The pound, along with Britain’s fiscal retrenchment, are often cited as explanations for why yields on UK government debt now hover around record lows.
Some suggest another factor is at play: financial repression.
This sinister-sounding phrase describes the situation where government policy attempts to artificially lower interest rates with the specific aim of reducing their debt burden. Given that QE has done much to lower yields on UK government debt, some have tagged the policy with the financial repression label.
Regardless of whether or not this is the case (more on which later), Fathom, a consulting group made up of former Bank economists, today expressed doubts about whether such a policy – and for that matter gilt purchases – will do much to aid the UK recovery. Read more
The Bank of England meets on Thursday with expectations running high that the MPC will announce a further large dose of quantitative easing. Even if they pass this month, which seems possible, this is likely to be only a temporary postponement. Whenever it comes, the next move will be another bout of “plain vanilla” QE, involving the purchase of £50-75bn of government bonds, and taking the overall Bank of England holdings to over one third of the total stock of gilts in issue.
Meanwhile, the Fed is still debating whether to increase its holdings of long dated securities, and if so whether to focus once again on government debt, or to re-open its purchases of mortgages. Any further QE would be contentious on the FOMC, but there is probably still a majority in favour. Read more
The European Central Bank’s governing council has a lot to discuss at Thursday’s meeting. Interest rates may not attract the most attention: the ECB’s main rate is widely expected to remain at 1 per cent.
Since January’s council meeting, the “tentative signs of stabilisation in activity at low levels” spotted by Mario Draghi, president, have been confirmed in economic indicators, especially eurozone purchasing managers’ indices. The latest bank lending data and survey of credit standards were very weak – but perhaps no weaker than expected. Crucially, it was too early for the impact of the €489bn of three year loans injected into the eurozone financial system by the ECB in December to have been felt.
Moreover, there seems little reason for the ECB to adjust interest rates ahead of a second three year longer-term refinancing operation (Ltro) on February 29. Instead, attention at Mr Draghi’s press conference is likely to focus on two issues: Greece, and the latest relaxation of ECB collateral rules. Read more