MNI INTERVIEW: QE Has Run Its Course, Says Ex-Boe's Sentance

With yield curves flat and any surprise factor exhausted, the Bank of England's quantitative easing programme is largely impotent in supporting economic activity in the face of a pandemic and government-mandated lockdowns, former Monetary Policy Committee member Andrew Sentance told MNI.

"People say 'another GBP150 billion of QE, what's that?' It has no impact on financial markets or on the public," he said, speaking after the BOE's latest expansion of its gilt purchases on Nov. 5.

"We have got a supply-side-driven, health-driven emergency which then constrains the output of the economy. There is very little demand side policy can do in aggregate apart from what fiscal policy can do."

QE's current effect is largely to keep government borrowing costs low. Sentance is concerned that this makes the BOE appear a wholly-owned subsidiary of the government.

RUN ITS COURSE

"This whole QE game has run its course … I think it has very little economic impact. I think it has very little impact on the general public in terms of the way their economic behaviour is being influenced, which is mainly due to government restrictions," he said.

"Through monetary policy we bring forward economic activity that might otherwise have taken place but, ultimately, if the supply-side constraints are the same ultimately that is at the expense of future growth."

Sentance, on the MPC from October 2006 to May 2011, was supportive of the first wave of QE, which was launched in March 2009 and ultimately saw GBP200 billion of assets purchased. It aimed to push down the whole yield curve. This time round, the yield curve is flat.

"It was an emergency measure which shocked financial markets back into action, made people aware that the Bank of England was coming to the rescue and that was all fine. But that, sort of, confidence effect … that is gone now," he said.

The BOE's latest expansion of QE exceeded analysts' median forecast for an additional GBP100 billion in bond purchases. But, while MPC members now say QE seems to work better when financial markets are stressed, the Bank has not guided investors by providing numerical estimates of the policy's effect on economic activity.

At least, though, while QE may now be ineffectual, Sentance said the costs of eventually unwinding it should be low.

"I think it has a fairly neutral effect, given interest rates are so low," he said, adding that the MPC should allow its stock of gilts to run down at times when it is not purchasing bonds, instead of buying more securities to replace those in its holdings which come due.