It has hit. Quantitative easing has finally been discovered by the mainstream press in the UK.
Or at least, it’s finally been acknowledged as the logical next policy step from the Bank of England as rates approach zero.
The consensus is for a 50bp cut from the MPC today, which would take rates to 1.5 per cent - the lowest they will ever have been. They will likely go lower still.
And as the FT reported yesterday, quantitative easing is very much on the policy agenda:
Mr Darling said that if rates fell close to zero, the central bank and Treasury would have to work “hand in hand”, since any operations by the Bank of England to print money would have to be authorised by him. His stance will disappoint many at the central bank who wanted to be given authority by the Treasury to operate quantitative easing - creating money to buy assets - within parameters agreed in advance.
The Times picked up the bone today, running it on its front page. Which prompted a swift response from the Treasury, out moments ago:
RTRS - UK TREASURY SPOKESMAN SAYS REPORTS GOVT ABOUT TO PRINT MORE CASH “NOT ACCURATE AT THIS STAGE”
The fact that the Treasury and not the BoE is commenting rather gives the game away. It corroborates the thrust of the FT’s story and that appearing in today’s Independent: that quantitative easing is being considered and the BoE is having its independence somewhat compromised because the Treasury wants an equal say in the process.
This is perhaps where the greatest danger lies in the UK. In the US, where a form of quantitative easing is underway, and has been slyly progressing for some months now (US monetary base started to spike in October), the process is very much in the hands of the Fed. (Though without a doubt, the Treasury will be being consulted).
In the UK, a joint role will make the whole affair susceptible to the political exigencies of the government - and with QE already appearing on front pages under the inflammatory guise of ‘printing money’, it’s a delicate situation. Particularly so since the main danger of QE - not spotting a suitable exit point, overshooting and triggering inflation - would be a problem the BoE would be left to handle.
On the other hand though, carping about the facade of independence at times like these might be rather silly. Willem Buiter notes:
One thing the central bank needs in order to engage wholeheartedly in quantitative easing and especially in qualitative easing, is the full backing of the Treasury/ministry of finance. Greater central bank exposure to private sector default risk is an inevitable result of quantitative and qualitative easing, unless the entire expansion of the balance sheet of the central bank is achieved by purchasing sovereign debt instruments. If the default risk materialises, the Treasury has to recapitalise the central bank immediately. Such automatic indemnification is necessary if the central bank is to be able to pursue its regular macroeconomic objectives. If it is not automatic and unconditional, it threatens the operational independence of the central bank in its rate setting decisions.
There are further reasons why QE in the UK would have to be done by the BoE and Treasury, hand in hand. The Treasury here still controls several key economic levers, like the Exchange Equalisation Account, which would be essential in QE.
Then there is the question of whether QE is actually an appropriate policy for the UK at all right now: the scale and size of the US quantitative easing operation (it is massive) may not be plausible in the UK, principally because sterling is a less stable currency than the dollar. Indeed a further collapse of the pound may obviate the need for QE altogether - something which analyst Michael Saunders at Citi has suggested as a possible outcome.
All of which is not to say that full-blown QE isn’t still the preferred - possibly inevitable - course. UK banks’ balance sheets are under huge deflationary pressures, house prices are collapsing and the BoE’s series of dramatic and unprecedented rate cuts have had little apparent effect.
QE is some sense, is indeed already underway in the UK. Banks’ money held on reserve at the BoE - a key component of the monetary supply measure (M0) - is already up sharply since the Lehman bankruptcy. An expanded M0 is, by definition, a quantitative expansion.
For full-blown QE though - as seen in Japan and America - the BoE would have to start fundamentally altering the composition of its balance sheet: buying troubled assets to target yields, just as the Fed is doing in the US.
And of course, interest rates would have to be a lot nearer zero, before QE could really justifiably be deployed as the final deflation-fighting weapon left in the BoE arsenal.
Roll on noon.
Related links:
Fed capitulates: the central bank is broken - FT Alphaville
Prsh-dum Prsh-dum Prsh-dum - FT Alphaville
We must start thinking like South American dictators - The Guardian
