BOE is Gambling With the QE Program

By TraderVox.com

Tradervox (Dublin) – From the controversies surrounding the Bank of England’s massive government bond buying program, one is left to wonder whether the BOE is certain of the outcomes of the process. In its defense, BOE is claiming that the quantitative easing program is an extension of ordinary monetary policy operation, insisting that it is no different from the interest rates. However, a further scrutiny of the program raises more questions than answers.

The BOE is printing money to buy gilts, this is something that has been questioned by many analysts who claim that this move will eventually cause more inflation in the Kingdom. Others are criticizing the policy on practical ground saying that it will not perfrom in the way the BOE wants it to work. The heated exchanges between the House of Commons Treasury Select Committee and the BOE Governor Sir Mervyn King only add to the questions being raised about the program.

If the BOE continues with this plan, it will accumulate gilts worth $427 billion, which almost a third of the governments bond market. This would represent the highest expansion of Central bank’s balance sheet in the world. However, this will not be supported by any fundamentals as the economy declined by 0.2 percent in the last quarter in 2011 and is expected to make minimal growth in 2012. Further, the inflation is higher than the set target and the household spending power is expected to be crimpled.

In comparison with the ECB’s quantitative easing plan, BOE’s plan seems impossible. While the ECB is flooding the economy with more money by directly lending to the banks, the BOE is trying to evade the use of banks by buying government gilts. The ECB move will reduce the pace of bank deleveraging hence allowing governments in the region to put their financial systems in order. On the other hand, BOE’s strategy is aimed at increasing government borrowing hence reducing the hence increasing the pace of public sector deleveraging, this would force the banks to pay their debts. According to analysts opposed to this move, buying government bonds is riskier than buying private sector assets since BOE has no authority over the government but other the private sector.

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