Thursday, Jul 09, 2009
Not printing as much as expected
Reuters: BoE maintains rate at 0.5%, holds QE steady
As expected, interest rates are held at 0.5%, but the markets were expecting the Bank of England to announce QE2 - a massive £25billion expansion of the quantitative easing programme. That didn't come today, although the bank hinted it would reconsider the issue at the August meeting. Sterling has jumped 2% against the euro and the dollar on the news.
Posted by little professor @ 12:09 PM (1712 views) Add Comment
19 Comments
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1. paul said...
"Bout of Rationality Takes Hold in the Bank of England" Shocker!
Normal service expected to resume shortly.
2. 51ck-6-51x said...
"Britain's economy is no longer in freefall"
- really?
3. mark wadsworth said...
This whole QE thing is a huge great smokescreen for very little. All that happens is the holder of a bond (a bit of paper with a number on in guaranteed by the government) and gets an electronic balance with the Bank of England instead (an electronic bit of paper with a number on it).
The only slight subtle impact is that the BoE is probably overpaying slightly, say by 2% or 3%. So the resulting increase in 'money supply' is about £3 billion or £4 billion, i.e. b-gger all in the grander scheme of things, it's about half as much as one year's overpaid Tax Credits or something.
4. little professor said...
Could you expand on that mark? It's news to me
5. mark wadsworth said...
LP, 'the state' has lots of different branches, like the Treasury, which encompasses The Bank of England and The Debt Management Office.
When they do QE, what happens, in practice is, on Tuesday, The DMO issues (say) £6 billion of gilts, to e.g. Commerical Bank, and on Thursday, The BoE buys up £6 billion of gilts from CB and gives them a credit balance with the BoE instead. (I have a friend who emails me the figures every couple of weeks, it's usually around £6 billion)
So on Monday, CB has £6 billion in deposits, with the Bank of England, let's say. On Tuesday it withdraws that money and gives to the DMO in exchange for a bit of paper saying "Government bond, redeemable 2019, interest 5%, payable semi-annually". CB then hangs on the bit of paper for two days. On Thursday, CB bank takes the piece of paper to the BoE and sells it to the BoE for £6 billion, and the BoE credits CB bank with £6 billion.
So by Friday, the bank is more or less in the same position as it was on Monday, give or take two days interest, minus transaction costs plus a small profit on the deal (as the BoE is overpaying slightly.
The BoE (left hand corridor of HM Treasury) has a computer than registers that it owes CB £6 billion (which is exactly the position as it was on Monday). BoE also has a bit of paper saying that the DMO owes it £6 billion.
Meanwhile, the boys and girls at the DMO are sitting in the right hand corridor and their computer tells them that they owe the BoE £6 billion.
But BoE and DMO are like two 'subsidiaries' of HM Treasury, which is in turn part of the State, they owe each other the £6 billion, which conveniently nets off to nil.
It's like you withdrawing £100 from your bank account with The Halifax and paying it into your wife's savings account with Lloyds. She feels richer, you feel poorer but taking your household as one economic unit, your overall wealth has not changed one bit. The overall wealth of the Lloyds Banking Group (incorporating Lloyds and the Halifax) has not changed one bit either.
6. paranoia blue said...
Hmmmm "holds QE steady" - they've maybe run out of cash!?
7. titaniccaptain said...
@Wadsworth
Would you agree then that QE will not give rise to the hyperinflation monster and the only benefit GE gives to the banks is it makes them more liquid in the immediate?......would that dispel the QE hyperinflation myth?
8. Me Me Me said...
Trading FX has been good since the 84p low however if it doesnt hold this 8637 support then the € is off lower once more.
9. debtfree said...
Hyperinflation will be caused by a loss of confidence in the currency, such as the dollar...
"The so-called Group of Five -- Brazil, China, India, Mexico and South Africa -- discussed “looking at the use of alternate currencies, not so much as reserve currencies,” Menon said. “But Brazilian President Lula suggested that we should consider using our own currencies to settle our own trading accounts with each other.” Menon said “everyone recognizes” that the idea of a new reserve currency “is a long-term goal.”
Lets say that again...... “everyone recognizes” that the idea of a new reserve currency “is a long-term goal.”
And again.
10. mark wadsworth said...
@ Titanic.
