The Bank of England’s quarterly inflation report is out today.
In addition to some dire inflation and GDP forecasts, there are also some distinctly US-style quantitative/qualitative easing things going on.
RBC’s Adam Cole notes this morning (emphasis ours):
GBP is weaker, though only moderately so, in the wake of an extremely downbeat BoE Inflation Report: The Bank’s central projection, based on market interest rate expectations shows inflation at just 0.5% on the two year horizon – 1.5% points below the inflation target. An undershoot of this magnitude, combined with the mere 100bp of policy left to play with, virtually guarantees a move to “unconventional” policy easing in the near term. Indeed a box in the Report goes on to explain how the current Asset Purchase Facility could be [used] to create money.
That’s the APF announced by the UK government on Jan. 19, with the “initial purpose” of purchasing up to £50bn in financial assets to improve corporate credit. But, the BoE is very explicit in today’s report that the facility could also be used to buy up government securities — i.e. gilts, to help increase the money supply and buoy inflation (similar to the US Fed’s consideration of buying up longer-term Treasuries).
Hence these snaps coming across Reuters quoting BoE governor Mervyn King:
10:42 11Feb09 RTRS-BOE’S KING-BUYING GILTS IS A NATURAL PARTNERSHIP TO BUYING OTHER ASSETS TO EASE CREDIT CONDITIONS
10:42 11Feb09 RTRS-BOE’S KING-PROBLEM IS THAT SUPPLY OF MONEY IS NOT RISING FAST ENOUGH
10:40 11Feb09 RTRS-BOE’S KING-WE WILL BE MOVING TO BUY A RANGE OF ASSETS, WHICH WILL ALMOST CERTAINLY INCLUDE GILTS
The BoE however, is amazingly forthright about the potential difficulties of the action in its report (emphasis ours):
There are uncertainties over the relative strength of these channels. One risk is that, if banks are concerned about their financial health, they may choose to hoard the increase in central bank reserves rather than expand the supply of credit, rendering the first channel partially ineffective. That happened to some extent in Japan in the earlier part of this decade, and underscores the importance of the major policy initiatives announced by the Government in October last year and January this year to improve the operation of UK banks. The strength of the second channel is also uncertain, both in terms of the impact of targeted asset purchases on illiquidity premia, and the extent to which that boosts new issuance. The Bank will gain early experience of the efficacy of this channel through its operation of the APF.
As FT Alphaville noted on Friday, the BoE has plenty to be wary of in trying to fight the market.
Doesn’t exactly inspire confidence does it?
Related links:
Rescuing banks, then Treasuries – FT Alphaville
All QEs are not created equal – FT Alphaville