The Bank of England is struggling badly on the subject of the impact of QE

This week has brought us more opinions from the Bank of England.Yesterday saw the man who Time magazine decided was one of the 100 most influential people in the world in 2014. Sadly it has been rather a slippery slope since then for the Bank of England’s Chief Economist Andy Haldane who did at least offer some variety on the apochryphal story about the two-handed economist. From Reuters.

Bank of England Chief Economist Andy Haldane said on Thursday that the central bank could decide to raise interest rates or to cut them if there was a disorderly, no-deal Brexit.

Although much more of a clue was given in the follow-up detail.

“on the balance of factors such as a fall in the value of the pound and the reduction in supply………just as it did pre-referendum,”

If we assume he has confused the word pre and post we see he is signalling us towards a fall in the pound £ he ignored and the way he panicked and demanded a cut in interest-rates as well as more QE. Also according to @LiveSquawk he told the audience this.

BoE Haldane: Impact Of Rate Hikes So Far Modest

That might be because in net terns there has only been one as the move in November simply reversed the 2016 mistake.

I note these days that those who tell us how intelligent he is, seem to have disappeared, and even the Reuters piece is accompanied by a picture of him looking a bit wild-eyed. The mainstream view that he is/was a deep thinker has been replaced by the view he is deep in something else. As to his campaign to be the next Governor of the Bank of England? You find out all you need to know by the way he was at Symonds College on Monday. His idea of a Grand Tour around the country to a chorus of acclaim has morphed into giving talks to sixth-form colleges and please do not misunderstand me I mean no offence to the students of Winchester. However I do suggest they ignore the failed output gap theory that he keeps trotting out.


Earlier this week Gertjan Vlieghe was more revealing than I think he intended about QE and its effects. Let me illustrate with his view on how it works.  First he tells us that unwinding QE is no big deal.

This view of how QE works implies that unwinding QE need not have a material impact on the shape of the yield curve, or indeed on the economy, if properly communicated and done gradually.

There is an obvious problem here which is that if taking it away does not have a material effect on the economy then how did applying it have a positive effect? Also if it is so easy to do there is the issue of why the Bank of England has not done any? Let us see how he thinks it works.

I argue against the view that QE works primarily by pushing down long-term interest-rates directly, through compressing the term premium  ( the portfolio balance channel)…… view that QE works primarily via expectations, with powerful additional liquidity effects which are temporary and mainly relevant during periods of market stress.

We note immediate;y that he downplays the most obvious effect it has had with is the lowering of many bond yields around the world to what have been unprecedented levels. Odd when that was so clearly in play when Gertjan applied QE in August 2016 and the UK ten-year Gilt yield plunged to an extraordinary 0.5% and some yields in the short to medium range went negative for a while. No doubt economic historians will call that “Haldane’s heights” or the “Carney peak” for Gilt prices because unless the Bank of England has another go at impersonating a headless chicken such levels are extremely unlikely to be seen again.

Rather than the route above where bond yields fall and have an impact via lower fixed rate mortgage and company borrowing costs he seems to prefer the expectations fairy. Here individuals and companies are supposed to respond positively to something the vast majority do not understand and more than a few either have not heard of or do not care. This sort of thinking has been notable in the rise of Forward Guidance where central bankers seem to believe or at least be willing to claim and imply that the population hangs on their every word.

The view on liquidity is interesting as it is another clear area where there is an impact as money is indeed created in electronic form and the money supply raised. This particularly affects narrow measures of the money supply as for example in Japan an initial target was to double the amount of base money.  The problem comes when we try to follow the trail of where the liquidity created went? In the early days of Bank of England QE much of it seemed to get deposited straight back to the Bank itself. But over time we can spot clear signs of its impact on the financial system in two ways. The first is the impact on asset prices and especially house prices with London in the van. But even that is complicated as credit easing most recently in the form of the £126 billion or so of the Term Funding Scheme was also required. Next is the way that the Bank of England so often denies any such impact these days which relies on us forgetting the research produced by it around 2012.

