Thursday, May 10, 2012

More ZIRP

UK interest rates held at 0.5%

The Bank of England has continued to hold UK interest rates at a record low of 0.5% and is not extending its quantitative easing programme (QE). QE is the Bank's scheme to boost the economy by buying bonds. In February, the Bank's Monetary Policy Committee (MPC) boosted the stimulus to £325bn. Rates have been at 0.5% for three years, despite persistent inflation.

Posted by quiet guy @ 12:50 PM (4371 views)
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11 thoughts on “More ZIRP

  • Under QE the bank buys government bonds (with new credit) already held by financial institutions, right? This adds to demand for bonds and so helps lower interest rates. But then the bank holds a large tranche of bonds. Either it sells them before maturity, and gets cash in return, or it holds them to maturity and then has a claim on the government. But since the Treasury acquires profits earned by the bank of england, in either case is not the net effect to reduce goverment debt? Or am I not understanding the process?
    N

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  • general congreve says:

    Yes, the net effect is to reduce govt. debt. However, where you may be getting confused is how the process works, as it seems a little counter-intuitive.

    The process works by monetising govt.debt. Namely, printing pounds and buying govt. debt, typically by using new cash to buy old govt. debt from banks, who use the new money to buy new debt from the govt. This monetises the debt, effectively lowering the burden of debt in real terms, although not nominal. So, in real terms government debt is reduced.

    Of course, this magic unicorn policy does have some disadvantages for anyone wanting to save a few quid for a rainy day, or who’s employer can’t afford to give them a pay rise is the coming years, or anyone who works for a company that is dependent on real disposable incomes not dropping, or anyone that generally lives in the UK.

    Apart from that, I’m sure it’ll all be fine though.

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  • Phew!!! That’s a relief.

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  • happy mondays says:

    Fantastic – got me worried for a bit that i may get some sort of return for lending the banks my money..

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  • mark wadsworth says:

    NickB, spot on, this is a question which lots of other people have asked – including me – seeing as the Bank of England (which holds the goernment bonds) and the Debt Management Office (which issued the government bonds) are both departments of HM Treasury and part of the UK government, those bits of paper in the BoE are really just bits of paper and are meaningless, can be torn up etc.

    If the DMO pays the interest, then HMT counts that as an expense but BoE counts it as income, and once HMT does its consolidated accounts, the net figure to come out is precisely £zero (minus running costs).

    Despite what the General says, there is no printing of coins and notes involved – and even if there were, printing coinds and notes to pay off government debts does not reduce government debts by one penny either (unless the holder loses them down the back of the sofa) because coins and notes are also – in a very real sense – government debts.

    If, like me, you know about bookkeeping and/or have ever bothered to look at the BoE balance sheet, you will know that coins and notes in circulation are counted as liabilities.

    Here endeth.

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  • mark wadsworth says:

    PS and of course QE neither reduces total government debts (instead of holding government bonds, financial institutions and investors are owed electronic money by the BoE) nor does it increase total government debts (QE is not in itseld “printing money”). In reality, QE merely shortens the average time to maturity of UK government debts and thus pushes down interest rates (short term rates are lower than long term fixed rates in most situations).

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  • I suspect the high rate for the £ against the Euro may hide price rises from Europe for the next few months. Inflation could “appear” to be reducing – but its just the Euro sinking, I believe.

    Oh dear, what a useless bunch of politicians and bankers to have led us into this mess……

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  • general congreve says:

    @5 – I beg to differ. If the BoE is funding a third of the UK deficit via QE, then that newly created book entry is flowing into the real economy as extra money supply when it is paid to government workers etc. If the govt. just had to rely on the free debt markets and taxation, it would have been forced to cut this expenditure long ago.

    Also the central tenet of QE supposedly being non-inflationary is that the market will buy back those bonds at face value from the BoE at a later date and the new money will be disappeared. Great exit strategy and surely deflationary in the future (as the disappearing money, disappears the previous QE-driven inflation), and we know from the BoE that we can’t have the dreaded DEFLATION 😮

    Finally, if it’s not inflationary, then it sounds like the holy grail. Why not use QE to pay for all government expenditure?

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  • general congreve says:

    @8 – And when I talk of printing money, by that I do not envision loads of coins and notes being printed. I include numbers on a computer screen in that definition.

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  • “You might get more QE in response to the eurozone problems, but the BoE has wisely decided to keep its powder dry in case it needs to do more in future,” he said.

    The wise old BoE… We’d be screwed without them, actually we probably would, as we’d have to live without our means for a change.

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  • general congreve says:

    There will be more QE, or whatever they want to call it next time.

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