This week, Augustin Eden from Accendo Markets tells Hot Commodity why the Bank of England’s QE troubles show the UK economy needs more than stimulus to boost consumer confidence…
Some awkward moments for the Bank of England over the last couple of days have again hit confidence in the ability of central banks to sort out economies when things turn sour. The UK’s central bank was unable to buy all the gilts (UK government bonds) it wanted when pension funds decided they didn’t want to sell – and why would they? Pension funds are the most risk averse of investors, required to have a virtually guaranteed stream of income to use to pay peoples’ pensions as and when the time comes.
Interest rates on government debt are now being driven towards zero – some shorter dated gilt yields have even dipped negative in the last two days. What will the pension funds do with the cash anyway? They’ll probably try to buy more bonds or even invest in defensive equities, but equities are riskier. Trying to encourage pension funds to take more risk is a dangerous move and, importantly, is something you can’t cloak in the smoke and mirrors of technical jargon. Listen to a central bank press conference and there’s little to be gleaned by those who aren’t versed in economics or market speak, but anyone can work out what it means for pension funds to take more risks – it means their pensions are at risk.
Likewise, everyone can understand what it means when pension funds can’t find the guaranteed income they need. Again, pensions are at risk. A healthy economy does of course depend on business confidence – if there’s plenty of cash in the system and it’s cheap to borrow, then you may as well spend and invest. But business confidence depends on consumer confidence, and I would argue that the latter is more immediate.
This throws up a major issue. If people are worried about their pensions – the one thing they should be able to rely on – then they’re not confident. If quantitative easing and other economic stimulus measures are not increasing consumer confidence then we have a problem. When you look at somewhere like Japan whose government and central bank have been engaged in stimulus activities for years and whose economy is still merely limping along, it could soon be time to start thinking about simply putting money directly into people’s pockets.
This commentary was produced exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.