Also you note that Gertjan seems to have forgotten the meaning of the word temporary as in “liquidity effects” as not one penny of the £435 billion of Bank of England QE has ever been withdrawn. So on the state of play so far it has been permanent and furthermore there is no apparent plan to change that.


As we note yet more attempts from the Bank of England to tell us that up is the new down another issue has popped up this morning that they will have hoped we have forgotten. Here is Ben Broadbent on the first quarter of 2018 from the May Inflation Report press conference.

they’re nonetheless consistent with growth much stronger than 0.1%………do not point to anything like as weak as 0.1%

Next here is the announcement this morning from the Office for National Statistics.

This follows a soft patch earlier in the year, where the UK economy grew by a revised 0.1% in Quarter 1 (Jan to Mar) 2018.

So we have seen a downwards revision to 0.1% meaning that the antennae of Ben Broadbent now have a 100% failure rate. So it is way past time for him to stop relying on surveys which keep misleading him. Actually if we look at the source of the change we see that the ONS is also finding itself in quicksand.

Construction output fell by a revised 1.6% in Quarter 1 2018, marking its weakest quarterly growth since mid- 2012. It was previously highlighted that the adverse weather conditions earlier in the year had some impact on the construction industry.

I guess they are hoping we have forgotten that they told us the weather was not much of a factor! More serious is the fact that for the past 4/5 years their measurement of construction output has been a complete mess. The have told us it was in recession ( now revised) and then that it was doing much better ( which also seems to have now been revised). Along the way we have had a large company switched from services to construction and modifications to the deflation measure of inflation. I can tell you that my Nine Elms crane index is still at its peak of 40.

So there have been much better days for both the ONS and the Bank of England. Returning to the issue of QE I would like to remind you of Wednesday’s article on the drawbacks from it which look rather more concrete than the claimed gains. As for Governor Carney he has been too busy this week flying to North America and back so he can lecture people on the dangers of climate change.



26 thoughts on “The Bank of England is struggling badly on the subject of the impact of QE

  1. “In the early days of Bank of England QE much of it seemed to get deposited straight back to the Bank itself”
    Well, yes. And in the later days as well. Central bank reserves, as created by QE and the TFS and any of the other methods the BofE might choose to use to supply reserves, HAVE to remain on deposit at the BofE. That is what central bank reserves are – deposits held at the BofE by any one of the 40-50 monetary financial institutions that hold a reserve account at the BofE. Reserves can move between these institutions and the other 160 or so institutions that also hold an account at the BofE, but CANNOT be lent or spent outside of this very small circle.

    Anyone who is disappointed that banks didn’t ‘lend out’ the reserves that were created by QE clearly doesn’t understand what money is and how banks work.

    • I probably fall into your category of those who know nothing but, if what you say is right, then:
      1. Why would anyone expect QE or TFS to have any effect on the real economy?
      2. What is the point of QE at all?

      • QE was primarily designed to create more broad money in the economy. The creation of central bank reserves was really just a byproduct, albeit a positive byproduct given that increased levels of reserves makes banks more liquid (in the UK the GFC was primarily a liquidity crisis rather than a solvency crisis).

        There’s always a desire for an amount of broad money in the economy at any given time. Demand varies, but usually money is created as and when required by the actions of the private sector. Just after the crisis there was heightened demand for money as more people wished to ‘put a little aside for a rainy day’, but the private sector didn’t have the capacity to create the money being demanded (not many households and companies were keen on borrowing and the banks didn’t have the regulatory capital required to grow their balance sheets)

        Coupled to this was the fact that the creation of new bank equity capital and non-deposit liabilities of banks that was taking place post the GFC in order to make banks safer, destroyed broad money. A lot of broad money. Several hundred billion £ of broad money in fact.

        QE, then, really just created the broad money that was being demanded by the economy, replacing the broad money that was being destroyed to create bank equity and non-deposit liabilities. Because this destruction is likely to be permanent (in that banks aren’t going to be allowed to reduce the amount of equity and instruments subject to bail-in that they use to fund their operations anytime soon), there really isn’t any reason for QE to be unwound.

