BOE tests faith in fund­ing for lend­ing as QE loses bite

The Pak Banker - - Front Page -


The Bank of Eng­land might need to take a leap of faith on an untested credit plan to do what quan­ti­ta­tive eas­ing is fail­ing to achieve.

With both of its deputy gov­er­nors ques­tion­ing the ef­fec­tive­ness of as­set pur­chases, and economists fore­cast­ing a halt to that stim­u­lus, that leaves the so­called Fund­ing for Lend­ing Scheme as of­fi­cials’ pri­mary pol­icy tool. Pol­icy mak­ers be­gin a two-day meet­ing on Nov. 7 to de­cide on QE’s fu­ture.

The Bank of Eng­land’s three-month old plan en­cour­ages banks to pro­vide cheap credit to com­pa­nies and house­holds, which con­trasts with the trick­le­down ef­fect of gilt pur­chases through QE.

“We are in un­char­tered ter­ri­tory,” said Steven Bell, chief econ­o­mist at hedge fund GLC Ltd. in Lon­don and a for­mer U.K. Trea­sury of­fi­cial. “The search for al­ter­na­tives to QE is gath­er­ing pace” and with the FLS, the cen­tral bank is “try­ing new ways as the econ­omy fails to re­spond to the medicine.”

The Bank of Eng­land’s three-month-old plan en­cour­ages banks to pro­vide cheap credit to com­pa­nies and house­holds, which con­trasts with the trick­le­down ef­fect of gilt pur­chases through QE. A re­think by pol­icy mak­ers will reach a cli­max this week as they as­sess new fore­casts and the im­pact of a pro­gram that’s left them with al­most a third of the gilt mar­ket.

The nine-mem­ber Mone­tary Pol­icy Com­mit­tee will prob­a­bly leave the tar­get for as­set pur­chases at 375 bil­lion pounds ($602 bil­lion) on Nov. 8, ac­cord­ing to 35 of 45 economists in a Bloomberg News sur­vey. Six fore­cast a 50 bil­lion-pound in­crease, and four an­tic­i­pate a 25 bil­lion-pound ex­pan­sion.

Of­fi­cials’ dis­en­chant­ment with QE has be­come in­creas­ingly ap­par­ent, with min­utes of their Oc­to­ber meet­ing show­ing that some mem­bers ques­tioned the im­pact fu­ture gilt pur­chases could have. The cen­tral bank said last week it had com­pleted the fi­nal tranche of its lat­est 50 bil­lion­pound round of bond- buy­ing.

In a speech last week, Bank of Eng­land Deputy Gover­nor Char­lie Bean said con­sumers’ and busi­nesses’ con­cerns about the out­look may un­der­mine the im­pact of QE. In Septem­ber, Deputy Gover­nor Paul Tucker said the as­set-pur­chase pro­gram no longer has “the same bite.”

Royal Bank of Scot­land Group Plc and JPMor­gan Chase & Co. are among banks that have aban­doned fore­casts for more QE this week, cit­ing com­ments by pol­icy mak­ers. Even with bond pur­chases fall­ing out of fa­vor, the econ­omy may still need sup­port. BOE Chief Econ­o­mist Spencer Dale said the 1 per­cent surge in third- quar­ter gross do­mes­tic prod­uct might not be sus­tained and there could be a “sharp fall back.”

Gold­man Sachs Group Inc. said in a Nov. 2 note that its con­vic­tion that the MPC will ex­pand QE this week is “rel­a­tively low.” It changed its fore­cast for more stim­u­lus on Nov. 8 to 25 bil­lion pounds from 50 bil­lion pounds.

“While we continue to see the need for more eas­ing, it looks in­creas­ingly likely that any fur­ther ac­tion will take the form of ad­di­tional ‘credit eas­ing’ rather than QE,” Gold­man economists in­clud­ing Kevin Daly in Lon­don said.

Gover­nor Mervyn King in­tro­duced the FLS in June as a “co­or­di­nated ac­tion” be­tween the cen­tral bank and the Trea­sury to fight the “black cloud of un­cer­tainty” re­lated to the eu­roarea cri­sis that has sti­fled Bri­tain’s econ­omy.

The pro­gram, which be­gan on Aug. 1 and could boost credit by at least 80 bil­lion pounds, al­lows banks to bor­row trea­sury bills from the cen­tral bank to fund lend­ing into the econ­omy. Lenders will have 18 months to use the fa­cil­ity and then up to four years to re­pay. The cen­tral bank said last month that 30 fi­nan­cial in­sti­tu­tions had signed up to the FLS, in­clud­ing Lloyds Bank­ing Group Plc and Bar­clays Plc.

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