2013-02-26 – London
Financial markets are braced in anticipation of a third, global wave of monetary easing. Quantitative easing is fast becoming a favourite option for central banks around the world, in an attempt to keep sovereign borrowing yields low despite the deterioration in national credit ratings.
In the light of the UK losing its AAA credit rating on Friday, a third instalment of quantitative easing looks an increasingly likely prospect. This strategy is the reason why UK gilt rates are at historical lows. The UK government’s cost of borrowing is very low, despite the actual rising risk to lenders, evidenced by the price of UK credit default swaps.
The reason for continued low borrowing rates is no accident. The Bank of England essentially keeps printing money, using the additional money to buy up gilts for which there is no current demand in the market. Bond prices thus rise, yields fall, and Britain satisfies its desire for borrowing at artificially low costs.
The first quantitative easing phase was introduced at the end of 2008 when interest rates were reduced to almost zero. Even then, quantitative easing was introduced as a “temporary” measure. However, Britain was to become very reliant on this measure and by late 2011 the global economy was crying out for its next monetary giveaway.
Quantitative easing has led to asset-price speculation, which has had the effect of pushing up certain commodity prices – which in turn has increased costs for businesses. This results in reductions to the real incomes of consumers. Add to this the combination of increasing austerity measures and additional tax increases, and lower demand and higher unemployment will inevitably follow. Currently, the Bank of England has had only one response to these issues: further quantitative easing.
