CFA Society Singapore
(Sept 26): The Bank of England can reverse its huge bond-buying stimulus programme without sharply pushing up long-term interest rates and hurting the economy, as long it explains the plan properly and moves only gradually, a top BoE policymaker said on Tuesday.
Gertjan Vlieghe said the careful messages sent out by the US Federal Reserve about the reversal of its quantitative easing (QE) programme had avoided sending the wrong signals about how fast it will wean the US economy off its crisis-era stimulus.
The BoE said in June it might start to unwind the 435 billion pounds ($778.7 billion) of government bonds it has amassed since the financial crisis once its benchmark interest rate reaches 1.5%, double its current level.
“Understanding the main channels through which QE works is going to be very important when it comes to unwinding QE,” Vlieghe, one of the central bank’s nine monetary policymakers, said in a speech at Imperial College in London on Tuesday.
His speech challenged the BoE’s view that QE works mostly through “portfolio rebalancing,” or the idea that a central bank’s government bond purchases force investors to buy other assets like corporate bonds, helping the economy.
Vliehge argued that QE shaped expectations of future policy steps which “implies that unwinding QE need not have a material impact on the shape of the yield curve, or indeed on the economy, if properly communicated and done gradually”.
JP Morgan economist Allan Monks said Vlieghe had presented a new case for the view among policymakers that QE had a more powerful impact on pushing rates down when a central bank buys bonds than on pushing rates up when the purchases are unwound.
Vlieghe said economists should look back into history for where rates might be heading.
He said the yield curve - the difference between the return on short and long-term debt - had been flat in the period before World War One, when the gold standard was still in force.
Since the BoE was granted independence in 1997, Britain’s inflation and inflation risk fundamentals had been more similar to the gold standard period than the 20th century average.
“So we should expect yield curves to be flat again on average,” he said.
He repeated his view that one or two interest rates hikes a year would be needed for the BoE to meet its 2% inflation target.