Central Banks in July chose words over action, and ironically the Pen (words) was mightier than the Sword (monetary action). Central Banks had a win, as investors were confident, and jumped back into investing. Bond yields fell, share markets rallied. Everyone was happy.
Or were they?
Quantitative Easing or money printing in the UK began in 2009, and was initially used to bolster the vulnerable economy post the Global Financial Crisis. By buying bonds (or Gilts as they are known in the UK), the Bank of England (BOE) hoped to flood the economy with money, which in turn would be used for investment, which would lead to growth.
Earlier this month, the BOE cut interest rates to 0.25% - a record low. Governor Carney is worried about the economic fallout from Britain’s decision to leave the EU. It also announced other measures which would force banks to pass on low interest rates to households, as well as buying £60b of bonds. It is this last measure that kicked in this week, as the BOE attempted to purchase a tranche of £1.17B of bonds, but instead coming up short.
The BOE missed its target as demand is high for positively yielding assets. Regulators compound the problem, as they require Banks to hold higher quality assets on their books, and Pension funds are reluctant sellers.
It would seem a bond drought is looming, and with economic activity diminishing, this is being interpreted by some as a failure in policy.
40 protestors outside the BOE this week chanted “create money for people, not financial markets”, and “our money, our country, our future”. They recognise that 7 years of abnormally loose monetary policy has not helped Main Street. They argue it has only increased inequality, created fuel asset bubbles and punished savers.
Perhaps the end of QE is close, and Governments and Central Banks may have to revisit other strategies.
