Quantitative Easing Is Back – But Will It Help the Real Economy?

Last week the Bank of England surprised commentators with the scale of its post-Brexit monetary stimulus package. It included a new £70bn round of quantitative easing (QE), the first since 2012, as well as the more widely predicted 0.25% cut to interest rates.

The idea of QE is that by buying up safe financial assets like government bonds in large quantities and taking them out of the market, the Bank of England will make more risky ‘real economy’ investments more attractive to investors – buying shares or bonds in businesses. The Bank’s previous £375bn worth QE was almost entirely made up of purchases of government debt, with the previous Governor Mervyn King apparently reluctant to buy assets from companies.

The question that NEF and others have raised a number of times is whether this will translate in to more money being lent and spent in the real economy. Investors have other options apart from simply buying corporate bonds or equity. For example buying foreign government debt or non-corporate assets such as currency derivatives. There is also evidence of negative side-effects from QE. It tends to inflate shares and house prices, helping the rich more than the poor. It also hurts savers, pension funds and insurers, who typically invest in the same safe government bonds and see their returns falling as the interest rates on these assets are pushed down.

The impact of QE

The latest round of QE has had a big impact, at least in the short term. Issuance of sterling debt by British companies has notably increased, the interest rate on sterling bonds has collapsed, and the share prices of British companies have risen. However, on its second day of operations, the Bank unusually failed to buy its target of £1bn in long-dated government debt. The reason was that pension funds and insurance companies refused to sell. The falling yields on their debt have made them more, not less risk averse and hence reluctant to let go of government debt.

Corporate QE

Perhaps the most interesting feature of the new round of QE was the decision by the Bank to buy £10bn of corporate bonds (the remaining £60bn will again be for government bonds). By increasing competition in the market for corporate debt, the intended effect will be to push down the interest rate that chosen firms have to pay on the issuance of their bonds.

This could be seen as a positive step. The Bank announced that bonds would be purchased from companies making a ‘material contribution’ to the British economy and that this would exclude banks, building societies, insurance companies and ‘leveraged investment vehicles.’

Concerns with corporate QE

But there are a number of concerns. The Bank will only purchase ‘investment grade’ bonds, meaning it will be mainly large companies or utilities that will benefit from the scheme, rather than the small and medium sized enterprises which are most likely to be effected by any slow-down in bank lending. Also, its not entirely clear large companies need more cheap cash – many are already sitting on huge cash profits so it’s not clear that they will spend the new money on investment. Other options include mergers and acquisitions and corporate buy-backs, whereby companies buy back shares from their own investors. Such activity pushes up share prices but does not necessarily lead to more investment or jobs.

The Bank will provide further information on the types of bond it will purchase in September. Until then, some insight can be gleaned from a look at what the European Central Bank (ECB), which commenced its own version of corporate QE in June, has been up to. According to analysis by the QE4People campaign, the main beneficiaries of ECB corporate asset purchases have been French and German multinationals, including oil producer Total, alcoholic drinks company Pernod Ricard, car-makers BMW, Daimler and Volkswagen.

These companies all have low risk credit ratings. But they might not be everyone’s first choice for a central bank subsidy, certainly not from a social or ecological sustainability perspective.

The Bank of England’s decision to embark on ‘corporate QE’ raises a number of important issues:

  • the criteria used to determine the types of companies the Bank  purchases from;
  • the role of the Treasury or Parliament in influencing this process;
  • whether wider social and ecological criteria relating to the government’s objectives should also be considered in the Bank’s assessment;
  • if the bank could consider purchasing assets in institutions that more directly support the UK’s key financing needs, such as the Green Investment Bank or British Business Bank.
    This decision could help boost much needed infrastructure spending, as called for in a recent letter by 35 economists.

Ultimately, the policy can be seen as a further step towards a more interventionist form of monetary policy that requires greater public and democratic scrutiny.

This article was first published by the New Economics Foundation on 12 August 2016.