Here’s a significant development in the Bank of England’s quantitative easing, we think.
Charlie Bean, the Bank’s deputy governor for monetary policy, has just made a speech called “Quantitative easing: An interim report”, in which he rather moves the QE goal posts. The policy, we are now told, is not so much about getting banks to lend. It’s more about pushing up asset prices to repair banks’ balance sheets.
Here’s the relevant bit from the speech:
Fortunately, increased bank lending is not necessary for Quantitative Easing to work. Indeed, it was precisely because the Monetary Policy Committee expected the additional monetary injection not to stimulate bank lending directly at the current juncture, that the Asset Purchase Facility’s purchases were targeted at assets held primarily by the non-bank private sector. So if the Asset Purchase Facility buys gilts from pension funds or asset managers, they will then have to look for another home for their money. As it is not very rewarding just to hold it on deposit, they are likely to look to put their money into other assets, including equities and corporate bonds. Thus not only does the price of gilts rise as a consequence of the Asset Purchase Facility’s initial purchases, but also the prices of a whole spectrum of other assets. That in turn lowers the cost of non-bank finance and encourages increased corporate issuance. Also the rise in asset prices increases wealth and improves balance sheets. In this way, Quantitative Easing helps to work around the blockage created by a banking system that is still undergoing a process of balance sheet repair.
That, of course, is rather different to Bean’s previous work on the QE subject (click to enlarge).
Full text of the speech here.
Related links:
Allocating, multiplying, QE – FT Alphaville
The (QE)uropean equities rally and yields – FT Alphaville
This bank-engineered equity rally – FT Alphaville
The ‘QE’ stockmarket effect – FT Alphaville