The minutes of the Bank of England’s Monetary Policy Committee meeting for its October interest rate decision are now out.
Anyone disappointed by the lack of guidance on the Bank’s £175bn quantitative easing programme in Mervyn King’s speech on Tuesday will not be assuaged by the details in the minutes. For a start, there’s a rather mixed message when it comes to QE’s effect on asset prices.
Here, for instance, is the bank attributing the recent astronomic rise in UK equities to everything but the Bank’s asset-purchasing programme:
Equity prices in the United Kingdom, euro area and United States had risen since the September MPC meeting. Equity prices had risen by around 50% since their March lows, but still remained at least 25% below their pre-crisis highs. This turnaround was likely to have reflected a combination of lower default-free rates, higher earnings forecasts and a reduction in the equity risk premium. According to estimates derived from a dividend discount model, the risk premium for UK equities, which had been extremely elevated in March, had returned to around its average of the past decade. Corporate bond yields and spreads had also fallen further, and yields on investment-grade bonds had fallen below their average of the past decade.
But further down there’s the note that QE has performed “as expected” in pushing up asset prices including equities:
The Committee reviewed the impact of the asset purchase programme on financial markets. The spread between gilt yields and OIS rates had fallen substantially since March. Over that period, there had been significant reductions in sterling Libor rates and sharp rises in a number of sterling asset prices, including those of equities and corporate bonds, and liquidity conditions in many financial markets were considerably improved compared with six months earlier. It was probable that the asset purchase programme had contributed to these developments, although it was unlikely to have been the only factor. Earlier cuts in Bank Rate, official sector intervention to stabilise the banking system, improvements in the global economy and the recovery in confidence since the panic of autumn 2008 had also probably played a part. The rate of adjusted M4 growth relative to nominal GDP was consistent too with money growth having been boosted by the asset purchase programme, although monetary data were volatile and not straightforward to interpret. Overall, the evidence suggested that the effect on asset prices had been of the type that the Committee had anticipated when it launched the programme and had been substantial.
Also of interest, is the first sign of inflation concern at the Bank:
There were differences of view among members of the Committee on the balance of risks to the medium-term outlook for inflation, and how it had shifted in recent months. All Committee members, however, agreed that recent developments were not sufficiently compelling to justify revising the target level of asset purchases that had been agreed at the August meeting or to change the level of Bank Rate at this meeting. The forecast round ahead of the November Inflation Report would provide an opportunity to assess more fully how the medium-term outlook for activity and inflation had evolved since August. 31
Nevertheless, the meeting ended rather predictably:
The Governor invited the Committee to vote on the proposition that:
Bank Rate should be maintained at 0.5%;
The Bank of England should continue with the programme, as announced following its 6 August meeting, of asset purchases totalling £175 billon financed by the creation of central bank reserves.
The Committee voted unanimously in favour of the proposition.
November MPC meeting — we await thee.
Related links:
My King-dom for some QE guidance – FT Alphaville
QE according to Smithers – FT Alphaville
Moving targets, QE edition – FT Alphaville
The governor’s insatiable appetite for QE – FT Alphaville