Quantitative easing was supposed to flood the market with liquidity, bring interest rates down and revive the economy. After the massive cuts in the MPC's bank rate, quantitative easing was the next step in the strategy to save the UK economy from deflation.Once the Bank of England began buying government paper, rates did come down fractionally. However, they began to creep back up almost immediately. As of May 6, rates on goverment debt are higher than they were at the beginning of the year. So much for QE for reducing rates and reviving the economy.
The Bank of England and the government think that the bond market comprises of a bunch of backward looking morons. However, investors are forward looking creatures, and when it comes to UK fiscal and monetary policy, they do not like what they see. If bond investors are going to hold UK government debt, they will need to be adequately rewarded. That means higher rates on UK gilts.
5 comments:
Hence the big increase in QE yesterday....
That number is going to keep on rising. When inflation starts to kick in, investors will start to ask for an inflation premium.
These people in the bond markets will not be fooled by such mental dwarves as brown and darling.
Agree with Roy. If we end up with high levels of inflation due to QE then I agree investors would expect a higher return.
Just think of an inflation rate of 10% against an outstanding loan of say 100K on a house. If the repayment per year is only 5K then the bank (or investor) is surely losing 5K per year? That would be a good reason for an investor to not put money in the UK. This could cause a second part to the credit crunch unless interest rates rapidly rise with inflation in my opinion.
Interest rates will need to hit 15 percent this year. The government has played every trick possible to avoid this, but the reality is the UK will need to attract real cash (not fictitious QE cash) to underpin the economy and fund investment and mortgages. This brutal fact will hit the gov by the end of the summer and interest rates will be jacked up to 15 percent. I have spoken.
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