What the BoE left out of their QE report

24th August 2012

For a start the economic recovery it was supposed to help provide is if anything even further away now than it was when the QE button was first pressed in the UK  in March 2009. Also as I pointed out on twitter yesterday there is something of an elephant in the room if the Bank of England is allowed to judge itself!

"Can anybody spot the moral hazard in the Bank of England reviewing its own Quantitative Easing policies?"

The Paper Itself

As if it is in a hurry to prove me correct the Bank of England tells us this in the second paragraph.

"Without the Bank's asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. Many more companies would have gone out of business. This would have had a significant detrimental impact on savers and pensioners along with every other group in our society. All assessments of the effect of asset purchases must be seen in that light."

There is a whole raft of assertions in there for which there is simply no evidence at all. And seeing that they are asserting out of thin air, the phrase "must be seen in that light" sounds rather desperate does it not? They would have loved to have been able to tell us that the economy is growing but of course it has struggled and then shrunk something which appears to be missing from their analysis. If we go back to March 2009 I doubt that they were predicting this to be the result (from the NIESR).

"We do not expect output to pass its peak in early 2008 until 2014."

What about savers and pensioners?

The Bank of England has obviously been hurt by suggestions that its policies have hurt savers and pensioners. However asserting something out of thin air does not make its rebuttal true. For example I took a look at one of its claims.

"the Bank's assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts"

Okay, now if we do what the Bank of England presumably hopes and look at the movement in UK equities represented by the UK FTSE 100 we see an increase of around 60% since QE began. But the more thoughtful analysis is to compare with places that do not have explicit QE and if we look at the Eurofirst 300 index we see that it rose by around 55%. So any impact is suddenly looking much much smaller than the Bank of England's assertion. And such an assertion tends to turn to dust if we were to compare it with the German Dax index which has rallied by 85% over the same time period.

However the Bank of England needs to assert that QE  has led to as strong an influence on equity prices as bond ones so it can claim this.

Continue reading…


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