        • Not quite sure it was purely a liquidity crisis

          HBOS and RBS were most certainly insolvent (and that had to be explained to a one ‘Fred the Shred’ by a fellow banker at a breakfast meeting at the BoE

          It has been one of the worst bordering in criminally mistakes giving the banks a blank cheque bailout

          Now they think they are rather untouchable ‘precious’ who have their losses paid for by Joe and Jane public

          • Yes Jason. Having read today’s comments I think I’m with James in the “know nothing” category.
            However, as I remember it, the shortage of liquidity (queues outside the Northern Rock and all that) was triggered by a fear of insolvency. We turned and banking crisis into an economic crisis. At the time the BoE stated the purpose of the Asset Purchase Facility was to bolster the economy and return inflation to target. 10 years on the BoE now says the purpose is to improve liquidity in the credit markets. It’s some liquidity crisis that takes over 10 years not to sort out.

            And if it has been sorted out why are things the way they are. (Low growth, low interest rates, etc)

            And if it was a liquidity crisis why was it tackled as though it was a solvency crisis – the £500B rescue package for the too big to fail banks announced 10 years ago almost to the day!

            Curiouser and curiouser, said Alice.

        • “QE, then, really just created the broad money that was being demanded by the economy, replacing the broad money that was being destroyed to create bank equity and non-deposit liabilities.”

          AM I correct in translating your hyperbole into understandable English that cuts to the devastating truth of the matter that QE created money to bolster the capital reserves I.E EQUITY of the banks that had destroyed it themselves by gambling and losing hundreds of billions on credit derivatives?

          In which case your other statement below is patently untrue and is in fact contradicted by the fact that the Bank of England gave hundreds of billions of pounds to shore up Tier 1 and Tier 2 ratios as otherwise THE BANKS WOULD HAVE BEEN INSOLVENT!!!!!!!!!!!!
          DO YOU NOT GET THIS????

          ” The creation of central bank reserves was really just a byproduct, albeit a positive byproduct given that increased levels of reserves makes banks more liquid (in the UK the GFC was primarily a liquidity crisis rather than a solvency crisis).”

          It pays not to actually contradict yourself when trying to convince others of your argument!!! The creation of equity on the bank balance sheets was to restore SOLVENCY as otherwise they would have been i breach of their licenses,NOT to restore liquidity.
          It is my opinion and that of many others on this blog that many of the UK banks are STILL insolvent, some ten years after the GFC and DESPITE all those bailouts, and these losses are being hidden off balance sheet as otherwise it would be patently obvious that they are INSOLVENT – not suffering from a liquidity problem.

          The depresed share prices of these dogs seems to bear this out.

          • No, you are completely wrong.

            QE created broad money in the form of customer deposits at banks. Customer deposits are not equity, but liabilities of the banks. The corresponding assets that were created for the banks were the central bank reserves.

            Bank equity and non-deposit liabilities are created by a bank persuading holders of those deposits to give them up and accept an equity instrument or a non-deposit liability instead. Alternatively, equity can (and was) created by banks not paying dividends, but retaining any profits they were making.

            The BofE did not give anything to banks, certainly nothing that would affect their tier 1 and tier 2 ratios.

            Central bank reserves have nothing to do with bank capital and solvency. The central bank reserves created by QE improved the banks’ liquidity position, but did absolutely nothing to their capital position or solvency.

  2. All the red flags have been flying for a number of months, I suspected there would be a further downgrade for GDP and posted a couple of links yesterday which Shaun has elaborated on today particularly on QE.

    The UK now on a par with Italy !
    Awful !

    Business investment announced today terrible -0.7% as against forecast of 0.5% no do doubt the BREXIT affect.

    Deficit against world widened, again awful !

    No wonder Haldane mentioned a fall in the £ I predict the BOE to cut the rate should things get worse.

