Bank of England pumps £5bn into firms and £20bn into banks to keep interest rates down
By Daryl Jackson, News Editor
30 Jan 2017
England’s quantitative easing scheme rolled out last year, borrowing far more than anticipated from the central bank.
The Bank of England bought £4.9bn of corporate bonds in just three months, when the scheme intended to buy £10bn over 18 months.
At the same time the Term Funding Scheme (TFS) which gives cheap funds to banks has injected £20.7bn into lenders. The aim of both policies, alongside a plan to buy £60bn of government bonds, was to keep interest rates down.
Economists welcomed the swift progress as an important boost to the economy, but as growth is currently relatively strong, they do not expect the Bank of England to extend the schemes when officials announce their next decision this Thursday.
“Corporate investment is a source of economic growth, and that borrowing costs came down can be seen as good thing because it boosted probability of investing more,” said John Wraith, head of UK rates strategy at UBS.
The policy also helped mortgage interest rates fall further.
“If think a robust housing market is part of the equation keeping consumers upbeat, then the Bank of England has to be thanked for that, they made sure the market was performing relatively well even in uncertain times,” said Mr Wraith.
The Bank of England anticipated a sharp slowdown in the economy but that did not materialise - something its chief economist Andy Haldane referred to as the Bank’s “Michael Fish moment”.
But economists argue that the QE programme has still helped cut borrowing costs and boost the economy, without doing much harm.
Overall around the rich world, however, interest rates are rising in bond markets, making it hard to see the overall effect of the policy.
At the same time inflation is picking up, in part because the pound has fallen, pushing up the cost of imports.
“The question really is if rates need to rise over the next year to cool inflation which now seems to be picking up faster than they had expected,” said Samuel Tombs, chief economist at Pantheon Macroeconomics.
“I think this week we will see slightly higher forecasts for inflation from the Bank of England, at least in the near term. It is even possible that one or two members of the Monetary Policy Committee may vote for a rate hike at this meeting. It is not my main expectation, but given the fact that growth and inflation have surprised to the upside over the past three months, then it cannot be ruled out.”