Jump to content
House Price Crash Forum

Recommended Posts

  • Replies 2.7k
  • Created
  • Last Reply

Top Posters In This Topic

There was no announcement of any extension to the present £125bn of asset purchases by the BoE under its quantitative easing programme by the MPC today.

News release by BoE

What are the Telegraph muttering about then? :blink:

http://www.telegraph.co.uk/finance/economi...ncrease-QE.html

Edit: Article was posted at 6AM, that explains it!

Edited by Kazuya
Link to post
Share on other sites
I must admit, I'm surprised.

I thought the remaining £25bn was pretty much a given.

edit: should this not have it's own thread?

I only put the info here for the record. It does deserve its own thread.

One interesting point in the news release is that the MPC estimate the current QE programme will take another month to complete.

So far they've spent £112bn of the proposed £125bn, and they've been buying £6.5bn of gilts each week like clockwork. That would suggest we've only got a couple of weeks left of QE. It's possible therefore that they may now scale down the purchases until the next MPC meeting, maybe buying only £3bn each week.

Link to post
Share on other sites

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to continue with its programme of asset purchases totalling £125 billion financed by the issuance of central bank reserves.

The Committee expects that the announced programme will take another month to complete. The Committee will review the scale of the programme again at its August meeting, alongside its latest inflation projections.

Link to post
Share on other sites
I must admit, I'm surprised.

I thought the remaining £25bn was pretty much a given.

edit: should this not have it's own thread?

Steph has a bit on this on her blog:

It's make your mind up time for the MPC. Either today or next month, the Bank of England's Monetary Policy Committee has to decide whether to continue with the current policy of "quantitative easing", or take a rest.

I don't know what will happen. There's a spirited debate within the committee on this, and I suspect the members don't know themselves.

In effect, the discussion comes down to this: do you think that QE is mainly about the quantity of money you put into the system - or the degree of "ease" that it provides?

Let me explain. One way to think about QE is as a topping-up exercise. Thanks to the recession, the Bank thinks that nominal GDP - the amount of national output in cash terms- is about 9% lower than it would be in "normal" times. That roughly corresponds to the £125bn the MPC is due to have spent by the end of this month (it's spent about £110bn so far).

If you thought QE was a one-off exercise to get the amount of cash flowing through the economy back up to more normal levels, and encourage similar growth in cash GDP, you could say the job was more or less done. All you need to do is stand back, and wait for that dollop of money to work its way through the system.

That way of looking at QE points in the direction of putting the policy on pause for a while after the £125bn is spent. Or, to let the markets down gently, you might say you were going to spend the final £25bn of the £150bn originally authorised by the chancellor, but at a slower rate.

But that's if you think of QE as a one-off injection. A lot of people think of the policy rather differently, as an ongoing stimulus, requiring continual injections of cash.

Economists who emphasize the policy's effect on government bond yields - and thus long-term borrowing rates - tend to think of it in this way. They think it would be disastrous to stop now.

QED

And further down she puts Mervyn King in the one-off camp, which fits in with what has happened today,

Peter.

Link to post
Share on other sites

Operational notice from BoE:

The MPC announced earlier today that it would maintain the target for its asset

purchases at Stg 125 billion and review the scale of the programme again at its

August meeting. In order to ensure that purchases of private sector assets can

continue to be financed through the creation of central bank reserves over the

next month, the Bank is reducing the size of the individual gilt purchase

auctions. This means that gilt purchase operations are expected to continue

until 29 July, one week before the MPC's next meeting.

Also another gilt is being removed from the buy list:

UKT 4.75% 2020 is excluded from Asset Purchase Facility gilt purchases until

further notice, since the Bank's holdings are above 70% of the free float, ie

the total amount in issue minus government holdings.

http://www.bankofengland.co.uk/markets/apf/announcements.htm

Link to post
Share on other sites

picking

Huge jump in gilt yields.

10-year from 3.61% to 3.77%.

Big story, small piece in today's Telegraph.

This looks live wave 2 of the downturn starting. Underwater mortgage holders will soon have their snorkels taken away.

Link to post
Share on other sites
Big story, small piece in today's Telegraph.

This looks live wave 2 of the downturn starting. Underwater mortgage holders will soon have their snorkels taken away.

Selloff is continuing today. 10-year is now 3.84%.

The DMO still has to sell £150bn gilts for the remainder of this fiscal year. If I were Robert Stheeman, the DMO chief exec, I wouldn't be too happy with the situation right now. The BoE has been like a big elephant that has stomped all over the gilts market and probably driven away many key investors. We don't know whether the Bank's purchases have finished for good, but you can't help but feel that this enormous purchase programme has damaged the normal workings of the market, and any re-entry by the BoE later this year will only cause more uncertainty and distortion.

Link to post
Share on other sites
Selloff is continuing today. 10-year is now 3.84%.

...

Sorry if this has been asked before, but at what point do gilt yields start forcing interest rates up? At the moment we have 10 year gilt yields at 3.84% and the base rate at 0.5%, how big can this difference be before the BoE is forced to do something?

Link to post
Share on other sites
Sorry if this has been asked before, but at what point do gilt yields start forcing interest rates up? At the moment we have 10 year gilt yields at 3.84% and the base rate at 0.5%, how big can this difference be before the BoE is forced to do something?

There's no compulsion on the BoE to raise its base rate (Bank Rate) no matter how high gilt yields rise. We just end up with a very steep yield curve. However a general rise in gilt yields could put upward pressure on other commercial lending rates such as those on fixed-rate mortgages and corporate bonds.

