LONDON (MNI) – The minutes of the December Monetary Policy
Committee meeting showed that the MPC was united in sticking to its
current pace of asset purchases, respecting a speed limit imposed by
markets.
Analysts believe the MPC could step up the pace of quantitative
easing a little, and the minutes support that view, but the committee
cannot put its foot down hard on the policy accelerator. Sanctioning a
three month round of Stg75 billion in QE in February is reckoned to be
as fast as the BOE could go, and even that might prove uncomfortably
fast.
The problem the MPC faces is it does not have complete freedom of
choice over the size and pace of its quantitative easing policy, as it
is curtailed by market participants’ propensity to sell it gilts.
The central bank is currently completing the Stg75 billion of asset
purchases, through purchases of conventional gilts, that the MPC
sanctioned in October at a pace of Stg5.1 billion a week.
“It was noted that market capacity made it difficult to
increase the monthly rate of purchases substantially above what was
already under way,” the December minutes said.
George Buckley, economist at Deutsche Bank, highlights the use of
the word “substantially” in that sentence. The message is the MPC can
increase the purchase pace, albeit not by much.
That could be one of the keys to whether it approves Stg75 billion
of further QE in February or Stg50 billion, when the MPC is expected to
launch the next round. The larger amount may be do-able if economic
conditions justify it, but it is debatable.
If the MPC were to then sanction Stg75 billion of QE in February
taking it up to the May meeting, that would step the pace up to Stg5.8
billion a week over the 13 week period while Stg50 billion a week would
decelerate it to some Stg3.8 billion.
The MPC has also said it could step up or decelerate QE if this,
the second wave, is having more or less impact than the first but the
minutes show the jury is still out on that.
“Assessing the effects of the current programme was complicated by
the volatility in financial markets, and the Committee was still
gathering evidence on the impact of its purchases on asset prices and on
the economy,” they said.
In both their minutes and public comments MPC members have not, so
far, elaborated much on the practical constraints they are facing buying
gilts. The most detailed comments have come from the BOE’s Executive
Director Markets Paul Fisher at a recent Treasury Select Committee
hearing.
“The markets at the moment are not functioning fully, generally
across a whole range of asset markets, so I think we are going about
the right rate,” Fisher said.
“We could go faster … The faster we go the more risk is that some
of our operations don’t quite deliver the amount of gilts we want to
purchase,” he added.
That leaves analysts having to look closely at the practical
restrictions.
Sam Hill, fixed income strategist at Royal Bank of Canada, notes
that the Bank of England has said it will not hold more than 70% of the
“free float” of any individual gilt.
On that basis, using the current stock of Gilts the BOE could only
buy another Stg55 billion in the 10 to 25 year range, and it has some
Stg80 billion left in the over 25s and Stg150 billion in the three to 10
year range.
“The middle (10 to 25) sector is very difficult,” Hill says.
On the flow side, planned issuance will boost the amount of gilts
the MPC has to buy but the RBC analysts note that even if the MPC
sanctions “only” Stg50 billion more in February, it will still be
taking conventional gilts out a lot faster than they are coming in.
“Even with higher borrowing the rate at which the Bank are taking
Gilts out of the market is, on average, Stg4.5bn a month faster than the
rate of gross conventional DMO issuance under new higher remit forecasts
and our forecast that QE continues with Stg50bn over three months from
February 2012,” the RBC analysts say.
Philip Shaw, economist at Investec, points out that the BOE is also
facing competition on the buying side. Pension funds, insurance
companies and others are going to buy and hold more gilts and the BOE is
“trying to get gilts out of a diminishing pool.”
Shaw is expecting Stg50 billion in further QE in February, as Stg75
billion “would be pushing it a bit.”
For MPC members, the practicalities of supply and demand in the
gilt market are proving to be a complicating factor in policy setting.
–London newsroom 0044 20 7862 7491; email:
drobinson@marketnews.com
[TOPICS: M$B$$$,M$$BE$]