Quantitative Easing - updates and views
This expression quantitative easing first came to the fore in the final months of 2008 as politicians and bankers both in the USA and UK sought out further initiatives beyond the Special Liquidity Scheme, capital injection by way of additional shares and most recently the Asset Protection Scheme which has resulted in the Bank of England taking further stakes in RBS, Lloyds Banking Group (now including HBOS). For the avoidance of doubt we have included a few lines on all three areas to help differentiate them from quantitative easing!
Special Liquidity Scheme (SLS) – first heralded by the Bank of England (BoE) in Spring 2008 and meant to be a pool of £50Bn of loans on commercial terms backed by quality mortgage securities. Finally released in October at an incredible £185Bn to 31 institutions with good asset cover (even with declining property values) the liquidity seems to have vaporised into balance sheet obligations and previously unquantified liabilities within the recipients. So a good idea, expanded through the whole of the summer, but bringing no improvement to the mortgage market that can be identified!
Shares in the Banks – following the USA letting Lehman Brothers going to the wall in September, Gordon Brown moved swiftly to announce that the UK Gov’t would do whatever was necessary to ensure the stability of the UK banking system. This resulted in bail-outs for RBS (who had effectively paid too much for Dutch Bank ABN Amro in summer 2007) and an agreement of support for Lloyds for seeing through the acquisition of HBOS which had already been identified as being vulnerable from its exposure to high level corporate loan defaults. As a first stage UKFI (the new investment vehicle set up to be at arms length from the Gov’t to hold these shares) took a 43% stake in the merged Lloyds Banking Group and 58% in RBS.
Asset Protection Scheme (APS) – the new deal for the end of 2008 and the beginning of 2009, where the beleagured banks are able to ring fence their liabilities on certain bundles of debt where the true downside of the risk is not yet fully known, by placing them into the APS with the BoE charging a premium for guaranteeing the risk. This has so far resulted in some £585Bn of perceived assets from RBS and Lloyds/HBOS where they have surrendered additional equity positions such that the Gov’t through UKFI now owns some 84% of RBS and finally agreed with Lloyds/HBOS an increase to 65% over the weekend of 7/8 March 2009. A market rumour that Barclays was looking to put some debt into the APS caused a wobble on their shares on 9 March and HSBC has currently kept away from it.
So we get to the BoE announcement on quantitative easing on Thursday 5 March when Bank of England Base Rate (BBR) was cut to 0.5% - the lowest in the history of the BoE- when the full announcement the MPC Committee agreed that the Bank should, in the first instance, finance £75 billion of asset purchases by the issuance of central bank reserves. The Committee recognised that it might take up to three months to carry out this programme of purchases. Part of that sum would finance the Bank of England's programme of private sector asset purchases through the Asset Purchase Facility (APF), intended to improve the functioning of corporate credit markets. But in order to meet the Committee's objective of total purchases of £75 billion, the Bank would also buy medium- and long-maturity conventional gilts in the secondary market.
So this is the first element of quantitative easing and traditionally this would have involved simply printing money – remember the history lessons about the Weimar Republic (Germany before Mr Hitler) and more recently Zimbabwe.....essentially it is now electronic and the Government can pump money into the banking system by a variety of measures – the key here is not to confuse quantitative easing with any of the previous initiatives above. There is an additiomal £75Bn already earmarked for further acquisitions of gilt stock as and when needed so effectively the Government is trying to “show” a measured approach to its commitment of £150Bn by only releasing £75Bn at outset.
What this page will seek to do is to "track" quantitative easing announcements and evidence of its success in the money markets where LIBOR rate stands today (10 March) at a 142bp premium to BBR which needs to be brought back into a maximum variance of 45 bps before the market can be deemed to be working “normally” – or at least that is our view!
Auctions will take place on a Monday and Wednesday each week and you can find out our more detialed views and opinions on our commercial borrowers blog.
LATEST EVENTS.......
5 November 2009
The previous tranche of £50 Bn of QE announced in August lasted 3 months and the next (Final????) tranche of £25Bn announced today is due to be released over the next 3 months - does this slow down indicate that the BoE thinks that this is sufficient to do the job? - or just that this is the maximum that it feels would be acceptable without total spooking the financial markets? Well the MPC has made a number of comments about positive international trends and presumably their belief is that these, combined with the collapse in the value of sterling, will help to bail out the UK economy over the next 12 months.
Once again I refer the reader back to my blog entry from July when I speculated - “Does that mean that QE is all but over - or is it a prelude to going back to the Treasury and asking for a further £75Bn.” – and whilst I believed in August that the £50 Bn authorised at that time would be the end of QE, the dismal figures that showed the UK economy still in recession in Q3 has encouraged the MPC to go a step further.
The biggest problem is that QE is a new policy and nobody knows how it will impact on the economy – either in terms of the effect it will have on growth and inflation, or the time it will take to do so. But so longer as the banks horde this additional liquidity rather than releasing it into the economy via increased business lending, the potential beneficial effects of QE will be restricted to the major corporates that can raise additional finance in the stock and bond markets at better prices.
