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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Bank of England UK Quantitative Easing Money Printing to Hit £275 Billion 2010

Interest-Rates / Quantitative Easing Jan 08, 2010 - 09:13 AM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThe Bank of England cut UK interest to a historic low of 0.5% in March 2009 for the objective of boosting the economy so as to enable it to SELL government bonds, however this did not work as bond auctions started to FAIL in March, which therefore triggered the Bank of England hitting the panic button and igniting Quantitative Easing or Quantitative Inflation, having received the green light from the Government a few months earlier.


The initial print run was for £75 billion which has been steadily extended to £200 billion to date. Nine months on the phrase Quantitative Easing is bandied about in the press as though it is normal, however I cannot emphasis enough how big an event Quantitative Easing aka Money Printing is, QE is the biggest monetary event in the Bank of England's 315 year history, as once ignited it is difficult to wean an economy off of QE as Governments fail to control the budget deficits that become endemic which demands a continuance of Q.E. and therefore risks igniting Quantitative Inflation and currency / market panics.

QE Huge Boost to GDP

I have received a few emails critical of my strong UK growth forecast for 2010 of +2.8%, mostly from those that expect / hope for a double dip recession that would allow them a second opportunity to buy into the stocks bull market at near the bear market lows having missed the birth of the stocks stealth bull market last March, in that light the following may enlighten readers on the huge boost to GDP during the past 9 months:

Whilst approx £180 billion of the £200 billion of QE authorised to date has been deployed over the past 9 months. However the true implication of QE on the economy can be better appreciated when setting it against the recession that has seen a contraction of some 6.2%, as QE of £180 to £200 billion is equivalent to GDP of 14% to 16% i.e. far greater than the loss of GDP during the 15 month recession, and not forgetting that QE is just one part of the programme of huge Government deficit spending (14% of GDP) and near ZERO interest rates (Savers subsidised bailouts) and the over £1 trillion of bailed out banks bad debt liabilities, then direct capital injections of over £80 billion (6% of GDP) illustrates the extreme lengths to which the authorities have gone to, to bring the recession to a halt, which sows the seeds for above trend growth during 2010.

The Bank of England's Route towards £200 billion QE

The Bank of England embarked upon a programme of printing money or Quantitative Easing during March 2009 with an initial print run of £75 billion of a total set at £150 billion in an attempt to wave the central bank magic wand to increase the supply of credit. However as I warned at the time (5th March 2009: Bank of England Ignites Quantitative Inflation) that once started the Bank of England would continue printing money right into the May 2010 General Election targeting an print run of as much as £450 billion and therefore igniting Quantitative Inflation during 2010.

Virtually all of the mainstream press swallowed the Bank of England's hints and winks that Quantitative Easing had ended at £125 billion during the summer months, which at the time I stated was not possible (8th July 2009: Irrelevant UK Base Interest Rate on Hold as Real Rates have Already Begun to Rise)

This confirms my view that the Bank of England will continue printing money into year end to beyond the current arrangement of £150 billion and probably as high as £250 billion.

I projected a Quantitative Easing total towards £250 billion by the end of 2009 with the actual total of £200 billion of money printed as a direct consequence of the Labour Government's objective of both aiming to maximise the number of seats retained at the next General Election as well as to deliver a scorched earth economy to the next Conservative Government. Therefore the Labour Government also wins because it gets to hide this Quantitative Easing debt as theoretically purchases and sales cancel each other out in the fantasy land of central banking accounting and feeble government auditing. I.e. by magic approx £200 billion of new government debt has vanished into thin air, for if had not been hidden under the carpet then UK Gilt interest rates would be much higher due to the increase in supply of approx 33%.

Asset Price Implications of the Potential End of Q.E.

Quantitative Easing being brought to an halt / unwinding of purchases would hit asset prices hard, i.e. we would see the Gilt bond market impacted as instead of purchasing 'most' of the government bonds the Bank of England would become its biggest seller with a lot of supply overhanging the market this would send the bond market into a tailspin which would follow into the stock market that has soared in good part as a consequence of Q.E., similarly the bounce in UK house prices would soon evaporate. This suggests whilst the BoE talks of ending Q.E. I just don't see it happening whilst the Government runs a budget deficit anywhere near as large as 15% even half of this would not be enough to end Q.E. So it looks like Q.E. will be here for many years as I originally voiced before Q.E. began. However as the asset markets stabilise at higher levels, the Bank of England rather than printing new money may entice banks and financial institutions to purchase bonds rather than further drive up stocks which is therefore suggestive of a tough year for other asset prices.