    • More evidence today on a deteriorating outlook was from the Gfk consumer confidence indicator:

      “According to the highly regarded monthly GfK survey, consumer confidence fell two points in September to -9, down from -7 in August.”

      The only reason the economy has shown much growth imo is the public spending more than they are earning partly due to low interest rates, any tightening up by the BOE will only exacerbate the situation imo.

      I know a number of people on this forum don’t want low interest rates due to overpriced house prices but the BOE in a rock and a hard place at the moment.

      Production per capita just isn’t good enough at the moment in the UK.

      There doesn’t seem to be an answer at the moment, and things will not get better with a hard BREXIT not slowdown in world growth.

      As for the US they could soon overheat and then go into recession.

      • Hi Peter

        I have suggested before that the UK has/had a growth momentum of around 0.3% per quarter and that seems to be the state of play. Not much but something. Meanwhile the Euro area is showing signs of slowing and Italy had quite a bad day after the new deficit plans were announced, neither of those help us.

        • Yes it is “something” but helped along by QE and low interest rates.

          Things aren’t good and wont improve soon and the worse case scenario is another financial crisis, which some think is just around the corner.

  3. I think what Gertjan may be doing is contrasting the very short period during which QE was applied with a very long period over which it could be withdrawn. However, this may conflict with his thoughts about expectations which are psychological and may be independent of the rate of withdrawal; it may be merely the fact that counts and not so much the amount or the withdrawal period.

    These people concentrate on the short term and seem to spend an inordinate amount of time justifying why their short term predictions (in fact prophecies) have been hopelessly wrong. What they miss is that growth is gradually deteriorating due to demographics and energy costs and has been deteriorating well before 2008. They keep talking about things getting back to normal whereas things are most unlikely to get back to “normal”.

    • Hi Bob J

      I agree that we no longer have much of a handle on what normal is, and the bits of it that are stable such a low real wage growth we do not like much. As to QE withdrawal I agree that they intend to do it much more slowly than the rate at what it is implemented. For example I suggested in City-AM five years ago now (!) that rather than reinvesting maturities of holdings they could let them run-off. That would in some ways deal with the expectations issue as the vast majority would not even be aware that it was happening. Instead of course they added another £60 billion and extended into longer-dated Gilts making the issue larger.

      But there is still the issue of how it can be such a gain on the way in but not a loss on the way out. I am sure football managers would love to give another version of that a go……..

      • what would the BofE be aiming to achieve by reversing QE?

        Would it be wishing to simply shrink the BofE’s balance sheet? There’s no real reason to do this. Having a large balance sheet causes no problems. Does it believe it needs to reduce the level of central bank reserves in the system? No reason to do this either. Prudential regulations require banks to hold plenty of highly liquid assets. They seem to like holding reserves – just under £500bn of them currently. If the Bank was to destroy some of these reserves by reversing QE it would likely have to add them straight back, possibly by reopening the TFS.

        So the only reason could be if the private sector was showing a marked lack of appetite to hold money in the form of bank deposits, specifically if it demonstrated a stronger desire to hold longer dated financial assets rather than zero-maturity bank deposits. Clearly there is strong demand for long dated financial assets – you can see that from the low yields available across the Gilt yield curve – but is there any indication that there is a weakening demand to hold deposits? I’m not seeing any evidence of this. Are you?

        Given that hundreds of billions of £ of deposits have been destroyed to create bank equity and non-deposit liabilities over the past few years, (which is likely to remain permanently destroyed), I would be very surprised if the BofE ever saw the need to drain even more money from the system.

  4. Shaun, my main concern is that now (well, recently) was a good time to raise rates and/or reduce the QE balance, while the ECB in particular was flooding the market with funds. If we start just when the ECB turns off its tap we’ll both be tightening/reducing stimulus at the same time, which will be more likely to cause economic problems. For that reason, the window for rates and QT has probably passed, at least until the dust settles from Brexit. Oh well, hard times for savers to continue for a few more years, then.

