Foreigners Are Stealing Uk Quantitative Easing

That’s the thrust of Wednesday’s Daily Mail story:

Newly minted Bank of England cash is going abroad


Up to half of the fresh cash being minted by the Bank of England is flooding abroad, official figures suggested yesterday.

The revelation casts fresh doubts over the effectiveness of the Old Lady’s quantitative easing scheme, which is intended to bolster the supply of cash in the economy and ease the credit drought.

The Bank has been snapping up government bonds using newly minted cash. In March and April it purchased almost £45billion of gilts.

But BoE statistics yesterday showed that sales of gilts in those two months were dominated by foreign investors, not British institutions.

Overseas sellers dumped a net £18billion of gilts in March and April - almost half the value of the government bonds bought by the BoE during the same period. UKbased firms sold just £8.8billion of British gilts.

City analysts said the figures will call into question the Monetary Policy Committee’s strategy for re-floating the economy, just a day ahead of its next monthly meeting.

While we would shy away from the slightly xenophobic tone in the above, there is an issue here — namely because of this graph.



That’s a chart of M4 lending to private nonfinancial companies, courtesy of JP Morgan. According to data also released by the BoE on Tuesday, loans to nonfinancials dropped by £4.7bn in April - meaning that corporate lending is now tighter than in the chaotic months of September/October — and that’s despite the Bank’s bout of quantitative easing, which was meant to get UK banks lending again.

So inevitably, people will be asking whether QE is effective.

That many of the sellers of UK government debt to the BoE in recent months have been foreign investors seems reasonable, given the BoE data. That those foreign investors are not necessarily reinvesting the proceeds from those sales in the UK also isn’t too big a stretch of the imagination.

We should caution though, that according to the FT, the Bank itself thinks it could take six to nine months for the full effects of its unconventional policy measures to become clear. In other words it may be far too early to judge the efficacy of QE.
JPM economist Allan Monk is also of that opinion — though he does think the BoE may nevertheless ratchet up its QE operations at its meeting on Thursday:
It is still too early to comment on whether the BoE’s asset purchases have been effective. But the renewed weakness in bank lending - particularly to businesses - at the start of the current quarter will come as a disappointment to the MPC. The last inflation report singled out weakness in lending to firms as the main reason for its bleaker assessment of growth prospects over the coming year. The inflation report hinted that more QE may be required when it projected an undershoot in its inflation forecast. We expect the MPC to vote on a further £25bn of asset purchases at this Thursday’s policy meeting. The bank lending figures for April give this view some additional support.

Whether that additional QE will be “flooding abroad” or staying home, in Daily Mail parlance, will remain to be seen.

http://ftalphaville.ft.com/blog/2009/06/03/56559/foreigners-are-stealing-our-quantitative-easing/

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