MPC looks set to stop at £175bn
21 October 2009
Hot on the heels of Mervyn King’s call last night to break up the banks to prevent another financial catastrophe occurring at some point in the future, the BoE dominated the economic calendar today, with the release of the MPC minutes and the latest Agents’ summary of business conditions.
While the Agents signalled that gradual recovery continues, the minutes, in contrast, gave perhaps the clearest signal yet that the BoE is unlikely to extend its £175bn asset purchase programme in November. The minutes were again bullish about the impact of QE on asset prices, while largely glossing over the fact that the evidence of a significant pass-through from financial markets to the real economy in the form of lower household borrowing costs is scant to say the least (more on this later).
Perhaps the most telling part of the minutes was the bit that was missing – the removal of the line from September’s minutes which indicated that Mervyn King and David Miles thought that a further extension of asset purchases was warranted, but also that they were prepared to wait until November. Not withstanding Posen’s dovish comments at the weekend, this omission, coupled with recent statements from MPC members Bean, Dale and Fisher, makes it look like the BoE is signalling that £175bn will be its lot, for now at least.
Chart: Changes in household interest rates
* Standard variable rate. Other mortgage rates shown are for a 75% LTV ratio. Source: BoE and Daiwa Securities SMBC Europe Ltd.
But while further asset purchases look unlikely in the near term, the fact that there are few signs of households finding credit easier and cheaper to come by provides a convincing argument for why the BoE should do more. As BoE Chief Economist Dale has rightly said, the transmission from higher asset prices and improvements in financial markets to lower borrowing costs in the real economy is critical for QE to be a success. And despite the BoE having spent almost all of its £175bn, many household interest rates have actually risen since March (see chart) – not much bang for lots of bucks.
That is why we still think there is a case for the BoE not only to buy more, but to buy other assets, including mortgage-backed and consumer credit-backed securities. Significant purchases of these securities would hopefully have a more direct impact on interest rates faced by households, in a similar way to which the US Fed’s large purchases of MBS have pushed down on mortgage rates in the States. But, for now, further gilt purchases look unlikely, let alone large purchases of private securities.
Colin Ellis, European Economist
Disclaimer:
This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.
This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at http://www.daiwausa.com/.
For more details, please contact:
Colin Ellis, Fixed Income Research
Daiwa Capital Markets Europe Limited
5 King William Street, London, EC4N 7AX
+44 (0)20 7597 8339
For up to date Research analysis, see our blog site here.