The Bank of England goes all-in on monetary stimulus

Yesterday the Bank of England announced an extraordinary package of policy measures even for these times. So without delay let us look at the consequences and indeed damage from such moves. But let us do so to a musical theme as we did indeed find out what Chief Economist Andy Haldane meant a few short weeks ago.

I want to be your sledgehammer
Why don’t you call my name
I’m going to be-the sledgehammer
This can be my testimony
I’m your sledgehammer
Let there be no doubt about it

Sledge sledge sledgehammer

There was something of a delay as the Bank of England website collapsed which I hope is not a metaphor for its knowledge of technology. Actually having just checked it the situation is worse than I thought as it is still down as I type this.

The announcement

Here we saw pretty much the whole play book being deployed. Here it is.

This package comprises:  a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.  The last three elements will be financed by the issuance of central bank reserves.

Okay so let us work our way through this.

Firstly the Bank of England has cut Bank Rate to as low as it has ever been in its 322 year history. Next we have yet another bank subsidy which I will analyse in a moment. Then rather oddly we have what might be called a “rave from the grave” as the Bank of England repeats a past ability to buy corporate bonds. The catch is that it did not back then apart from the occasional purchase of £10 million or so  in the summer of 2013 which were usually quickly reversed. Perhaps as the ECB is undertaking such a program Governor Mark Carney saw an opportunity to live up to his description as “a dedicated follower of fashion”. Also you may note that the previous corporate bond effort was very badly timed as the UK economy was improving.

Then we got an announcement of more conventional Quantitative Easing amounting to an extra £60 billion. You might think that if £375 billion did not work then another £60 billion was unlikely to but remember Governor Carney kept telling us that such numbers had been “carefully crafted” . By who and how was left unasked! Anyway let me help out by using the Bank of England’s latest working paper on the subject.

Our focus in this paper, however, is on the second round of purchases between October 2011 and June 2012, when the Bank of England purchased £175 billion of gilts, about 11% of nominal GDP,

Okay so what impact did it have?

We find that the second round of the Bank’s QE purchases during 2011–12……..boosted GDP in the United Kingdom by around 0.5%–0.8%.

So a “carefully crafted” £60 billion will supposedly raise UK GDP by something of the order of 0.2% if the paper is correct. More of a pea shooter than a bazooka isn’t it? That is of course to ignore the side-effects like this.

(The) effect on inflation was also broadly positive reaching around 0.6 percentage points, at its peak.

If we skip over the central banker speak of higher inflation being a “positive” we see that inflation will be expected to be 0.2% higher as we already mull the side-effects that in my opinion could easily make the  additional QE a subtraction from GDP rather than a boost.

The problem that is final salary pensions

These are valued in terms of the bond yields which the Bank of England is doing its best to drive lower, specifically AA Corporate Bond yields. So as you can see the only thing worse for this than ordinary QE is the Bank of England buying Corporate Bonds. Oops! Here is some analysis of the matter from the Financial Times.

The deficit of defined benefit pensions, which pay out an income linked to an employee’s final salary, jumped £70bn as a direct consequence of the decision to reduce interest rates by 0.25 per cent, according to Hymans Robertson, the consultancy.

Ah so a one for one ratio with the planned QE increase! At this point Mark Carney and the Bank of England are wearing a collective Dunces cap. Still they have a plan.

Many companies that saw increased pension deficits were able to extend the period over which they brought them back to balance, maintaining the existing level of contributions.

So kick the can into the future and hope that the problem somehow disappears is apparently the new “carefully crafted”. Also if you mimic an ostrich and stick you head in the sand the problem disappears.

At present, however, those effects appeared to be relatively limited.

Either the Bank of England does not understand final salary schemes – after all didn’t its Chief Economist Andy Haldane state that only recently? – or it is being rather economical with the truth here.

Yet another subsidy for the banks

The announcement of the Term Funding Scheme came like this.

the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate.

At this point you may be thinking is this the Funding for (Mortgage) Lending Scheme or FLS in disguise? That will only be reinforced by this bit.

the TFS provides participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against the risk that conditions tighten in bank funding markets.

So a £100 billion of subsidy sorry funding to the banks. At that point please indulge me a little as I cut to this morning’s announcement from Royal Bank of Scotland (RBS) .From the BBC

Royal Bank of Scotland reports £2bn loss for the first six months of the year, blaming “legacy issues”

That is the same RBS which was fixed last year and the year before that and the year before that and the year before that…….

Oh by the way how is the culture of subsiding our banks going?