20 August 2009
July 10 blog entry - “Does that mean that QE is all but over - or is it a prelude to going back to the Treasury and asking for a further £75Bn.”
Well now we know – the Governor of BoE and two other members of MPC wanted £75Bn – but were narrowly over-ruled so we “only” had an increase of £50Bn. Despite these facts the markets seem to be remarkably sanguine about the causes for this increase and its potential long term effects. This time I think we may have seen the last of QE expansion – once the current facilty has been fully used.
10 July 2009
For once the MPC has surprised us. It was no surprise that Base Rate was left unaltered - but it had been widely assumed that the MPC would anoounce that it planned to use the last £25Bn of the £150Bn of QE that had been approved by the Treasury . Instead they have deferred this by a month so that they can start to assess the impact of QE on the markets and the economy at large. Does that mean that QE is all but over - or is it a prelude to going back to the Treasury and asking for a further £75Bn.
Who knows!
25 June 2009
It has been a while since I last wrote anything on this blog – but that has been because in reality there has been nothing to report. The asset purchase programme has rolled on – although with a minor glitch in the week ended 12 June when “only” £6.4Bn of Gilts were purchased – so that Gilts purchases to 19 June amounted to £89.868 Bn. The purchases of Commercial Paper (short dated corporate loans) have failed to keep pace with redemptions over the last three weeks with the result that net purchases are now only £2.1Bn compared with £2.3Bn at the end of May. Purchases of Corporate Bonds amount to just £750Mn – leaving the grand total of purchases under the QE programme at £92.718Bn.
5 June 2009
What a week - but no change to the Asset Purchase programme of buyin £6.5Bn of gilts each week! One fact I have only just noticed is the discrepancy between the 1 month and the 3 month LIBOR rates. 3 month LIBOR had fallen to 1.27% yesterday - whereas 1 month LIBOR was 0.67%. In normal times this would only be explicable by an expectation of a major movement in interest rates in the period - now it can only be explained by risk pricing for money placed beyond a 1 month period. Surely there cannot be such a significant risk of default in a 3 month period - can there?
29 May 2009
Not a lot to report this week - the "normal" £6.5Bn of Gilts purchases were completed within the normal parameters and a further £31m of Corporate Bonds.
22 May 2009
Another week - another £6.5Bn. And the BoE has said formally that they intend to use the remainder of of total £125Bn facility over a period of 3 months. So far they have spent £64B on gilts, £2.2Bn (net of redemptions) on Commercial Paper (unquoted) and £0.7Bn on Corporate Bonds. Too soon to say whether there will be any effect from S&P putting UK Government debt on "negative outlook" watch - but unlikely to stop the QE juggernaut in its tracks!
Interesting to hear the thoughts of the RBS chief economist today - apparently the full £125Bn of QE should give a boost to the economy equivalent to a reduction in Base rate of 1.67% - so in economic terms we have a Base Rate of -1%! And they still have £25Bn up their sleaves!
21 May 2009
The IMF has just released their latest report on the health of the UK economy and the steps being taken by the Government and Bank of England. On balance it was mildly positive and complimentary. It also looks like they have been reading the previous entry in this blog since they recommended “Further diversifying the Bank’s asset purchases, with the aim of improving market functioning. We support, in particular, targeted efforts to reduce excessive risk premia in private credit markets that are currently dysfunctional but deemed to be viable in the long term.” Or to put that into English, they suggested that the Bank of England should expand its programme of credit easing by purchasing more private sector debt, as opposed to its current focus on buying up government debt.
15 May 2009
Another £6.5Bn of Gilts purchases this week – so the trend of the previous four weeks is continued making a total of £57.5Bn of Gilts purchased compared with just £625m of Corporate Bonds. It makes you wonder why they bother with the non-Gilt elements of the QE programme – the companies whose paper is being purchased don’t need any support and the pricing of paper outside of the scheme appears not to benefit from any “trickle-down” effect.
Having said that it is worth saying that the LIBOR premium over Base Rate is now just 86bp (and falling) – and this compares with an average over the past year of 101bps and 151bps in October last year. Looking at US$ LIBOR we can see that the premium here is 60Bps and for the Euro it is just 26Bps. Whereas this latter may be impacted by expectations of further cuts in Base Rate – it is clear that these currencies are closer to the “normal” level of 10 – 20 Bps. So the massive injections of liquidity into the system are apparently having some effect.
8 May 2009
Gilts purchases have amounted to £6.5Bn in each of the last four weeks so that total Gilts purchase under APS now amount to £51Bn with a further £0.6Bn of Corporate Bonds purchased and at least £2.0Bn of Commercial Paper. So at the current rate the initial £75Bn will all be spent by the end of the month and the additional £50Bn that the Bank of England announced on Thursday will all be spent by the end of July. Some commentators have suggested that maybe the fact that the Bank has only announced a further £50Bn compared with the Treasury authorisation of up to £75Bn is a good sign – i.e. that the Bank believes that the Quantitative Easing policy is starting to work.
Or maybe it’s better for the markets to keep the figure “low” for now and then slip out a further announcement on July when people are on holiday?
- Quantitative Easing - April 2009
- Quantitative Easing - March 2009
- Quantitative Easing - February 2009
