Chris Wylie, chief investment officer, Iveagh Private Investment House

Latest round of QE is 'bold'

Mon, 10/10/2011 - 12:43

Chris Wyllie, chief investment officer at Iveagh Private Investment House (Guinness family office), comments on the BoE’s announcement of a further GBP75bn of QE…

We are not surprised by the BoE’s move as it was well flagged, however increasing the existing QE program by such a large sum (more than a third) is bold. The Bank has ventured where the Fed feared to tread, pumping more money into the British economy whilst current inflation is elevated. The UK money supply is more constricted than in the US, which probably persuaded the Bank they could get away with it. This will be an interesting case study for the debate on whether QE, as a policy, is now running into the law of diminishing returns.
 
It is disappointing that we have not yet heard of more direct measures to get cheaper money through to the corporate sector and we expect the pound to weaken in light of the Bank’s actions. Whether gilt yields sustain the knee-jerk falls seen today is uncertain but it could transpire that, by loosening monetary policy and weakening the pound, this move will raise long term inflationary expectations and actually drive gilt yields up (as appears to have happened in the US last year with QE 2). The Bank won’t mind this outcome so long as it is accompanied by better growth. If not, it will merely exacerbate inflationary pressures.


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