The Bank for International Settlements (BIS) tallies up the unconventional policies undertaken by central banks quite nicely in its latest quarterly review.
The table it provides shows the Bank of England currently stacking up as the most unconventional central bank in the pack:
But, if Monday’s BoE announcement that it is planning to widen its asset-purchase programme to include working capital paper is anything to go by, the BIS might have to consider adding a whole new row to the table by the time of its next review.
As the FT reports:
Companies will soon be able to offload high-quality short-term debt on to the Bank of England, which announced on Monday it planned to extend its Asset Purchase Facility to forms of working capital. The Bank said it would begin a rapid consultation on purchasing commercial paper backed by assets such as trade receivables, equipment leases and short-term credit to consumers for uses such as credit cards and short-term loans.
Bank officials indicated the potential market size was a few billion pounds and the purchases would be financed by creating money under the £125bn quantitative easing programme, designed to pump money into the British economy, limit the recession and risks of deflation and ease strains in credit markets.
Those who believe the current programme is focusing too much on the gilt market, and therefore risking failure by not stimulating business lending enough, might well see this sort of QE expansion as a positive.
Certainly, there is evidence something desperately needed to be done. Last week, data from the Bank of England showed lending to companies and households fell in April for the first time since records began in 1997 even despite the initiation of the BoE’s quantitative easing programme.
However, as some others point out, the innovation could risk setting a dangerous paradigm by essentially wiping out the intermediary role of banks completely by taking central bank money straight to businesses themselves. Alice cook at UK Bubble sums it up quite well:
Think about that for a moment. The Bank of England is going to introduce a new cash creation operation to support the “provision of working capital to a broad population of companies”. The central bank will begin to feed liquidity straight into companies, bypassing the banking sector directly.
Central banks are supposed to ensure price stability. They shouldn’t be trying to replace commercial banks and supporting industry directly.
As ever, it seems the BoE is choosing to engage in a finely balanced tightrope act.
Related links:
Warning signals: QE rally might be over - FT Alphaville
FOREIGNERS ARE STEALING OUR QUANTITATIVE EASING – FT Alphaville
Slowdown in lending acts as warning – FT