Will there be more QE?

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This question has been asked in the FT. As they noted:

With the £200bn of bond purchases it announced at its emergency meeting in March, the Bank of England has so far succeeded in calming the gilt market and ensuring the UK government can fund its crisis stimulus package at cheap rates. But the majority of analysts think the BoE will soon have to scale up its quantitative easing (QE), possibly as soon as Thursday’s scheduled meeting.

They add:

The central bank has bought £70bn of assets since the programme was announced on March 19 – double the rate of purchases seen during the financial crisis, according to Paul Dales of Capital Economics. At the current rate the BoE will complete its purchases by the end of June and may need to announce more to convince investors that the huge issuance coming from the government can be digested.

What's interesting is that what this implies is that quantitative easing may be keeping up with new bond issuance, which is expected to be £180bn over the same period. In other words:

  • No net new debt is being created because QE'd debt is now tacitly accepted to be cancelled, even by the Bank of England;
  • There is then, to date, no actual costs to society of the bailouts;
  • If this can be done now, it can continue.

So, is more QE needed? Yes, of course it is.

But let's also be clear, the reason why is not because new issues need to be digested: there has probably been very little new 'net digestion' by markets as yet because QE is doing all the heavy lifting. So the reason for a QE announcement is not to keep markets happy: it is just to tell them that they have no role to play, which is just the way that they want it.

That's not how the FT may wish to portray it, but the reality is that in this crisis, as pretty much in the last, markets have no solution to what is happening. And that's the real message that needs to be put out there.