Asset Purchase Program (UK)

On March 5, 2009, in the wake of the fallout from the Global Financial Crisis, the Monetary Policy Committee of the Bank of England announced a new, unconventional policy measure: quantitative easing. The MPC determined that simply cutting the Bank Rate in the face of a recession would not be enough to boost spending and increase inflation to meet the Bank’s goal of a 2% CPI-inflation target in the medium term. Rather, over the course of the next year, the Bank purchased £200 billion of assets—primarily gilts—in reverse auctions through a newly created Asset Purchase Program. After just under one year of purchases and a brief hiatus, the Bank revisited the program in 2011 and purchased an additional £175 billion of assets, bringing the total to £375 billion. For the most part, studies hold that these two episodes of purchasing—QE1 and QE2—were successful, as gilt and other asset prices increased and the program had an impact on inflation and GDP. However, it is hard to conclusively assert the impact of QE on the economy, as the unconventional policy was implemented concurrently with other measures in the United Kingdom and around the world.

At the beginning of 2009, economic forecasts for the United Kingdom predicted a recession worse than that of the 1990s. To offset this contraction, the Bank of England employed conventional monetary policy and slashed the Bank Rate to its effective lower bound, but predictions remained grim, so in March 2009, the Bank introduced the first episode of its Asset Purchase Program. The stated aim of this program was to increase nominal spending and bring Consumer Price Index (CPI) inflation back to its 2% target.

The Asset Purchase Program involved the practice of quantitative easing—in this case, large-scale asset purchases (LSAPs) primarily of government bonds (gilts) that targeted nonbank financial institutions, such as insurers and pension funds. These purchases were made during reverse auctions; at first, there were two each week, and then three every two weeks to accommodate more flexible standards for asset eligibility. The Bank concluded its first episode of purchases in just under a year, at which point the purchase amount was roughly equal to 30% of gilts held by the private sector.

In October 2011, the Bank revitalized the program in what is referred to as QE2—quantitative easing two—when concerns arose about the status of some Eurozone economies, inflation, a shrinking GDP, and a need for confidence and growth. QE2 was an explicit continuation of QE1 and focused on countering the effects of the Global Financial Crisis (GFC); it expanded the Bank’s asset purchases from £200 billion to £375 billion.

The Asset Purchase Program is generally seen as effective, but isolating the impact of the quantitative easing policy on the United Kingdom’s economy is difficult given concurrent domestic and international recovery programs. However, the program did have a tangible impact: purchases lowered the yields of medium- to long-term gilts by approximately 100 basis points, and studies show that the gilt markets reacted to QE announcements. More generally, there was a consistent increase in asset prices. Estimates of the program’s impact on inflation range from 0.75 percentage points to 2.5 percentage points, and GDP estimates range from just under 1.5% to 2.5%.

The majority of existing literature holds that quantitative easing did have a positive effect on the economy of the United Kingdom. However, uncertainty exists as to how much and in what ways, as it is both hard to create reliable counterfactuals and to isolate the policy of QE from other economic recovery programs implemented both domestically and internationally at the same time. In addition, it has been estimated that “the degree of uncertainty surrounding the macroeconomic effects of asset purchases is at least twice as large as that for conventional monetary policy” (Haldane et al. 2016).

There are a few main categories that stand out in the existing attempts to quantify the impact of QE on the United Kingdom’s economy. The first of these is the impact of asset purchases on gilt prices and other asset prices.

There is a general consensus that QE asset purchases had “a significant and persistent impact on gilt yields.” Joyce and Tong looked at the market reactions to the separate QE announcements and found that the biggest reaction occurred between 15- and 20-year maturities, with yields lowered by as much as 120 basis points (Joyce and Tong 2012).

Another examination by Joyce et al. of the announcement effects of QE during the first wave of auctions found that the purchases lowered medium- to long-term gilt yields by approximately 100 basis points (Joyce, Tong, and Woods 2011).

During the first wave of purchases, from March 2009 through March 2010, asset prices rose steadily. This trend occurred simultaneously with a general rise in asset prices internationally, as other countries employed similar programs (Joyce, Tong, and Woods 2011). One estimate by Bridges and Thomas places the increase in asset prices at around 20% (Bridges and Thomas 2012). Figure 4 provides an overview of the various asset price movements during the QE episodes.

Source: Joyce 2013.

The effectiveness of the portfolio rebalancing channel is corroborated by other data, which shows that a decrease in gilt yields after the QE announcements (as seen in Figure 5, below) did not occur along with a decrease in interest rates from OIS (overnight indexed swap) contracts; “this lack of movement indicate[d] that the large fall in gilt yields [could not] be primarily attributed to signaling of future policy rates or macroeconomic news” (Joyce, Tong, and Woods 2011).

Source: Joyce, Tong, and Woods 2011.

Additionally, during QE1, sterling investment-grade corporate bond yields decreased by an amount that paralleled the decrease in gilt yields. However, in total, the yields of sterling high-yield corporate bonds decreased by an average of 150 basis points over the course of the six QE announcements. Finally, corporate bond and equity issuance rose due to QE1 (Joyce, Tong, and Woods 2011).

The second category analyzing the impact of QE examines inflation. Joyce, Tong, and Woods (2011) used a Phillips curve relationship to determine the effect of QE on inflation and found an impact of between approximately 0.75 percentage points and 2.5 percentage points. Another study by Kapetanios et al. (2012) estimated a peak impact on annual CPI inflation of approximately 1.25 percentage points.

The third category looks at QE’s estimated impact on GDP. Of the existing studies that examine this question, one cites QE’s peak impact on the level of real GDP as between 1.5% and 2.5% (Joyce, Tong, and Woods 2011), and the other cites it as around 1.5% (Meaning and Warren 2015). Weale and Wieladek (2016) conducted a structural vector autoregression (SVAR) approach and concluded that the QE program may have fostered a rise in GDP.

However, there is a dissenting voice amongst the existing literature: Lyonett and Werner (2012), who argue that “QE as defined and announced in March 2009 had no apparent impact on the UK economy.” They use the Hendry form of econometric modeling to examine the impact of QE on GDP and conclude that the Bank of England should instead focus on the “growth of bank credit for GDP transactions,” citing the fact that bank credit growth fell by “record amounts” in late 2011 (Lyonett and Werner 2012).

Finally, most studies that examine the macroeconomic effects of QE conclude that it successfully allowed the UK to avoid potent future risks of deflation and “output collapses” (Baumeister and Benati 2013; Bridges and Thomas 2012; Goodhart and Ashworth 2012).

It is clear that QE had an impact. A study by Joyce, Tong, and Woods (2011) concludes that the policy had “economically significant effects equivalent to a 150 to 300 basis point cut in the bank rate” (Joyce, Tong, and Woods 2011).