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UK Sours on £895 Billion Stimulus Tool After Side Effects Hit Home

UK Sours on £895 Billion Stimulus Tool After Side Effects Hit Home

Quantitative easing, the policy tool deployed across the Group of Seven to stimulate economies through the financial crisis and pandemic, is rapidly falling out of favor in Britain.

From politicians to economists and a former Bank of England governor, many are cooling rapidly on the merits of the tool as its cost to taxpayers and side effects become apparent. The result is likely to make it more difficult for the UK central bank to pull the QE lever in the same way again if the economy sours.

What’s changed is that the BOE’s QE program, now that it’s winding down rapidly, has absorbed blame for stoking the worst bout of inflation in four decades, deepening inequality and forcing the Treasury to fund the scheme’s losses at a time when the public finances are strained.

Economists are calling for the tool to be dramatically reined in for future crises and question what role it stands to play in a world of higher inflation. Their thoughts underscore the end of an era of cheap money and a return of more normal central bank tools to manage the economy, namely interest rates.

The BOE Has Accelerated the Pace of Balance-Sheet Reduction

Source: Bank of England, Bloomberg EconomicsNote: Profile includes maturing gilts and active sales

“Quantitative easing played a very successful role in stopping panics where people were turning to cash,” Charles Goodhart, a former BOE rate-setter, said. “What it wasn’t ever really was a useful tool for dealing with low inflation, and since we’re not going to have low inflation, it’s not going to be used for that ever again. But it could still be used for panics and people rushing into cash.”

The BOE this week begins a second year of sales from the QE program, a process dubbed quantitative tightening. The bank built up its Asset Purchase Facility to a peak of £895 billion in 2021. It will divest about £100 billion of assets through sales and allowing debt to mature from this month, up from £80 billion in the last period. The total APF stood at £757 billion last week.

Central banks adopted QE as an experimental tool to give markets and the economy a boost once they cut interest rates to near zero, buying bonds to push down long-term interest rates in financial markets.


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