BoE to try quantitative easing

In its latest Monetary Policy Committee Minutes:

To the extent that further cuts in Bank Rate could not inject sufficient stimulus, the Committee would need to use alternative policy instruments. The MPC’s ability to influence the value of nominal spending and inflation in the economy ultimately came from the Bank of England’s role as the monopoly supplier of sterling central bank money: banknotes and reserves held by the banking system at the Bank. The MPC had up until now influenced the economy by changing the interest rate –currently Bank Rate – at which those reserves were remunerated. The Bank had supplied the amount of central bank money demanded at that level of Bank Rate, mostly by purchasing and selling government securities.

But the MPC could also influence the economy by controlling the quantity of that central bank  money directly. Increasing the supply of central bank money in the economy through additional purchases of government securities should raise private sector spending, both directly (through the increase in money holdings of private sector asset sellers) and indirectly (through an expansion by banks of the supply of credit).

UK economy is under dire straits. Recently BoE started Asset Purchase Facility (under UK’s TARP) :

In the present environment, where particular credit markets were not functioning normally, it was appropriate to consider increasing the supply of central bank money by more unconventional types of asset purchases. 

The Bank, rather than the MPC, had already been given the authority by the Chancellor to conduct such purchases, via the Asset Purchase Facility (APF), although in this case financed by the issuance of Treasury Bills. The APF was a specially created fund, indemnified by the Treasury. Those purchases were aimed at improving conditions in the specific credit markets rather than achieving the inflation target. Nevertheless, these measures might help to change banks’ behaviour and boost the broad supply of money, which could provide a material stimulus to nominal spending.

APF is being financed by  UK Treasury and does not lead to pumping reserves in the economy. Infact money stays constant in the economy and just changes hands. UK Treasury raises monies by issuing T-Bills; Monies are transferred to BoE to buy securities under APF.

The difference between APF and what Minutes mean is  – BoE would try and buy govt bonds and other securities on its own account and not on Treasury’s account. This is Japan did in its 1990s crisis and it will be interesting to see how BoE fares.

BBC points BoE is looking  to seek permission from government for the same. Also read Stephanomics for more details

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3 Responses to “BoE to try quantitative easing”

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