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'Zombies, inflation and bubbles' threat from lingering QE

Barclays warns of ‘a lot of destruction, a lot of volatility’ if central bankers mis-time the withdrawal of their quantitative easing stimulus programmes.

 
'Zombies, inflation and bubbles' threat from lingering QE

Rising inflation under the stewardship of increasingly tolerant central bankers, asset price bubbles, and ‘zombie’ companies are all risks from keeping quantitative easing (QE) alive for too long, Barclays has warned in its authoritative annual study on financial markets.

The Equity Gilt report comes as the debate grows as to when the UK and US in particular will start to reel back their massive stimulus programmes of 'money printing'. Speculation that the UK, which has already created £375 billion of new money under QE, could extend the policy to buy more government bonds (or gilts), boosted the FTSE 100 and sent the pound tumbling on Wednesday. Just hours later signs that the US could wind down its programme sooner than expected sparked a global market sell-off.

‘The withdrawal of QE itself should not be problematic given that the central banks’ interventions have been designed to allow for a clear exit path,’ the report says.

Get the timing and pace of this unwinding of central bank asset purchases wrong though and there could be ‘a lot of destruction, a lot of volatility’, said Barclays’ Michael Gapen, one of the report’s authors.

‘In this thorny environment, policymakers are likely to fear tightening “too soon” and derailing a nascent recovery; but the upshot could well be that policy is kept too loose for too long, with inflation rising to higher-than-intended levels,’ according to the report.

The bank points to the increasing tolerance for inflation shown by central bankers in the UK, US and Japan as they tackle stagnant economic growth. Among major stimulating banks, only the European Central Bank hasn’t shown this increased tolerance for inflation, said Simon Hayes, one of the report’s authors.

‘Although it [QE] need not lead to high inflation, the latter may result from an increased tolerance of inflation in the face of stagnant real economic growth,’ the report warns, adding that ‘the US and the UK appear most vulnerable to these pressures’.

Barclays also warns of the ‘distorting’ impact of investors going too far in their search for returns amid ultra-low interest rates. This was part of the rationale for monetary stimulus, but the longer rates are held at rock-bottom, the more likely distortions are to arise, Hayes argues.

‘History suggests the authorities’ ability to prevent the build-up of imbalances is highly limited’, Hayes says.

Years of low interest rates enforced by quantitative easing, as well as pressure on banks not to force companies out of business, has also kept companies alive that would otherwise have gone under, the Barclays report says, with low productivity growth the result.

2 comments so far. Why not have your say?

Nick-

Feb 21, 2013 at 17:44

I presume the "zombie companies" are still employing people and that is why Osborne and King feeding them with cheap money to keep them alive while they can.

Despite all the constant negative feed about the Euroland the facts are proving the opposite to the daily hype: at the time of Euro's birth the exchange rate was 73p and now it is 87p. We are now nearly 20% worse off by feeding "zomby companies" with cheap finance eroding the Pound with planned unnecessary inflation.

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William Bishop

Feb 21, 2013 at 19:59

"increased tolerance of inflation in the face of stagnant economic growth" may be justified. What would not be justified is continuing this in the face of increased use of credit and enhanced economic growth. Also, I'm not convinced that pulling back QE by resale of a huge volume of bonds previously acquired by central banks would prove as straightforward as Barclays appear to think.

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