Silvana Tenreyro is the latest in a growing line of current and former members of the Bank of England’s Monetary Policy Committee to raise deep concerns about the effectiveness of quantitative easing as a monetary policy tool (“Chancellor selects centrist economists for MPC”, report, 12 March 2009). . April).
The MPC appears increasingly skeptical of the idea that QE can have a significant and lasting impact on bond yields, whether by sending a signal to the market or by reducing the stock of bonds available to retail investors.
MPC members seem to believe QE is only effective when markets are dysfunctional. However, liability-driven investment intervention over the past year has set a useful precedent for QE aimed at restoring liquidity to core financial markets. In these circumstances, while indirectly supporting the objectives of the MPC, QE is primarily a financial stability operation which is now the responsibility of the Bank of England’s Financial Policy Committee and not the MPC. We are therefore challenged to conclude that many (most?) MPC members believe that the MPC should permanently exit the QE game. But this conclusion raises new questions.
First, wouldn’t it be better to think further and establish beyond doubt that QE is ineffective before finally and effectively speaking out and taking the instrument out of the hands of prospective members of the MPC?
Second, if traditional QE is truly ineffective, isn’t it time for a reassessment of the Bank of Japan’s unconventional strategy that has allowed it to control yields for the better part of a decade?
Third, if QE isn’t going to work in the next recession, wouldn’t it be wise to prioritize actions that allow the Bank of England to push rates deep into negative territory instead?
Fourth, if asset purchases have had so little impact, why hasn’t much more progress been made selling those assets back during the quiet times of the last decade?
And fifth, why has the MPC voted for so much QE outside of crisis conditions if it is so ineffective?
Richard Barwell
Head of Macro Research and Investment Strategy,
BNP Paribas Asset Management London EC2, United Kingdom
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