Of course the official version of the TFS is this.

This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions.

No doubt “should help” will be appearing in future versions of my financial lexicon for these times.

The impact of the fall in the UK Pound £

The trade-weighted index fell by around 1% or to put it another way equivalent to another 0.25% fall in Bank Rate to add to the 2% post Brexit fall that I discussed on Wednesday.

The Bank of England cuts its own income

The last three elements will be financed by the issuance of central bank reserves.

A little known fact is that the Bank of England charges Bank Rate on such issuance such that it got 0.5% until yesterday in what might be called “a nice little earner” by Arthur Daley. In a way it is analogous to seigniorage although there are differences. Now it will be 0.25% and presumably less later in 2016. Mind you that 0.25% will of course be levied on more,more,more.

Open Mouth Operations

The actual moves were added to by a lot of rhetoric about more in fact so much more that they should have been playing MARRS.

pump up the volume
pump up the volume

brothers and sisters
pump up the volume
we’re gonna need you

brothers and sisters
pump up the volume
pump that baby

We were left in no doubt that if necessary the volume will be turned up to 11.


On Wednesday I wrote that I would have voted for no further stimulus on two main grounds. Firstly the fall in the UK Pound £ at that point was broadly equivalent to a 2% reduction in Bank Rate. Secondly I feel that moves which are badged as stimulus have such side effects that the can easily turn out to be both deflationary for demand and inflationary for prices for the economy. That operates through businesses via pension schemes as I have looked at above and for the ordinary person in falls in real wages just like what happened when the Bank of England looked through an inflationary episode in 2010/11.

What we are in effect seeing are put options for the banking sector, house prices and the equity market.

Also if we move to the Bank of England press conference there was one glaring bit as Bank of England Deputy Governor Broadbent told us that they were looking at sentiment measures and downgraded “hard data” such as GDP. This was a complete U-Turn on past policy which has often been to wait for GDP data. Please do not think I am a sort of fan boy for GDP statistics, regular readers will have seen my critiques. But my point is that the Bank of England is now “cherry-picking ” the data to confirm its pre-existing view.

Actually Ben Broadbent seems to be in a state of distress. Here is the BBC’s view of what he said on Radio 4 Today earlier.

Deputy governor Ben Broadbent asked if the ‘s action will have an effect soon, he replies “absolutely, yes”

I have asked them if he has abandoned the long-standing view that interest-rate changes take 18/24 months to have full effect? If I get a reply I will let you know.

Never believe anything until it is officially denied.

Bank of England deputy governor Ben Broadbent says interest rate cut does not send out message of panic (The Independent).

Share Radio

I will be on Share Radio today between 1.10 pm and 1.40 pm covering these matters and the US Employment Report in the latter part. For those not in the UK it is online as well.

40 thoughts on “The Bank of England goes all-in on monetary stimulus

  1. Shaun,
    I knew that you would be depressed by the action taken yesterday!
    I think that our masters have unfortunately stopped talking to anyone else;
    This is why:
    1. They are so surprised by the Brexit vote;
    2. They can’t get over the Brexit vote;
    3. They think Brexit is a disaster and therefore give credence to every bad indicator and ignore everything else;
    3. They keep doing things which are not going to work;
    4. They keep doing things for the benefit of the banks.
    Basically, they have told us plebs what is good for us for so long without being really challenged that the Brexit vote has sent them into a tailspin of depression, anger and a determination to show that they were right after all.
    Sorry to be cynical, but you see it everywhere, not just the BoE.

  2. Hi Shaun
    For some reason ( perhaps boredom with the usual sources) I tuned into CNBC this morning, and was surprised to hear even these comedians describe the BoE package as only having the effect of further inflating asset values with little overspill into the real economy. When these guys start saying this, you know its really gone bad. There was also another nugget re RBS. Apparently since the tax payers rescue of £45bn they have recorded annual losses of £50bn. Who says you can’t have ‘black holes’ on Earth?
    DB Pensions are toast unless flexibility is employed on their deficit valuations. As they are suffering from forced investment criteria plus NIRP, it is only by extending to ‘infinity’ that you can square the circle. Its not clever, but its better than cratering the whole edifice and putting the resulting mess onto the tax payer one way or another.

    • Surely JW the problem is that you cannot extend to “infinity”; sooner or later you will run out of actual readies aka “cash” and then what happens?

      • “…the Bank of England is now “cherry-picking ” the data to confirm its pre-existing view….”

        delusional – Psychiatry. maintaining fixed false beliefs even when confronted with facts, usually as a result of mental illness:

        GDP falsification , public being wrong headed , sex , drugs and rent imputed ( ie made up ) …….

