Unwinding of QE need not impact on economy

Central banks will be able to unwind their vast bond purchases when market conditions are more normal without a big impact on asset prices and the real economy, Bank of England research suggested yesterday.

Since the global financial crisis of 2008-09, the world’s central banks have added trillions of dollars to their balance sheets through government bond purchases as they pumped money into their economies.

The research, co-authored by the Bank policymaker David Miles, showed central banks should be able to wind down that stimulus without major disruption.

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“(If) the unwinding of large-scale purchases happens when market conditions are more normal they may have relatively little impact on asset prices and the real economy,” the study said.

The study also showed that one of the channels through which quantitative easing might work – by affecting the way that households invest – probably only has a weak effect when markets are functioning normally.

Governor Mark Carney last month said Britain had come to the end of its £375bn quantitative easing programme, barring any additional shocks to the econ-omy.

Instead, the debate is now focused on when the Bank will raise interest rates as the economic recovery gathers further momentum.

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Minutes from the Bank’s latest policy meeting will be released tomorrow and offer the Bank a chance to tweak its message to the markets.

More than a third of economists polled by Reuters last week expect the Bank to set the stage for it to lower the unemployment threshold to 6.5 per cent from 7 per cent – a move that will reinforce its message that it will keep rates lower for longer.

The Bank has said it will not consider hiking interest rates from their record low of 0.5 per cent until the goal is met.

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