Quantitative easing five years on

In: Uncategorized

5 Mar 2014

It is five years since the introduction of quantitative easing (QE) in Britain. This chronology is from my latest Fund Strategy cover story.

QE was first implemented in Britain five years ago. However, there were precedents in other countries. The Bank of Japan implemented a form of QE from 2001 to 2006. In November 2008 the Federal Reserve introduced quantitative easing following turmoil on Wall Street in previous months. There are technical differences in the implementation of QE between countries but in broad terms they all seek to bolster demand to head off deflation.

December 2008. Speculation about the introduction of QE in Britain began. By January 2009 the Bank of England, under a remit from the Chancellor, had set up a subsidiary company to allow it to purchase assets to improve market liquidity.

February 2009. Under the new Banking Act the Bank of England was given two statutory objectives: financial stability and monetary stability.

March 2009. The start of QE proper in Britain. It was announced that official interest rates would fall to a historical low of 0.5% and the Bank was given the power to purchase assets for monetary policy purposes. Initially it bought £75bn of assets but by November 2009 the total had reached £200bn.

October 2009. The then leader of the opposition, David Cameron, told the Conservative party conference that QE would need to be curtailed sooner rather than later. “If we spend more than we earn, we have to get the money from somewhere. Right now, the government is simply printing it. Sometime soon that will have to stop, because in the end, printing money leads to inflation,” he said. In May 2010 he became prime minister after the general election.

November 2010. The Bank voted to increase total asset purchases to £200bn.

February 2011. The bank set up an interim Financial Policy Committee (FPC). It held its first policy meeting in June 2011.

September 2011. Consumer Prices Index (CPI) inflation reached 5.2%, matching the high in September 2008.

October 2011. Almost two years after its last purchase, the Bank of England bought another £75bn of gilts, bringing its stock of assets up to £275bn.

February 2012.The size of asset purchase programme was increased by £50bn to a total of £325bn

July 2012. The Bank announced another £50bn of asset purchases to bring the total amount to £375bn. Some argue that this was the end of QE since the Bank has made no new purchases under the scheme since then. However, the stock of QE has not been reduced either.

In the same month the Bank and HM Treasury launched the Funding for Lending Scheme (FLS). The FLS is designed to incentivise banks and building societies to boost their lending to the real economy. It does this by providing funding to banks and building societies for an extended period with both the price and quantity of funding provided linked to their lending performance.

November 2012. George Osborne, the chancellor of the Exchequer, announced that Mark Carney, then governor of the Bank of Canada, would become governor of the Bank of England.

December 2012. The Financial Services Act, a fundamental reform of the system of financial regulation, became law.

April 2013. The new legislation regulatory system came into effect. The old Financial Services Authority was abolished and the Bank of England took over responsibility for protecting and enhancing financial stability. A new architecture consisting of the FPC, Prudential Regulation Authority and Financial Conduct Authority was set up. In the same month the Bank and the Treasury announced an extension to the FLS.

July 2013. Mark Carney became the governor of the Bank.

August 2013.The Bank gave forward guidance for the first time. It said it would consider making further asset purchases if the unemployment rate remained above 7%.

December 2013. CPI inflation rate fell to its 2% target.

Over the year the British economy grew by 1.9%, the strongest annual growth rate for six years.

February 2014. Carney announced a new form of forward guidance that depends on the performance of several indicators.