£75bn increase in QE suggests negative 3rd quarter GDP
Posted on 9 December 2011 by
Ray Boulger of leading independent mortgage adviser John Charcol comments on the news that the MPC left Bank Rate unchanged today for the 31st consecutive month at its lowest ever rate of 0.5% but increased the amount of Quantitative Easing by £75bn.
"Whilst an unchanged Bank Rate was very much par for the course, t
"Although the MPC is still forecasting the CPI will rise "above 5% in the next month or so" it is also now being more positive in saying it expects CPI to undershoot the 2% target in the medium term. Although, as the MPC highlights, the recently announced increases in utility prices will boost inflation in the short term the sharp falls in the price of oil and other key commodities over the last few weeks will help it fall in the medium term, along with the elimination of last January’s VAT increase from the calculation in the new year."
he MPC’s decision to increase QE by as much as £75bn, to be utilised over the next 4 months, suggests it is even more bearish on our economic prospects than most economists. Information on which the MPC will be particularly well-informed, compared to outsiders, is the health of the banking system in general and so this move is not encouraging in that context.
"In authorising the increase in the ceiling for QE the Chancellor has confirmed that eligible assets for purchase are as set out by the previous Chancellor when the QE programme started at the beginning of 2009 and include gilts and private sector assets. However, so far almost all of the purchases have been gilts. Furthermore Mervyn King has given the clear impression he is much more comfortable buying gilts than private sector assets and so in the absence of anything in the MPC’s much longer than normal statement to the contrary it seems any significant change of policy on the type of asset bought is unlikely.
"Bearing in mind the Fed’s recent "operation twist" the most interesting unanswered question in the MPC’s statement is what maturity terms the Bank will primarily focus on. Since today’s midday announcement short dated gilts up to 3 years are virtually unchanged but the yields on longer dated issues have not only fallen but the yield curve has continued to narrow, a trend which has been very apparent over the last week.
What Does This Mean for Mortgages?
"If the Bank concentrates its buying power at the longer end of the gilt market the it will result in a contraction of the yield spread when compared to short and medium dated issues. This should allow mortgage lenders to offer longer term, say at least 10 years, fixed rates at a keener margin over 5 year rates than we have seen to date. Although demand for longer term fixed rate mortgages is fairly small the closer the rates get to 5 year rates the more borrowers will be tempted to fix for longer."