    • Hi Doubting Dick

      The time in my opinion began when Governor Carney gave his “sooner than markets think” speech at Mansion House.So we could and should have started in 2014/15. Instead he dithered and then of course cut interest-rates and added to QE in August 2016 so the problem got bigger meaning they are ever more afraid of reversing policy and then being blamed for a slow down.

  5. Great blog as usual, Shaun.
    I found this link by Jeff Snider:
    just to check if Andy Haldane was accurate in attributing ““never explain, never apologize” to Montagu Norman. He was. Snider writes: “The legend of the maestro. Never explain, never apologize. Only now, there is so much to explain and apologize for. In Bernanke’s purposeful spirit of openness, inflation would be a good start. Perhaps bubbles, too.” Bravo!
    Snider also notes, which was news to me, that one member of the FOMC, Daniel Terullo, was concerned about the move to an inflation target for the US Fed under Bernanke in January 2012: “How can a commitment to greater transparency in the form of more openness on a policy level contribute to instead to ‘vagueness’ as Tarullo warned? The answer is the inflation history of the last six years in between… If they can’t achieve their inflation target after six years of massive interventions, what the hell are they doing?”
    On a totally different topic, I am sure the Canadian negotiators dreamed of a successfully renegotiated NAFTA when they started and didn’t deliberately set out to sabotage the talks. As Daniel Bélanger would say, they should have dreamed better, and more wisely:

    • Hi Andrew and thank you

      Cheers for the song and the finger picking guitar playing linked to something I had been discussing on social media which is how much of a loss is Lyndsey Buckingham to Fleetwood Mac? In my opinion quite a bit because whilst I like Neil Finn the truth is that Lyndsey’s guitar playing is if not unique very different.

      Moving back to central banks I think that whilst they have claimed independence and transparency they have in fact gone the other way. They have been sucked into the establishment and after all a 2% inflation target has no real backing in theory or reality.

  6. It is quite simple – for some reason, probably based around sucking up to Carney – the BoE refuses quite clearly to accept that QE has merely inflated asset prices, especially houses, and that this has sucked money out of current consumption, flooring GDP. With the recent report on U.K. and Canada having “ negative household balances” we are just living on cheap debt in a Mikawber way.

    Just like the useless management in U.K. financial services, I now see Carney and Haldane wittering on about “diversity” being a means to improve decision-making. Haldane of course being a white man, now goes on about different “backgrounds” – not being Oxbridge in his case.

    I am no fan of The Donald , but he was right in his recent comments about Fed rises putting a price on money. It means savers get a return and thus have the confidence to spend money they actually have, which would lift GDP. Instead, with cretinous ZIaRP and QE, we now have floored consumption living on debt, falling business investment and it seems the Bobskis are going home, so construction is falling. Maybe Haldane should try rubbing two brain cells together rather than pushing his degree from Sheffield?

    The local BOE rep here in Scotland seems to be addressing the CISI at the end of November. So, I shall pop along and suggest the leadership resigns in late Feb when Steve Priest is back off tour.i expect I will be told that we need the experience of the current bunch of clowns.

    • Hi David

      The Bank of England is usually pushing a theme that is the opposite of what it is doing so this week’s diversity push makes me think the opposite is true. We do know that there has been a “woman overboard” problem only patched up by giving a role to a female economist from Argentina that no-one had heard of.

      I agree entirely that we need some sort of interest-rate to restore some sort of balance. The reason why we do not get it is they are afraid the whole house of cards will tumble.

  7. Re Carney and ”climate change’, wasn’t there an FT article this week with the Bank of England warning that banks are “ill prepared for climate change”? One would have thought the Bank would have had more than enough on its plate thinking about Brexit…but no. And I’m sure they will give you some very fine and lofty reasons as to why they need to lift their heads above the parapet and cast the gaze of their binoculars onto the deep horizon as they studiously ignore the present.

    • Hi Hotairmail

      I see it as a type of deflection tactic. As there have been issues to say the least with monetary policy then focus on something else which has taken two main forms.One is Brexit and the other is climate change. Both by their nature start a debate which is usually fractious and we are deflected from the monetary policy.

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