Quantitative easing for whom?

They say you can't please all of the people, all of the time. But three years on since the Bank of England launched its quantitative easing policy, the central bank seems to be pleasing very few people at all.

As expected, the Monetary Policy Committee have decided to keep policy where it is, with the extra £50bn cash injection agreed last month still under way and the official Bank Rate on hold at a mere 0.5%.

The betting is that the MPC may decide to do a little more quantitative easing at their May meeting, when that £50bn has been used up.

If the Bank's forecasts for growth and inflation stay roughly where they were in February, we could be looking at the beginning of the end for QE.

Given how everyone's forecasts have bounced around during the past few years, you could hardly say that was a sure thing.

Bad news for savers

But for the National Association of Pension Funds (NAPF) the end of QE cannot come too soon.

Today the NAPF blamed the Bank's fresh round of cash injections since October for adding another £90bn to the shortfall in Britain's corporate pension funds - by pushing down interest rates too low.

It's the same complaint that Bank officials hear from savers, up and down the country. But the bad news for savers does not seem to translate into good news for borrowers - or not lately, at least.

As we know, smaller businesses are still having trouble getting cash from banks.

This week, we've seen several mortgage lenders increase their standard rates as well..

You might wonder how QE could simultaneously hammer savers with low rates - while allowing rates for borrowers to creep up.

Government benefits

The answer is that one borrower has benefited enormously from the Bank's easy money policies: the government.

But the very fact that official policy has remained so loose, for so long, has meant that the Bank has much less influence now on the cost of borrowing for households.

Last spring, the interest rate on a ten year government bond was more than 3%. It's now hovering around 2%, and has been for some time.

As taxpayers we should be grateful to the Bank for any role it played in that decline. But NAPF says that as members of pension funds we should consider it a disaster. Is it right?

'Safe haven flows'

In a recent speech, David Miles, an external member of the MPC and academic economist, said no.

For one thing, QE is probably only responsible for about half of the fall in gilt yields over the past few years. "Safe haven flows" into government bonds have also played a big part.

He reckons the world does not have to become a lot more scary, to see a very large increase in demand for "safe" assets like gilts - and a correspondingly sharp decline in the interest rate which the government needs to pay.

If a very bad event is expected every 100 years, instead of, say, every 133 years, he calculates that the real rate of return on 'safe' bonds could fall from 3.7 per cent to 2.3%. The world has indeed been a scary place over the past few years

Where David Miles does see a large impact from QE is in the price - and implied yield - on other assets, notably corporate bonds. Ever since the policy began, we have seen big companies benefit from cheaper borrowing costs, as long as they were in a position to borrow from the corporate debt market, not their local bank.

That could help their cash-flow in the next years. It has also helped to push up share values and the value of the corporate bonds.

Miles notes that the UK stock market has risen by 50% since February 2009, just before QE was announced. In fact, he estimates that about 60% of the assets held by company pension schemes have increased since the policy began. Shares have also gained value since October, when the policy was expanded.

Dr Miles does not think the Bank can take all the credit for rising asset price. But it's implausible, in his view, to suggest they are entirely unrelated to QE. So pension funds have been helped as well as hurt by QE.

There are losers from lower gilt yields - including many individual savers. Low gilt yields, as a matter of arithmetic, also raise the future value of the pensions that companies have promised to pay out. That is unavoidable.

But, says Miles, it's a mistake to see gilt yields as the single measure of of the impact of QE. Its main impact "should be seen as working through the effect on the prices of other assets (besides gilts) and on the cost of availability of funds to companies and households2.

Borrowers who are not HM Treasury might think this a more powerful argument, were mortgage rates not now going up.

What's behind this? The answer is that when it comes to retail and wholesale borrowing rates, the lesson of the past few years is that the Bank of England is only one piece of the puzzle, and a smaller one that it was a few years ago.

Eurozone factor

When it comes to individual bank decisions on mortgage rates - and deposit rates for savers - the Bank is much less of a factor today than in more normal times, precisely because the official base rate has been so low, for so long.

Other market factors play a bigger role, because of the lack of movement by the Bank.

Thanks, in part, to the situation in the eurozone, banks and other lenders are finding it more expensive to borrow on wholesale markets, even if the government is not.

We don't see it reported as prominently, but that's leading banks to raise the interest rate on many savings accounts, to attract more deposits.

So we may see some good news for savers in the months ahead. However, mortgage rates appear to be heading up - with or without more QE.

They say you can't please all of the people, all of the time. But three years on since the Bank of England launched its quantitative easing policy, the central bank seems to be pleasing very few people at all.

More on this story