The biggest problem with rising gilt yields is simply the increased interest burden on public debt.

Link to post
Share on other sites
There's no compulsion on the BoE to raise its base rate (Bank Rate) no matter how high gilt yields rise. We just end up with a very steep yield curve. However a general rise in gilt yields could put upward pressure on other commercial lending rates such as those on fixed-rate mortgages and corporate bonds.

The biggest problem with rising gilt yields is simply the increased interest burden on public debt.

Yes, but essentially the BoE is funded by the Treasury, so if the BoE is to lend a large amount of cash in to the market at the BoE rate, it has to borrower this money (ex. QE), if from nowhere else, from the Treasury.

Since the Treasury raises money in the Gilt markets, if Gilt yields go up, and the BoE rate remains low, banks can make a pretty profit from the Govt by borrowing from the BoE at 0.5% and buying Gilts at 3.8%. This is essentially a loss to the Govt. At some point the strain on the public finances is such that the BoE can no longer provide the funds at 0.5% and will have to raise the rate, simply to reduce the demand for borrowing, and so reduce the drain on the public finances this causes.

In other words, you can't lend at 0.5% and borrow at 3.8% forever without going bust.

Link to post
Share on other sites
Yes, but essentially the BoE is funded by the Treasury, so if the BoE is to lend a large amount of cash in to the market at the BoE rate, it has to borrower this money (ex. QE), if from nowhere else, from the Treasury.

Since the Treasury raises money in the Gilt markets, if Gilt yields go up, and the BoE rate remains low, banks can make a pretty profit from the Govt by borrowing from the BoE at 0.5% and buying Gilts at 3.8%. This is essentially a loss to the Govt. At some point the strain on the public finances is such that the BoE can no longer provide the funds at 0.5% and will have to raise the rate, simply to reduce the demand for borrowing, and so reduce the drain on the public finances this causes.

In other words, you can't lend at 0.5% and borrow at 3.8% forever without going bust.

This post is gibberish from start to finish.

Link to post
Share on other sites
Yes, but essentially the BoE is funded by the Treasury, so if the BoE is to lend a large amount of cash in to the market at the BoE rate, it has to borrower this money (ex. QE), if from nowhere else, from the Treasury.

Since the Treasury raises money in the Gilt markets, if Gilt yields go up, and the BoE rate remains low, banks can make a pretty profit from the Govt by borrowing from the BoE at 0.5% and buying Gilts at 3.8%. This is essentially a loss to the Govt. At some point the strain on the public finances is such that the BoE can no longer provide the funds at 0.5% and will have to raise the rate, simply to reduce the demand for borrowing, and so reduce the drain on the public finances this causes.

In other words, you can't lend at 0.5% and borrow at 3.8% forever without going bust.

This post is gibberish from start to finish.

It might be gibberish but I was under a similar impression as well. i.e. If the BoE base rate is sufficiently less than gilt yields, then banks will just borrow en-masse from the BoE and buy gilts. Maybe that doesn't happen because en-masse buying of gilts will force the yields back down again. However I'd like some clarification, because there certainly is a meme going round that says high gilt yields put pressure on central banks to increase interest rates.

Link to post
Share on other sites

The 0.5% rate is the spot rate while the 3.8% is on a 10 year note. You have a mismatch if you borrow short and lend long. Owners of 10 year gilts are nervous as before they could sell to the BOE but now they need to find someone else.

The present QE strategy has been a transfer of wealth from the general population to owners of gilts. This is to allow the Government to borrow more money. The BOE has implicitly said it does not believe in this strategy.

Who will lose from the change - banks, foreign investors and the Government who will pay more to borrow money.

Who will win - you, me and everyone else with money (£) in the bank or a UK salary.

Link to post
Share on other sites

"The biggest problem with rising gilt yields is simply the increased interest burden on public debt."

Hi FT - this is one of the bits i dont get.

Is not the interest that govt will be paying fixed when the gilt is sold ie the coupon.

How does what it trade for and therefore yield after the intital sale have anything to do with the what govt pay?

cheers

Edited by CHF
Link to post
Share on other sites
Yes, but essentially the BoE is funded by the Treasury, so if the BoE is to lend a large amount of cash in to the market at the BoE rate, it has to borrower this money (ex. QE), if from nowhere else, from the Treasury.

Since the Treasury raises money in the Gilt markets, if Gilt yields go up, and the BoE rate remains low, banks can make a pretty profit from the Govt by borrowing from the BoE at 0.5% and buying Gilts at 3.8%. This is essentially a loss to the Govt. At some point the strain on the public finances is such that the BoE can no longer provide the funds at 0.5% and will have to raise the rate, simply to reduce the demand for borrowing, and so reduce the drain on the public finances this causes.

In other words, you can't lend at 0.5% and borrow at 3.8% forever without going bust.

This post is gibberish from start to finish.
It might be gibberish but I was under a similar impression as well. i.e. If the BoE base rate is sufficiently less than gilt yields, then banks will just borrow en-masse from the BoE and buy gilts. Maybe that doesn't happen because en-masse buying of gilts will force the yields back down again. However I'd like some clarification, because there certainly is a meme going round that says high gilt yields put pressure on central banks to increase interest rates.

Perhaps someone more knowledgeable can explain this more clearly, as I was pondering this the other day too.

Link to post
Share on other sites
  • Guest featured this topic

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    No registered users viewing this page.



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.