Quantitative easing falls short - what next for the Bank of England?


Darren Bustin, Head of Derivatives

10 August 2016

Commenting on the Bank of England (BoE) announcement following its failure to buy enough bonds to fulfil its quantitative easing (QE) plan yesterday, Darren Bustin, Head of Derivatives at Royal London Asset Management, said:
The BoE fell £50m short in its gilt purchase target for yesterday, and even then only secured this much by paying well above market price for some of these gilts. Today’s announcement has the BoE kicking the can down the road and has created a ‘wait and see’ scenario for investors looking at reasons for the failure. QE was meant to have been a solution for the problems facing the British economy following ‘Brexit’ however, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution.
“It should be noted that the Debt Management Office (DMO) will issue long-term gilts, maturing in 2055 next week which may mean investors will be more eager to sell other bonds to make room for this new supply, which could make up for yesterday’s shortfall. They could also continue to take advantage of the artificial demand QE has created to offer bonds at values well above the current market price. However, with plummeting government bond yields and pension schemes desperate not to increase deficits further, we could well see more bond purchase failures, with low coverage ratios a likelihood for some time. 
“Longer term, if QE continues to fail this could mean a fiscal response such as a VAT cut of 2.5% in the Autumn Statement as the Treasury steps in. This could help to curb inflation as the BoE is currently forecasting medium-term inflation above its stated 2% target.
The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.

Commenting on the Bank of England (BoE) announcement following its failure to buy enough bonds to fulfil its quantitative easing (QE) plan yesterday, Darren Bustin, Head of Derivatives at Royal London Asset Management, said:

The BoE fell £50m short in its gilt purchase target for yesterday, and even then only secured this much by paying well above market price for some of these gilts. Today’s announcement has the BoE kicking the can down the road and has created a ‘wait and see’ scenario for investors looking at reasons for the failure. QE was meant to have been a solution for the problems facing the British economy following ‘Brexit’ however, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution.

It should be noted that the Debt Management Office (DMO) will issue long-term gilts, maturing in 2055 next week which may mean investors will be more eager to sell other bonds to make room for this new supply, which could make up for yesterday’s shortfall. They could also continue to take advantage of the artificial demand QE has created to offer bonds at values well above the current market price. However, with plummeting government bond yields and pension schemes desperate not to increase deficits further, we could well see more bond purchase failures, with low coverage ratios a likelihood for some time.

Longer term, if QE continues to fail this could mean a fiscal response such as a VAT cut of 2.5% in the Autumn Statement as the Treasury steps in. This could help to curb inflation as the BoE is currently forecasting medium-term inflation above its stated 2% target.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.