QE Raised UK Firms’ Inflation Outlook, Guidance Remains Unchanged: BoE Research, According to Reuters

By David Milliken

LONDON – Research co-authored by Bank of England Monetary Policy Committee member Martin Weale has concluded that while the central bank’s asset purchases increased inflation after the financial crisis, its forward guidance has had little impact.

With a decision approaching on potential stimulus measures in response to last month’s vote to leave the European Union, the Bank is evaluating options. Weale expressed skepticism about the necessity of immediate action, although many of his colleagues anticipate supporting unspecified measures, possibly including a cut in interest rates to a historic low.

The research, conducted by Weale and three other Bank researchers, indicates that the quantitative easing program, which involved £375 billion in government bond purchases between March 2009 and October 2012, significantly influenced companies’ inflation expectations. The study noted, "QE interventions played a modest role in stabilizing inflation expectations in the United Kingdom in recent years. Our findings for other policy interventions were not conclusive."

Specifically, for every £50 billion in purchases, companies anticipated a 0.19 percentage point increase in inflation within their industry and a 0.28 percent rise in wages. The launch of the Bank’s Funding for Lending Scheme, which provided banks with low-cost credit, along with European Central Bank President Mario Draghi’s 2012 assurance to "do whatever it takes" to protect the euro, also notably impacted firms’ pricing expectations.

In contrast, Governor Mark Carney’s forward guidance policy from 2013, which stated that interest rates would not rise until the unemployment rate decreased, had a negligible effect on companies’ inflation forecasts. The research concluded that "the effect of the MPC’s forward guidance is not statistically significant."

Weale had voiced opposition to the forward guidance when it was introduced, primarily due to concerns about inadequate safeguards against rising inflation. He has been part of the Monetary Policy Committee since 2010 and will conclude his two-term tenure as an independent external member next month. His co-authors on the paper were Lena Boneva, James Cloyne, and Tomasz Wieladek.

The study utilized data from quarterly surveys conducted by the Confederation of British Industry to assess firms’ inflation expectations. Previous research has suggested that quantitative easing had a modest positive effect on UK consumer price inflation, bond prices, and overall economic output.