qe extended by the back door

The Bank of England has changed how its asset purchase facility (APF) is managed, in a move which amounts to further loosening of UK monetary policy.

qe extended by the back door


The Bank will start handing the interest it earns on the £375bn of gilts acquired through quantitative easing (QE) back to the Treasury. Data shows this amounted to £24bn in March, but this is expected to have increased to £35bn by March 2013.

Ultimately, the money earned through the AFP belongs to the Treasury under the terms of an indemnity provided to the Bank. However, until now its has remained with the Bank  in an unused account.

A letter sent by the Treasury to the Bank on 9 November said: "Holding large amounts of cash in the APF is economically inefficient as it requires the Government to borrow money to fund these coupon payments.

“Transferring net income from the AFP will allow the Government to manage its cash more efficiently and should lead to debt interest savings to central government in the short term.”

In his reply, Bank of England governor Mervyn King said the change “amounts to a small loosening of monetary conditions”.

“This is because … your intention is to use any funds transferred to the Exchequer to reduce the stock of outstanding government debt,” King explained. 

“As a result the private sector will hold fewer gilts and more money than otherwise. That implies an easing in monetary conditions relative to the present position in which the coupon payments are held on deposit by the APF.”

The governor added that the move is equivalent to the Bank purchasing gilts of the same value – implying the effect is the same an an extra £35bn of QE.

Capital Economics chief UK economist Vicky Redwood said: “The move is similar to an additional dose of quantitative easing. Indeed, the fact that this change amounts to a loosening of monetary conditions helps to explain why the [Monetary Policy Committee] took no action at yesterday’s meeting.”

The letters between the Bank and the Treasury added that the cash flows may need to be reversed in the future when monetary conditions begin to normalise and the APF is wound down.

Toby Nangle, head of multi-asset allocation at Threadneedle Investments, commented: “In other countries such as the United States, Japan and in the eurozone it is the case that these ‘profits’ are automatically remitted to their respective national treasuries.

“In July our paper ‘The unspent dividends of quantitative easing’ called for HM Treasury to come into line with international practice and transfer the QE profits to the Treasury. We welcome their move to do so today.”


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