        ” but QE must work , it must , it must , it must ! , no ,no, no, Japan is NOT the same , because I said so , so there! ”

        ( back ground comments caught on M Carney’s left on mike )


        Ps , remember the Iraqi information minister ? Is mark related to him ? or his guru ?

  3. “…. Broadbent asked if the #BOE‘s action will have an effect soon,

    he replies “absolutely, yes”

    did he have a straight face?

    Forbin ,

  4. Leaving aside the matter of what GDP is and means, prepared to leave that aside, is there any independent backing for this?

    “We find that the second round of the Bank’s QE purchases during 2011–12……..boosted GDP in the United Kingdom by around 0.5%–0.8%.”

    Indeed given the narcissism of neo classical economics is anyone independent. But prepared to leave that argument aside too.

    I am clearly skeptical on all Levels.

    • “… is there any independent backing for this?”

      they think they are independent already

      musical link

      fun boy three

  5. Independent from the independent BoE? Treasury & OBR & ONS does not count for me even if nominally independent from the BoE.

    Apologies for my lack of precision.

    • Hi Bedfont

      To answer your earlier question I have written in the past that I am dubious about numbers provided on QE by the Bank of England. Specifically I would argue that if you put house prices into inflation measures you would get a less favourable mix with lower growth and higher inflation.

      That is before we get to the issue of the Bank of England being judge and jury on its own performance.

  6. On Mark Carney

    “In an age of spin, Mark offers feeling and authenticity. His message is consistent — unshakeable, in fact, no matter the evidence — but he commands daily attention by his on-the-spot variations on the theme Brexit was the fault.

    His lunatic counterfactual art is more appealing than the banal awfulness of the (un)Reliable Sources of the BBC.

    He is a Method actor in a production that will close in a couple of years.

    He stands superior to truth.* ”

    * So do all at the BoE ………


  7. But F…. Me why arnt the politicians picking up on these points. Love the Blog but the analysis gets more and more frustrating and nobody does a F ing thing. Going back many blogs the impact on GDP of QE £350b was a drop in the sand yet now….£60b whatever……. seems a load of bollocks. I’m just a an aged baker amongst economist so forgive the language

    • I think once the politicians and the BOE what a poor state the MSM are in they realised they could get away with anything without criticism they went gung-ho.
      It’s a sad day that people have to go to blogs to get any independent thought on the economy.
      I am just grateful that blogs like this exist.

  8. I have just written to the pensions service, said that I didn’t trust the Bank of England’s funny money and demanded that they pay me my £120 a week with 60 £2 Britannia coins. What do you think my chances are?

  9. Hi Shaun
    Thankyou for your quality blogs
    this week.
    So what have we learnt this week,
    that the new May government is the same
    as the Cameron or Brown or Blair versions.
    I would love to know what was agreed by
    TPTB in 2008, it seems that whatever it was
    it was literally written in stone! We also know
    that we have more of the same to come
    with a slowbicycle race to -2%, and then what?
    Were you one of the 35 economists
    who put the “aggregate demand” question and
    don’t you think that the RBS “legacy issues” is
    worthy of entry into your lexicon?

    Steven Bishop
    On and on
    I just keep on trying
    And I smile when I feel like dying
    On and on
    On and on
    On and on.


    • Hi JRH and thank you

      As to RBS I think that “legacy issues” joins a bulging section of excuses for failure. Maybe in the future failure will be defined with reference to RBS!

      As to the letter I was not involved.

  10. Isn’t it funny that the people making these monetary decision,which effects everyone else’s pension, does not effect theirs?

      • The Child Abuse enquiry is going just as the establishment wants it to.
        There are a number of people still to die before the facts can come out.

  11. Anyone notice Knight Frank’s prime global cities price stats released today, for Q2 2016? It seems Vancouver is the world leader, up at a whopping 36% growth! Canadian out-of-control, completely insane House Price Inflation, funny that…

  12. Ah, all those BOE plates were beginning to wobble what better than a 25pt spinner to keep then going a bit longer. It seems to me that upping the dose of the wrong medicine, continuing to tell us how much better the patient looks and is doing, until with a look of total horror and complete surprise on their faces, the patent suddenly dies!

