The day after Richard’s ‘walking on custard‘ blog last week, the BoE announced that it was going to have a break from its QE program, at least until its quarterly Inflation Report comes out next month. The BoE had previously committed to buy back £125bn of gilts, £25bn short of the £150bn that the government had permitted. Market expectations had been for the BoE to announce that it would buy back the additional £25bn and provide some sort of guidance for how many more gilts it would buy over the remainder of this year.
Markets interpreted the lack of guidance as a possible first move towards a QE exit strategy. Suddenly, investors started thinking that not only is the QE support for the gilt market potentially being withdrawn, but the BoE might start selling back its £125bn of gilts to the market at some point in the not too distant future – and that’s on top of the £200bn+ that’s going to be issued in the next 18 months regardless of what the BoE does. Gilts puked a bit on Thursday, with 10 year gilt yields jumping by 0.17%, making it the ninth biggest intraday selloff of the past decade.
Then, on Friday, we had the announcement of the Charlie Bean Tour. The Deputy Governor has jumped in his battle bus and will spend this week gigging at 14 cities around the UK, armed with this pamphlet. We’re wondering why the Deputy Governor would take a week out of his busy schedule to explain to the masses how QE works just as QE finishes. So maybe it isn’t going to finish.
The market seems to have reached a similar conclusion, with 10 year gilts having recovered about half of the ground lost on Thursday . We’re probably not going to get many more clues until the minutes of last Thursday’s MPC meeting are released next Wednesday, but either way, while it’s possible that we have seen the end of QE, it feels more likely to be just the end of the beginning (and in fact, Charlie Bean has just said on his Leeds leg that policy makers were wary of ending their asset program “too early” since that posed the risk they may “nip the recovery in the bud”).
Two things from the pamphlet – firstly there is explicit talk of QE as a means of lowering government and corporate bond yields to get borrowing rates down for the economy (previously the focus was on the pure inflationary impact of pushing pound notes into UK plc), and secondly the diagram on page 12 couldn’t look more like a helicopter dropping banknotes over the nation if it tried.