Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Could the British Pound Bear a Fresh Slug of Quantitative Easing?

Interest-Rates / Quantitative Easing Jan 08, 2010 - 01:42 PM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleRearranging the Deck chairs on the QEII - The BANK of ENGLAND's asset purchase program – better known as "quantitative easing" – was maintained at its £200 billion limit ($318bn) at this week's policy meeting in London.

With one month and just £7bn left to go, we wonder here at BullionVault what the chances are that a QEII will soon hove into view. Because, all told, the first £200bn has been sunk to little effect.

To recap...

Financed by "the issuance of central bank reserves" (better known as money printing), the Old Lady's queasing was initially given a limit of £75bn when it began in March 2009. So far, the money has gone on:

Commercial Paper


Corporate Bonds


UK Government Bonds (gilts)


Secured Commercial Paper


So while the avowed aim was to "get money into the economy" with a cash injection approaching 14% of GDP, the mechanism of choice was in fact to buy UK government bonds, rather than extending, say, loans to business.

No matter; stated logic had it that, this way, the banks and other institutions relieved of their government gilts would put the money received in exchange to good use...investing in and lending to the private sector.

But no. Not quite. Loan growth to UK households has sunk to near-historic lows beneath 2.0% year-on-year, while lending to non-financial businesses continues to contract, down by almost 1% of GDP (£13bn) since QEI was launched last March.

What about interest rates? Q.E., after all, is all about "easing with quantity"...throwing money at the long-end of the yield curve to suppress those rates which overnight and short-term market operations cannot reach. That way, mortgage costs and lending to business can also be "eased", smoothing private-sector recovery with a little monetary magic.

But no again. Because after an initial plunge on news of the asset-purchase program in Feb-March, gilt yields have since risen above where they started in 2009. Home-loan rates and commercial loans have ticked higher as well. Which kinda begs the question whether next month really will "should" see an end to QE or not...

Given the money-supply and interest-rate failures of queasing to date, that leaves the unmentionable aim of QEI – helping the UK government finance the worst budget deficit in peace-time history.

Sure, so "debt monetization" a la Weimar Germany it ain't. Not quite. Because the Old Lady hasn't actually pushed a wheel-barrow full of cash from Threadneedle Street two miles west to Whitehall. But the net effect, as BullionVault is hardly alone in guessing, is pretty much the same. Market demand for UK debt got a £191bn fillip (so far; there is £7bn still to go remember) courtesy of the Bank offering to buy gilts for cash. And by bizarre coincidence, the QE total of £200bn just so happens to match the government's fiscal deficit for this current year.

The wheel-barrow was pushed around the Square Mile, in short, but eventually found its way to the Treasury all the same. And just what did the Old Lady get for her freshly-inked money?

Now holding 21% of the UK government's total £803bn debt outstanding, the Bank of England hasn't bothered with any gilts maturing before March 2013. No doubt those bonds could look after themselves, what with the Bank's own overnight rate set at just 0.50%, keeping a lid on such "ultra-short" gilt yields (i.e. boosting prices).

The Bank hasn't bought any of the measly £3.5bn in undated War Loan or consolidated "rumps" either. Nor has it picked up any inflation-linked gilts, not with its quantitative easing, at least. (The BoE's staff pension scheme, in contrast, can't enough of the things...holding 88% of the Old Lady's retirement funds as inflation-proof bonds at last count, more than 1% of all index-linkers in issue by value.) No, in the asset purchase scheme, the Bank has focused solely on conventional (i.e. inflation-exposed) gilts, weighting its money most heavily on medium- and long-term bonds.

The Bank owns...

  • Fully 29% of the UK's £167bn in short-dated gilts;
  • Some 40% of the £140bn in debt set to mature in 2017-2022; and
  • Almost 24% of the £248bn due to redeem between then and 2060.

To see her QEI return home safely, the Old Lady could of course hold these gilts to maturity, picking up the interest meantime but wearing a 10.5% loss from purchase price (£191bn) to redemption (£171bn face value at par). Rather than waiting five decades to retire this cash injection, however, let's imagine the Bank of England not only stops buying more gilts in February 2010, but actually chooses to exit its current gilt positions before March 2013, when its shortest-term holding matures.

Why not? The government's now counting on 3.75% GDP growth year-after-year starting in 2012. But reversing the QEI would mean the bond market has to swallow another £171 billion of UK debt (or more, depending on market prices...) and that would come on top of the £431bn already slated for sale in the Treasury's forecasts (last pegged too small by half as fiscal year 2009-2010 unwound), which in turn do not include the £132bn that will need refinancing as the current stock of ultra-short gilts mature.

Totaling £563bn (£895bn) even without a reversal of quantitative easing, in fact, likely debt issuance over the next 36 months already equals 90% of total gilt holdings outside the Bank today (including index-linkers, War Loan and rump).

That's an awful lot of cash to find in a hurry. Not least with the United States already set to ask bond buyers for $3.5 trillion in the next 12 months alone.

What might happen to gilt prices, and thus UK interest rates, if the QEI does put into shore? But how much more money-printing can the Pound bear should QEII launch to rescue the state...?

Adrian Ash

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules