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Spencer Dale: the 3 big risks of more QE
Spencer Dale, the Bank of England's chief economist, has expressed his concerns about its policy of creating £375 billion of new money.
Spencer Dale, the Bank of England's chief economist, has shared his reservations about the controversial policy of creating money to buy government bonds, or gilts.
In a speech at Trinity College, Dublin, at the weekend Dale – the only member of the Bank's monetary policy committee to vote against the last increase in quantitative easing in July – outlined the dangers of its extraordinary policy of creating £375 billion of new money, which is equivalent to 25% of the UK’s nominal GDP.
Pension scheme providers and pensioner groups have complained bitterly that the QE drive to push up gilt prices, lower gilt yields and thereby reduce long-term interest rates has slashed annuity rates, which dictate many pensioners’ incomes. Dale said the three risks are:
Unwelcome side effects on the economy:
By pushing gilt yields to all-time lows, QE forces institutional investors to hold riskier assets such as shares and corporate and junk bonds for their higher yields. While this can be good for companies seeking to raise money from investors, it increases the risks ‘borne by key parts of our financial sector,’ Dale said.
He also said the prolonged period of low interest rates could delay rebalancing and restructuring in the economy as inefficient firms stay in business for longer.
‘Monetary policy can and should provide shorter-term support in times of need, but it must avoid becoming a long-term crutch obstructing the required rebalancing of our economy,’ Dale said.
The Bank of England now owns 40% of the total stock of conventional gilts (ie, excluding inflation linked gilts). Selling these back without unsettling the government bond market and causing yields to soar and the cost of borrowing to rocket, would be ‘a delicate task’.
Risks to the Bank’s credibility:
Dale conceded that QE was an ‘efficient and effective’ way of injecting much-needed liquidity into the economy to avoid a deep recession after the 2008 banking crisis. Nevertheless, the policy risks damaging the Bank’s reputation as it could look that it was simply indulging in ‘monetary financing’, ie, propping up gilt prices to avoid the government having to balance its books.
Dale said: ‘it may look to some a little too convenient that we are choosing to hold vast quantities of government debt at a time when the fiscal deficit remains around post-war highs. However unfounded, these perceptions need to be taken seriously.’
With speculation growing that the Bank will extend QE for the fourth time in November in response to the stubbornly weak economy, Dale asked the question: ‘how much further can monetary policy be pushed until the potential costs and risks outweigh the benefits?’
For more on QE watch our video: 2 freaky facts about QE
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by Michelle McGagh on Dec 12, 2013 at 10:57