    25pt drop is good for those with appreciating ‘assets’, but for savers, pensioners and the majority with a static, at best, PPP and falling for the majority things are grim. We have now sacked the EU elites for a failing EU,and Euro where they can’t and won’t fix the pressing problems, including the EU’s percentage of world trade, which is falling at twice the rate of the US. Long term relative impoverishment happening right before our eyes, especially for Southern Europe. Next we need a clear out at the BOE so a new group of elites can start implementing sound monetary policies. Can we have a monetary policy referendum or BOE/MPC elections next please?

  13. Great blog as always, Shaun. Such a pity you aren’t there to ask questions when there is an Inflation Report press conference.
    In your blog yesterday you mentioned that Ben Chu of The Independent asked a very good question at yesterday’s press conference. He said in part “during the referendum campaign you warned that a technical recession was a possibility as a result of a Brexit vote. Your pro-Brexit critics said that was inappropriate because they said it assumed no countervailing stimulus from the Bank of England…[T]oday’s… [numbers] don’t have a recession forecast in them, but the strong implication is that’s because you have stimulated…[D]o these forecasts vindicate you or them?”
    Carney’s reply was snide even for him: “…you know that on the GDP forecast we have a fan chart which there are probabilities around. I am quoting you the central expectation – the most likely outcome we expect – a little growth in the second half of this year… Now that growth could be a little higher or it could be a little lower, I’ll let you get out the ruler and figure out the probability that it goes below zero.” Even the ruler reference was dumb, since the Inflation Report’s fan chart section does show the percentiles of the probability distribution for four-quarter growth rates over the forecast period, and really should have shown them for growth over 2016H2 as well.
    Prior to the referendum, Carney was saying that if the vote was in favour of Brexit maybe he would stimulate, maybe he would do the opposite to meet the inflation target, maybe there would be a recession or maybe not. He never told people that the Bank of England was bound to stimulate if there was a vote in favour of Brexit and he expected that would be enough to prevent even a single quarter of negative growth in the year ahead, let alone a technical recession, let alone a deep recession. He should have told Chu if all this had only been figured out after the vote, because otherwise it would seem he was scaremongering on behalf of the Remain side. Instead Carney asked the business editor of The Independent why was he so lazy about using his ruler! Unbelievable!

    • Hi Andrew and thanks

      With the performance of the Bank of England website after the MPC announcement perhaps a ruler is considered high tech there! You are right about Mark Carney’s poor manner though as he was also aggressive towards Louise Cooper who asked a question about someone with £6000 of savings. Perhaps Mark Carney lives and moves in such gilded circles that he cannot conceive that for quite a few people that seems a solid sum of money.

  14. When in 2009 the Labour party started £ 375 Billion of quantitive easing to save the world economy from an unanticipated subprime crisis, the Conservatives were quick to blame the Labour party of financial miss-management. But when in 2016 the conservatives inject £ 70 Billion of quantitive easing (19% of the above figure) to cover up their wrecking of the economy… It almost goes unnoticed.

  15. Precaution or panic. Undue weight based on the negative surveys by Markit. The ONS even have a post explaining the differences between their reporting on construction and Markit’s. Still I don’t think what Carney did will do harm and it may add a small amount of growth by confidence, if it was needed, rather than by actual economic effects generated by his policy.
    Poor reporting like the above shows the unbalanced side of things which have created the panic. On housing no mention that Nationwide say different; no mention that Barclays say that consumer spending was up after the vote; no mention that the CBI say manufacturing was fine; etc.
    Finally the models pre brexit and public person statements pre brexit need, as data comes in, a thorough exposure for their inaccuracies and appropriate comment should be made. Bout time someone wrote a blog post on it. Hint, hint, not too subtle. Short run and long run. Send it to the Beeb for wider publication when finished.

  16. Hi Shaun,
    In the latest letter from the Govnr. to the Chancellor it seems the £m100 TFS is provided just in case the Base rate reduction doesn’t work.

    ” To avoid the risk that the reduction in Bank Rate does not feed through fully to the rates faced by households and businesses, the MPC voted to establish a Term Funding Scheme…..”

    Click to access cpiletter040816.pdf

    Strange they think their tools now may have a blunt edge.

  17. So how does all this “good news for mortgage payers” stack up against the increasing proportion of jobs that are offered on a fixed term basis rather than the traditional ‘permanent employee’ – e.g. a one-year position with ‘possibility of renewal’ ? As far as I know the mortgage lenders still require at least 2 years of ‘permanent’ employment, so there must be a fair number of people who either can’t qualify for even a or who got a mortgage a few years ago and then lost their ‘permanent’ job and while remaining in work are stuck with, say, a 5% rate due solely to failing this requirement

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