Tag Archives: quantitative easing

The Bank of England’s QE hurdle shows the economy needs more than stimulus

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.

ECB’s QE plan is widening gap between rich and poor, but it has no choice

The European Central Bank is set to announce whether it wants to extend its quantitative easing programme in the eurozone this Thursday. Andreas Utermann, global chief investment officer at Allianz Global Investors, is confident that the ECB will do what is expected and the market will get the liquidity it wants.

“The European Central Bank’s plan, although they might not admit it, is to keep the euro cheap,” he said at the asset manager’s Market Outlook 2016 roundtable. “The tap of liquidity is turned on and it is not getting turned off.”

The ECB launched its bond-buying programme in January, pledging to splash out about €60bn a month from March 2015 until September 2016, hoping to rocket-launch inflation from its near-zero doldrums to a sparkling two per cent.

But growth has not picked up as quickly as some hoped and there have been hints from the central bank that they may extend the programme. ECB president Mario Draghi recently said that the central bank will “do what we must” to return inflation to its two per cent target “as quickly as possible” – a strong hint of further action.

But all this easy money comes at a price.

“Noone is writing about the social impact of quantitative easing,” said Andreas. “It widens the gap between rich and poor. But noone is addressing it due to lack of other options.”

In the US, former Republican presidential candidate Mitt Romney has blamed QE for rising inequality as it “held down interest rates” and “caused the stock market to rise”.

Here in the UK, pensions minister Ros Altmann has complained that the bond-buying programme has resulted in a huge tax increase on pensions – with pensioners relying on interest income – and a tax cut for banks, borrowers and the wealthy.

And Bank of England research back in 2012 said the policy had boosted asset prices and made the rich richer.

But as Andreas says, what is the other option? Answers on a postcard please, or even better, email info@hotcommodity.co.uk with your views.