Following the revelation new BOE Governor Mark Carney led a 9-0 vote against more quantitative easing (QE) at the July 4 meeting, I’ve seen some chatter about what the end of the BOE’s Asset Purchase Programme means for the UK economy. It’s not unlike the jitters over the US Federal Reserve’s plans to scale back its own QE program later this year. People worry the lack of fresh stimulus will be a setback.
This overlooks a key point: The BOE’s QE technically ended in late 2012, when the BOE finished the last round of asset purchases. Yes, speculation over more QE has continued, but the economy has been running without fresh gilt purchases this entire year. And it has accelerated.
Exhibit 1 shows the UK’s bank liability yield curve on 12/31/2012—just after the BOE stopped purchasing gilts—and on 6/30/2012. The curve has steepened—the spread between long and short rates is wider today, which is generally good for economic activity and bank lending. It hasn’t caused a huge increase in lending year-to-date since regulators have ordered banks to meet Basel III regulatory capital requirements by year-end (the rest of the world gets another five years), but it should support loan growth once the banks have satisfied regulators.
Exhibit 1: UK Bank Liability Nominal Spot Curve
Source: Bank of England, as of 7/17/2013.
Meanwhile, there are other signs of fundamental improvement. Construction, Manufacturing and Services PMIs have all accelerated in recent months. Retail sales have risen, exports and imports have crept higher, and business investment registered its first quarterly increase in a year in Q1. This all isn’t necessarily because QE ended, but a broad uptick in economic activity post-QE certainly doesn’t square with the notion of an economy that needs QE in order to grow.