Economic Implications of QE

3 April 2012

Reform roundtable seminar introduced by Dr Adam Posen, member of the Bank of England’s Monetary Policy Committee, on Thursday 29 March.

Long-time students of central banks are often surprised at the degree of interest, and strength of feeling, that this topic currently generates. But this should be no surprise. Since the Bank of England started its Quantitative Easing (QE) programme in March 2009, it has pumped £325 billion into the UK economy. Any intervention on this scale will have major economic effects.
To provide an insight into thinking on QE and its likely economic effects, Reform held a round table seminar on Thursday 30 March with Dr Adam Posen, member of the Bank of England’s Monetary Policy Committee. This event was held under the Chatham House Rule. Some of the key points raised included:

1. Impact on pensions of QE. The National Association of Pension Funds (NAPF) recently published an estimate that the latest £50 billion asset purchase added £45 billion to the deficit of UK companies’ final salary pension schemes. The challenge is to assess whether any gain to the economy from QE exceeds these losses to pensions (there are no easy answers to this). To understand the full implications of QE it is also important to consider the counter-factual. What would the UK economy (and thus pensions) look like if QE had not have taken place?

2. Regulatory impact on pensions. There was concern that the effects of QE on pensions may have been increased by a lack of response from the regulator. Pension schemes report receiving inconsistent messages from the authorities, with pressure to transfer their investments into riskier assets while at the same time being encouraged to de-risk. Finding the right approach to regulation will become more important when the Bank of England needs to unwind its position and return gilts to the market.

3. Role of bank lending. An asset purchase programme should increase the amount of money in the economy and encourage bank lending. Yet there is a concern that banks have used much of the money to shore up their own balance sheets, rather than injecting cash into the real economy. This highlights two issues. First, is credit allocation by UK banks good enough? One view is that institutions in the US do a better job of this than our capital markets, given the larger reliance on bank lending in the UK and lower levels of competition in the sector. Second, QE should cause an increase in asset prices by allowing corporates to raise debt more cheaply, in turn generating wealth creation as consumption increases. While this has happened, evidence suggests that the impact is much smaller in the UK than in the US.

4. Circumventing the banking system. It has been suggested that the Bank of England could issue money closer to the market, by-passing the banks. In the US this can happen more readily given the existence of government backed organisations such as Fannie Mae and Freddie Mac. Yet there are two challenges to going in this direction. The first is scale – to match the tranches of QE already completed the Bank of England would need to buy a significant majority of the UK corporate bond market. The second is political. It would require “picking winners” which has well-known challenges.

These discussions aside, there is also a wider concern over the potential impact of QE on expectations. Will it increase moral hazard in markets? If QE is successful, are we likely to behave differently in the knowledge that the Bank of England can prop up the economy in this way? It is perhaps these dimensions of QE that will have the longest long-term effect.




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