sachs although some such as Ben Broadbent fulfil both. Just by chance ( irony intended) it has led to a period where the Bank of England has essentially purchased HM Treasury bond issuance and reduced the yields it has had to pay.

Bernard, if the right people don’t have power, do you know what happens? The wrong people get it: politicians, councillors, ordinary voters! ( Sir Humphrey Appleby)

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