QE Day (2)
The Bank of England has pressed the button on quantitative easing (see earlier post). The initial size of the scheme - £75bn over the next few months - is smaller than some analysts have suggested, but it's a lot more than if they were dipping their toes in the water.
To give some perspective, £75bn is the equivalent of about 5% of GDP. And the fact that the chancellor has authorised purchases up to £150bn shows that the Monetary Policy Committee (MPC) also knows it may have to do more.
In light of the discussion in my previous post, one quick conclusion I might draw from both the headline amounts and the content of the statements is that the MPC thinks that the asset price (or yield) effect of the policy is going to be more important than the traditional money channel.
I don't know for sure, of course - but, as we saw, if you thought that the money multiplier was in good shape, you would be talking much smaller amounts.
The Bank might demur. Officials tend to say that they don't care how it works if it achieves the right result. By making the purchases over several months, the MPC is also giving itself room to stop, if the effect is much greater than anyone expects.
But in his letter to the chancellor, the Governor, Mervyn King also highlights that £50bn of the total allowed purchases of £150bn should be of corporate securities, "in recognition of the importance of supporting the flow of corporate credit".
Given the size of the two markets and the dangers of taking too much corporate risk onto the Bank's balance sheet, the majority of the purchases will have to be gilts. They don't want to increase the risk premium on government assets, which would push up borrowing rates for everyone and defeat the purpose of the exercise.
But the governor's emphasis is striking. Of course, by emphasising the credit aspects to the policy, King also wants to draw as sharp a contrast as possible between this policy and a policy of printing money simply to finance government deficits. As he will continue to remind us, buying government bonds as part of QE is a means to an end. It is not, as in Zimbabwe, an end in itself.
As I've discussed before, it's an important political and practical difference, even if the short-term effect of what the Bank is doing is the same: namely, monetising part of the government's debt.