MNI INSIGHT: More BOE QE Likely Even If Gains Slight

Recent research has reassured the Bank of England it would be safe to boost its quantitative easing programme, which it is likely by the end of the year, without fear of risking market disruption when it is eventually withdrawn, MNI understands.

With the Bank's consultation on negative interest rates only starting, the likely expansion of the GBP745 billion QE stock target in November or December would potentially relieve any upsurge in market stress in the event of a disruptive Brexit or a worsening Covid-19 pandemic.

If markets are calm, the stimulative effect would be small, according to MPC member Gertjan Vlieghe. But, with 10-year gilts yielding below 0.18%, the cost of a small QE boost should be low, and BOE research indicates that when bond purchases ultimately have to be unwound there is little risk of "taper tantrum"-like disruption so long as investors do not interpret the move as a signal of a coming rise in interest rates.

LOW RATES STRUCTURAL

Governor Andrew Bailey, like Vlieghe, sees low rates as structural, due to demographic and other factors. The governor has made the case, yet to be sanctioned by the MPC, that a QE unwind could begin before Bank Rate is raised in order to build ammunition against future downturns.

The MPC has slowed its asset purchases from around GBP13 billion a week in March, when the Covid shock roiled markets, to some GBP4.5 billion a week, but Deputy Governor Dave Ramsden told the Treasury Select Committee last month "we can step up the pace of QE significantly."