Exiting quantitative easing may be harder than the Bank of England thinks
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After more than a decade of quantitative easing, the Bank of England will soon own nearly 900 billion pounds of government bonds. Last week, as the central bank gradually tightened monetary policy after the Covid-19 pandemic, the central bank provided the first detailed plan to explain how it aims to get rid of these pressures.
It makes the process sound very calm. Once the interest rate climbs to 0.5%, the Bank of England will stop reinvesting the proceeds of its maturing bonds-leading to a steady decline in its holdings. When the interest rate reaches 1%, Threadneedle Street will consider selling some Phnom Penh sows back to the market.
The Bank of England’s Monetary Policy Committee believes that reducing the stock of assets will have less impact on monetary conditions than the initial purchase of assets.Governor Andrew Bailey Add to At his press conference, quantitative easing will be carried out “automatically” along a “gradual and completely predictable path.”
The breeze seems strange, especially considering the market turmoil caused by the Fed’s past attempts to shrink its balance sheet, whether it was in 2013 “Cone tantrum” Then based on the Fed’s own experience “Quantitative tightening” three years ago.
The Bank of England believes that past quantitative easing statements may provide policymakers with a “signal” for their assessment of the economy and how they will respond, indicating to the market that interest rates will remain low for a longer period of time. The Bank of England stated that, in contrast, the announcement to reduce purchases of inventories would not contain such signals.
There are two big problems with this statement. First of all, the Bank of England also stated that quantitative austerity will only be carried out “under the appropriate economic environment”-so it is difficult to conclude that such a decision will indeed send some signals about the economy.
The second problem is more fundamental. Central bank governors can control what they say, but they cannot decide what the market hears.A sort of Polls The “Financial Times” this year revealed a common view of large investors in Phnom Penh bonds that the Bank of England’s quantitative easing program is a hidden program to finance government deficits, rather than trying to stimulate the economy to ensure that the central bank achieves its inflation target.
If the purpose of the Bank of England and investors are opposite, this is not just an academic issue. The ability of the central bank to influence the economy through its monetary policy is regulated by the financial market. If borrowing costs rise, growth may slow down. Fluctuations in the value of the pound sterling will have a great impact on inflation.
Chad Barwell, head of macro research at BNP Paribas Asset Management, said that interpreting the goals that the Monetary Policy Committee is trying to achieve through quantitative easing is “like trying to understand a mystery.” He argued that committee members even seem to have different opinions on how quantitative easing works-so it’s no wonder investors are confused.
Gertjan Frieger An outside member of MPC said in a statement speech Last month, he predicted that the additional £150 billion bond purchases announced in November last year would not provide any additional stimulus to the economy: instead, they are an insurance policy to prevent the turmoil that hit the markets at the beginning of the pandemic from reappearing. Perhaps since last week. Vlieghe, who has left the MPC since the meeting, is unusually frank, because this explanation seems to be inconsistent with the central bank’s previous reasons for launching the latest round of quantitative easing.
In any case, if policymakers want to reassure the market that they are ready to step in when the price of Phnom Penh bonds falls, why not just say it? Bailey has always been keen to distance himself from any suggestion that the Bank of England uses quantitative easing to finance government budget deficits to blur the line between fiscal and monetary policy.
But investors already believe that MPC is practicing the hidden version of the Bank of Japan “Yield Curve Control” Policy, Is actually using its bond purchases to prevent the yield of Treasury bonds from rising, rather than trying to push it down.
Or, if the additional quantitative easing aims to inform investors about the future path of interest rates, it would certainly be simpler to provide direct guidance. On the contrary, the Monetary Policy Committee chose what Pavel said “may be the most expensive signal in the history of monetary policy,” but the market is difficult to interpret.
Reversing the dominance of quantitative easing is always worrying. However, BlueBay Asset Management Chief Investment Officer Mark Dowding (Mark Dowding) said that the Bank of England’s approach may add an additional layer of complexity to the process, which may result in greater than Bailey and his colleagues expected. Market influence.
A report from the House of Lords Committee on Economic Affairs (including former Governor Mervyn King) last month statement The central bank has been “obsessed with” quantitative easing. The term was condemned by Bailey, who said it “has a very destructive meaning for many suffering people.” But whether the Bank of England is addicted or not, pretending that the withdrawal is straightforward is reckless.