Bank of England Forcing Banks to Buy Gilts

The official line of QE was to boost bank lending, however Q.E. is apparently having the opposite effect at the commercial banks as the Bank of England's twin objectives of monetizing government debt and for the the bankrupt banks to improve their balance sheets is in effect forcing the banks to BUY government bonds as Gilts are seen as the safest asset class and therefore boosts the Banking sectors credit worthiness in terms of capital ratios so instead of lending tax payer money loaned to the banks, the banks are using tax payer money to buy government bonds and on short-term deposit at the Bank of England.

Surely this must be by design as the Bank of England's primary purpose is for the orderly management of the Government debt market hence this is ensuring the maximum demand for a huge amount of debt issuance estimated at £225 billion for the current financial year, which includes new debt and maturing debt rolled over.

Continuing Budget Deficits for Several Years

Even if the next government manages to implement significant policy measures to cut the annual deficit by £80 billion year to approx £100 billion by means of tax rises, spending cuts and revenue from growth, against the Labour governments target of £162 billion. A deficit of £100 billion would still equate to about 8% of GDP, so would still require more money printing to monetize government debt of which approx £60-£70 billion would need to be monetized.

QE Money Printing 2010 Conclusion

QE will continue during 2010 until the Bank of England is sure that a. the bankrupt bailed out banks no longer risk financial armageddon, and b. That government debt issuance does not risk a Gilt bond market collapse.

My original estimate was for QE to rise to £450 billion over the next 5 years (from 2009), therefore I expect we will pass the half way point during 2010 as I expect the Bank of England keep printing printing money for several more years.

The Bank of England's December 09 announcement that it would now buy and sell corporate paper to me suggests that the Bank is considering selling corporate paper bought during the past 9 months in favour of supporting the Gilt bond market. Therefore I expect this coupled with further incentives for banks to buy gilts means much less QE during 2010 than 2009, which suggests a target total for 2010 of £275 billion, whilst at present academic economists and mainstream press suggest that there would be no further Q.E. beyond £200 billion and even that the Bank will seek to unwind QE during 2010 i.e.

Bank set to close the £200bn printing press - Independant 8th Jan 10

The Bank of England's £200bn quantitative easing (QE) experiment is set to come to an end next month, with the Monetary Policy Committee (MPC) yesterday voting to leave the scale of the scheme on hold. The remaining money in the programme will be exhausted by the time of the MPC's February meeting and it is then expected – barring shocks – to take the economy off its life support system.

Though the mainstream press said basically the same thing last July when Q.E. was at £125 billion, as mentioned earlier.

Money Printing Theft of the Value From Holders of Existing Currency

Quantitative Easing is not a free lunch, the price of which is being paid by savers as the supply of money increases so does it decrease the value of all currency, this is most clearly evident by two indices,

1. Sterling exchange rate against other currencies, though all currencies are engaged in competitive devaluation so therefore probably something like gold is a better indicator in this case 2009 saw a devaluation of about 20% with more to come during 2010.

2. The inflation indices of which the Consumer Price Index is the governments preferred measure. Throughout 2009 and into 2010 we have seen the base interest rate BELOW the rate of CPI inflation which means NEGATIVE real interest rates i.e. your rate of interest is below the rate of inflation. This means that the bill for low / negative interest rates is being paid by Savers who along with all tax payers are being forced to pay for the bankster's crimes as tax payer bailed out banks such as HBOS pay a pittance on instant access savings accounts of as little as 0.1% against a requirement of 2.3% just to cover CPI inflation of 1.9% plus the 20% tax charged on interest.

Implications for Interest Rates

The Bank of England is likely to be reluctant to raise interest rates whilst Q.E. continues. Which therefore suggests rates will only rise when the Bank of England is forced to raise rates by the markets as a consequence of risks of bond purchases. Which suggests 2010 is going to be a difficult year to forecast interest rates.

UK Interest Rate Forecast 2009

This analysis is part of a series of analysis that will resolve in an Interest forecast for 2010 in the next few days, ensure you are subscribed to my always free newsletter to get this in your email in box.

The UK interest rate forecast of early December 2008 for 2009 forecast that UK interest rates should decline to 1% (from 3%) by early 2009 and remain there into the second half of 2009. However following the cut to 0.5% in March 2009, the Bank of England has continued to pursue an artificial banking system by keeping interest rates at an extreme historic low of just 0.5% into the end of 2009 so as to flood the bankrupt banks with liquidity to enable them to rebuild their balance sheets by overcharging customers against the base interest rate and manipulated interbank market rate of 0.66% against rising real market interest rates which have been in a steady climb since March 2009 which increasingly means that the base interest rate has become irrelevant to the retail market place as explained in the article - Bailed Out Banks Not Lending, Sitting on Tax Payers Cash.

Source: http://www.marketoracle.co.uk/Article16333.html

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market . Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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