-Bank Rate, Not QE, Dominant Influence On Savers
LONDON (MNI), Aug 23 – The Bank of England Monetary Policy
Committee’s extensive quantitative easing has come under fire for
harming the finances of pensioners and savers but BOE research published
Thursday downplays its impact on them.
A BOE paper says cuts in Bank Rate, rather than QE, have had the
big impact on savers and the effect on many pensions has been either
neutral or beneficial. Parts of the pensions industry, in particular,
have lobbied hard against QE but the BOE research suggests much of the
criticism of QE is misguided and its distributional impact won’t be a
bar to extending it.
The BOE notes that the bulk of households’ direct savings are in
bank or building society deposits, with around 55% of the stock of
deposits in fairly short term accounts. This entails a key determinant
of household savings returns are short term, not longer term, rates and
QE has more of an influence on the latter.
“Deposit holders are likely to have been affected much more by the
cuts in Bank Rate than by downward pressure on longer-term interest
rates as a result of QE,” the paper says.
Bank Rate was still at 5% in September 2008 before the MPC began to
cut it in earnest in response to the intensifying credit crunch. The BOE
paper quantifies the impact of the rate cuts which brought Bank Rate
down to its current level of just 0.5% by March 2009.
It says the loss in receipts on deposits compared with September
2008 amounts to some stg70 billion but offsetting this households may
have reduced outstanding loan payments by around stg100 billion.
Unlike QE, which can bypass the bank channel, cuts in Bank Rate can
have offsetting effects. They squeeze bank sector profits if assets and
liabilities are not re-priced simultaneously and by the same magnitude,
ultimately resulting in lower bank dividends or remuneration or higher
banking fees.
The BOE paper notes that while Bank Rate has been cut by 450 basis
points since September 2008 rates on the stock of sight and time
deposits have only fallen around 200 basis points.
QE, meanwhile, has had some clearly beneficial effects. On the
BOE’s estimates it has pushed up a wide range of asset prices, driving
the price of equities up by as much as gilts and it has boosted the
value of household wealth.
The paper, produced at the request of the Treasury Select
Committee, looks closely at the impact of QE on pensions. It notes the
impact varies according to the type of pension and whether it is
substantially in deficit or not.
Those who were already getting a pension before QE was launched
have not seen their pension income impacted, nor have those who are
close to retirement and in a defined benefit scheme.
Where QE has harmed defined benefit pension schemes is when they
are in sizeable deficit, as it is likely to have raised both assets and
liabilities by similar proportions and as the former are smaller than
the latter the deficit will have widened.
The BOE paper notes, however, that the major factor driving the
widening in pension deficits and falling annuity incomes has been the
relative decline of equity prices relative to gilt prices.
This fall “was not caused by QE. It happened in all the major
economies,” the paper says and notes that by boosting the economy UK
monetary policy probably dampened the effect.
It estimates the BOE’s stg325 billion of asset purchases completed
at the date of the paper, almost entirely gilts, via QE has, on the
central bank’s own ready reckoners, fed through to some stg500 to stg800
per person in the UK in aggregate, looking at its impact on GDP and
inflation.
“Without the loosening in monetary policy, it is likely that the
economic downturn would have been far more severe, to the detriment of
almost everyone in the economy, including savers and pensioners,” the
report concludes.
–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$$BE$]