In its latest quarterly report, the Bank for International Settlements suggests that the UK’s use of Quantitative Easing in the form of the Bank of England’s Asset Purchase Facility (APF) has its limitations.
Despite the outlook for UK economic growth worsening by the day, QE may be one policy action that the Bank will have to let go.
The BIS outlines the background to the APF as follows:
In 2009, the Bank committed an initial £75 billion to purchase bonds with residual maturity between five and 25 years.
This was raised to £125 billion in May; £175 billion in August and £200 billion in November of the same year.
According to the BIS, by February 2010, the purchases of gilts amounted to £198 billion, or about 29% of the free-float gilt market.
Then on 6th October 2011, the Bank decided to expand the APF by a further £75 billion, to £275 billion.
In its report, the BIS goes on to note that the asset purchase programmes implemented by both the Bank of England and Federal Reserve have significantly reduced yields of longer-term bonds.
It says the purchase programmes had a “lasting and large” yield impact, having withdrawn bond supply from the market.
The central bank body therefore suggests that while recent asset purchases seem to have been effective, there are limitations for further actions.
The BIS explains its conclusion as follows:
“First, long-term government bond yields are already very low, and the scope for further reduction becomes smaller as more purchases are carried out.
“Second, it may be harder to achieve the same degree of effectiveness as with the initial programmes once the surprise or novelty element wanes.
“Third, central banks face some risks associated with large holdings of longer-term securities and riskier private debt.
“For instance, a sharp balance sheet expansion due to outright asset purchases, if it persists, may affect inflation expectations.
“Also, it can be difficult to unwind large asset holdings in a way that does not roil markets.”