Exactly. It doesn't even make Commercial Bank "more liquid" (whatever that means) as it is in exactly the same position on Friday as it was on Monday. The whole shenanigins merely enriches Commercial Bank by a couple of hundred million every week, i.e. QE itself has got nothing to do with inflation, hyper or otherwise.
Hyperinflation, if it happens, will be caused by the government running up debts of £175 billion a year, or whatever horrendous figure they are talking about.
11. Fallingbuzzard said...
Correct mark wadsworth, except for the small matter than the BoE never had any money with which to buy that piece of paper. QE is simply financing government defecit to the tune of £125bn this year, which is about the amount that the government is overspending versus what was expected before the stuff hit the fan.
12. titaniccaptain said...
What I meant Wadwsorth is instead of having that money tied up in a bond they have it readily available "should" they decide to invest.
13. sold out said...
Mark wadsworth@0303pm
"It's like you withdrawing £100 from your bank account with The Halifax and paying it into your wife's savings account with Lloyds. She feels richer, you feel poorer but taking your household as one economic unit, your overall wealth has not changed one bit. The overall wealth of the Lloyds Banking Group (incorporating Lloyds and the Halifax) has not changed one bit either"
unless she goes and spends it on new shoes, clothes, make up, perfume........the list is endless....or maybe thats just my misses bless her
14. quiet guy said...
@Mark Wadsworth
Thanks for comment #5. Very interesting and thought provoking.
After kicking the ideas about for a while, I think I understand the deflationist camp a bit better now. Most economists seem to be worried by deflation in case we get into a Japanese style long recession. As you noted later, an inflationary risk is excessive government debt so if you are of the opinion that inflation is better than deflation, doesn't it follow that we should be hoping for a Labour victory at the next election to inflate away personal and national debt?
(I'm just joking but there is a grain of twisted logic in there)
15. techieman said...
Me Me Me we shall see :-)
16. hpwatcher said...
nflation, if it happens, will be caused by the government running up debts of £175 billion a year, or whatever horrendous figure they are talking about.
They seem well on their way though.
17. britishblue said...
14. Quiet Guy at 14.
Gordon Brown will probably be recognised in history for doing exactly the right thing in saving the banks and pumping money into the economy. (this has nothing to do with his failure to recognise you need to save for a rainy day over the last ten years). A keynsian boost was exactly right and without it the economy would have spiralled downwards and the patient could have died. However, the trick is the timing of when the patient has been stabalised and has to come out of rehab. Then the heroin has to stop. i.e the moneyhas to be paid back. Given the timing of the next election we may well be lucky that Labour were still in power when this crisis hit and will hand over to the Conservatives who will be forced to make the savings. we were lucky we wer'nt in the uro and were able to devalue the pound and we may be lucky that a change of givernment will almost perfect timing in terms of moving from spending to paying debt back
18. mark wadsworth said...
@ FB "QE is simply financing government defecit to the tune of £125bn this year"
No, that's a different issue. QE does not actually increase government debt (apart from the overpayment element, which in turn goes as profits to the banks), it just shuffles bits of paper back and forth.
The government borrowing more money is a different thing - net government debt has been increasing year-on-year for the past [nearly ten years] and that was without any QE whatsoever.
Admittedly, both QE and increasing government debt are signs that Labour are doing a scorched earth policy, and QE props up gilts prices (in the short term at least) so it makes it easier for the government to issue gilts for the time being, but once QE stops, gilt prices will drop by a couple of per cent accordingly (and interest rates will rise by 0.2% or whatever the maths is).
19. Poacher said...
@Mark Wadsworth
I don't think it can be dismissed as a smoke screen. Your description of the process reduces the timescale to a few days juggling new govermnent debt, which doesn't allow room for the intended effect at all. The idea is that extant government debt, or bonds, end up with the BOE in exchange for deposits at Threadneedle St. The deposits count against a bank's reserve requirements, whereas the gilts and bonds didn't. If the commercial bank sheds £6bn of gilts from its balance sheet in favour of £6bn M0 money, then deposit multiplication theoretically delivers as much as £600bn to the economy in the long run, providing the banks can be persuaded to lend. So instead of the impact being the modest £3bn or £4bn you suggest, it is in actual fact potentially £1.25tn over time, which would be hugely inflationary if it weren't sterilised to the necessary extent down the line.