The Bank of England restarts QE with bond buying programme

Earlier this week, the Bank of England announced that it’s going to restart the Quantative Easing programme.

This is huge news in the Financial world and will have enormous ramifications in the UK and beyond, so let’s have a look at it.

The Bank of England is going to buy up some £5 Billion Pounds worth of long-term Bonds every day until 14th October. Although they have put no actual upper limit on this intervention.

They have done this becuase they were concerned about heightened risks to the Financial system.

A quote from the Bank of England website reads, "The purpose of these purchases will be to restore orderly market conditions." I had a little chuckle at that one.

The Bank of England had been planning, over the next 12 months, to start selling off £80 Billion Pounds of its £838 Billion Pounds holdings - a legacy from 2008 Financial crisis and also the more recent Pandemic financial rescue package. However, this latest development has meant that that has had to have been postponed.

So, they’re going to actually be adding to their holdings rather than reducing them. Unless some miracle were to happen, they are never going to be able to reduce their balance sheet.

I should also mention that what triggered this intervention was the UK Government announcing that it would be making large, unfunded tax cuts which were to be financed by increased borrowing. The Pound Sterling immediately fell against the Dollar and Bond yields spiked. Obviously, the markets didn’t like what they were hearing.

The issue is more involved than this and has to do with Pension Funds and LDIs - Liability Debt Instruments, and all sorts of finical shenanigans, but I won’t be going into that here. Joe Brown from “Heresy Finance” on YouTube has done a good job of explaining all this including the LDIs and Pensions so if you want to find out more ....
All we really need to know is that the Central Bank had to step in. Basically, it’s bailed out the Government by buying Bonds. This move has provided a back-stop for the Bond Market.

So rather than demand that the Government be fiscally prudent, the Bank of England has financed their Deficit Spending.