Is QE working?, asks the Bank of England | FT Alphaville

Is QE working?, asks the Bank of England

Linda Yueh of Bloomberg TV just asked a very sharp question of Bank of England governor Mervyn King at Wednesday’s Inflation Report press conference, at pixel time. If the UK’s money supply is contracting, shouldn’t there be more QE, and are you buying the right assets (gilts) anyway?

Mervyn dodged the last part. (Update — see below)

But there is an interesting (defensive?) discussion of the M4 data and the Bank’s purchases of gilts in the Inflation Report itself (emphasis ours):

It is difficult to account for the weakness in money in Q4. The MPC’s purchases of gilts in Q4 were associated with some reduction in the holdings of gilts in the non-bank private sector (Chart 1.2), which should have boosted the deposits of those investors and, therefore, broad money.There are a number of factors that could have reduced money growth in Q4. First, market contacts suggest that some investors have chosen to reinvest the proceeds of gilt sales in other liquid assets, which would reduce money if such assets were ultimately purchased from outside the non-bank private sector. Perhaps consistent with that, the non-bank private sector increased its net holdings of Treasury bills by £11 billion in Q4. Second, some financial institutions in the non-bank private sector may have borrowed money from banks to buy gilts in Q3 in anticipation of further asset purchases being announced by the MPC. That would have boosted money growth in Q3 and reduced it in Q4 when the gilts were sold and the loans were repaid. Third, large intragroup movements of capital by some banks at the end of the year are likely to have reduced money growth, relative to its rate in the absence of those transfers.

Overall, it is difficult to assess the impact that the MPC’s latest asset purchases have had on the money supply. It is impossible to know how weak money growth would have been in the absence of asset purchases. And volatility in the recent money data makes it hard to judge how much news there is in a single quarterly outturn…

Update — Yueh did eventually get an answer from Mervyn on buying other assets…

That would be asking us to buy assets which other people don’t want to buy. That is the definition of a subsidy… the suggestion that there assets to be purchased that we are not purchasing today is a fallacy.

Related link:
Bank of England ups QE (and tweaks its gilts) – FT Alphaville