The winners and losers of QE, by the BoE | FT Alphaville

The winners and losers of QE, by the BoE

This the Bank of England’s report into the distributional effects of its asset purchases. Click through the image for the full doc:

Or, if you’re not bothered, here are some extracts (with our emphasis):

The Bank’s asset purchases, commonly referred to as quantitative easing (QE), have depressed longer-term yields.  Consequently, some groups have borne a greater burden than usual from the sustained period of low interest rates.  But, on the other hand, the benefits have also been greater than usual, by helping to avoid a far worse outcome for the economy as a whole.

The Bank’s asset purchases have been almost entirely of gilts, causing the price of gilts to rise and yields to fall.  But this in turn has led to an increase in demand for other assets, including corporate bonds and equities.  As a result, the Bank’s asset purchases have increased the prices of a wide range of assets, not just gilts.  In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these asset.

For a defined benefit pension scheme in substantial deficit, asset purchases are likely to have increased the size of the deficit. That is because although QE raised the value of the assets and liabilities by a similar proportion, that nonetheless implies a widening in the gap between the two.  The burden of these deficits is likely to fall on employers and future employees, rather than those coming up for retirement now.

According to the reported estimates of the peak impact, the £200 billion of QE between March 2009 and January 2010 is likely to have raised the level of real GDP by 1½ to 2%… For comparison, a simple ready-reckoner from the primary forecasting model used by the Bank of England suggests that a cut in Bank Rate of between 250 and 500 basis points would have been required to achieve the same effect.

Of course, these figures do not translate into extra cash for each individual in the economy.  One reason is because they are an attempt to gauge the impact of QE relative to what would otherwise have happened, so the benefits might show up as smaller falls in wages than employees would otherwise have experienced, and lower job losses.  In addition, there will have been distributional consequences, with some groups being affected more than others.

The overall impact of QE on household wealth is likely to have been substantial… In practice, the benefits from these wealth effects will accrue to those households holding most financial assets. Evidence from the 2011 survey by NMG Financial Services Consulting,12carried out on behalf of the Bank, suggests that close to 80% of financial assets (excluding pension wealth, but including deposits) are held by those above the age of 45. And the survey suggested that the median household held only around £1,500 of gross assets, while the top 5% of households held an average of £175,000 of gross assets (Chart 4), or around 40% of the financial assets of the household sector as a whole.

Related links:
BoE concludes QE has not harmed pensions – FT
Team BoE pins hopes on lending scheme – FT Alphaville
Bank of England holds rates and QE – FT