The signalling channel inflationary pressure driver via quantitative easing, a BOE working paper finds. Looking ahead, that inflationary channel is turned off during quantitative tightening.
Bank of England research into how quantitative easing worked supports the view that its effects varied in the different waves and that at times, the mass gilt purchases worked through both lowering term premia and sending a signal about the future direction of policy.
A key new finding, though, is that the signalling channel, which works when the policy rate is at its zero lower bound, was the one that drove inflationary pressure.
"We find that signalling has stronger effects on the real exchange rate and on equity prices than the pure QE-specific term premia channel" and "only signalling generates inflationary pressures," authors Iryna Kaminska and Haroon Mumtaz stated in the research note published via the BOE's Underground website. They did not comment on the implications for quantitative tightening, now underway at the BOE, but the normal assumption is that the signalling channel is turned off in QT, suggesting there may be no obvious route through to inflation.