Buying bonds didn't boost economy, admits Bank of England

Telegraph

4 days ago

The Bank of England's bond-buying experiments in the financial crisis lined investors' pockets rather than boosting the economy, officials have admitted.
It created £20bn to buy bonds issued by companies as part of its quantitative easing (QE) programme in the hope of lowering borrowing costs and supporting the economy.
But research published by the Bank shows the companies instead channelled the money to shareholders through boosting the stock market.
It adds to the criticism surrounding the wider QE scheme, which kicked off in 2009 and ultimately grew to £895bn. Critics argue it worsened inequality and is now draining the public purse, while its supporters see it as a vital aid to the economy at times of crisis.
The £20bn of corporate QE created a 'boom' in borrowing by businesses which swooped in to make the most of lower interest bills, according to a working paper from the central bank.
'The fall in corporate bond yields appears to have caused a boom in issuances by non-financial companies in the UK. Between January 2003 and the end of February 2009, these companies issued a total of £180.85bn.
'The additional low-cost funding has not translated into real effects, as the issuing companies chose to use the funds to substitute away from bank borrowing and buy back their shares to boost their prices.'
It means they favoured pocketing the cash 'rather than real investment,' said the report, written by the Bank's Mahmoud Fatouh, and academics Simone Giansante and Meryem Duygun.
To be eligible for the scheme, the bonds had to come from companies with good credit ratings and significant operations in the UK – which meant even foreign businesses such as Apple and McDonald's.
BMW and Volkswagen were among those whose bonds were bought by the Bank, as were storied British companies including tobacco giant Imperial Brands.
The corporate bond portfolio was largely sold off by 2023 and the final bonds bought under this part of the scheme matured in 2024.
The Bank first launched QE as officials sought new ways to try to support the economy and the financial system in the credit crunch, when the Bank's Monetary Policy Committee had already cut interest rates to 0.5pc.
At the time that was a record low, and was considered to be the lowest practical level. After the Brexit vote, the MPC cut the base rate to 0.25pc, and in the pandemic it reached a fresh low of 0.1pc.
The biggest chunk of QE was the purchase of government bonds, which totalled £875bn.
This was deemed to have boosted the economy and lowered unemployment while supporting inflation, in an era when the pace of prices rises repeatedly fell below the Bank's 2pc target.
It also helped push down government borrowing costs, supporting heavy spending at a time when the public purse was under strain.
However, the policy was also criticised for boosting asset prices, and so supporting the rich.
Cash flow from the QE scheme initially made profits which the Bank passed on to the Treasury. But since interest rates increased sharply from the end of 2021 amid the post-pandemic cost of living crisis, the Treasury has had to transfer funds back to the Bank.
The net cumulative loss from the scheme is forecast to rise as high as £150bn in the years to come.
Reform UK has called for the Bank to stem these losses by ceasing to pay interest on the reserves held by commercial banks.
Andrew Bailey, the Bank's Governor, has cautioned that these payments are an important part of the way in which interest rate decisions made by the MPC pass through to the wider economy.
In a letter to Richard Tice, a Reform MP, last week, Mr Bailey said: 'Our implementation of the MPC's chosen level for Bank Rate is anchored by remunerating reserve accounts at that rate. This helps to ensure that the rates at which banks lend to businesses and households – and the rates they pay on customers' savings – move broadly with Bank Rate'.